NFTs, explained: Non-fungible token, What are NFTs, How do NFTs work

NFTs have taken the art world by storm. One NFT sold for over 69 million dollars! But what is an NFT? What is the fuzz about NFTs?

You may have heard Jack Dorsey, the founder of Twitter, sold his first tweet ever as an NFT for over $2.9 million, Super Bowl champ Rob Gronkowski sold out his NFT collection for $1.6 million, Or you may have seen art, video game items, and music from your favorite influencers are selling for thousands as NFTs. But what is this frenzy about? How much money is going into these NFT things? Over 150 million dollars have been spent on NFTs since November 2017. NFTs have become hugely popular amongst celebrities, athletes, and companies due to their revolutionizing impact on the gaming and collectibles industry. Here, we will do our best to illustrate NFTs important characteristics and why you should understand NFTs.

What is an NFT?


First and foremost, NFT stands for Non-fungible Token. By definition, the term fungible, typically used in finance, illustrates being able to replace or be replaced by another identical item; mutually interchangeable. NFTs are unique digital assets, unable to be replaced by another identical item, hence the name non-fungible token. For instance, all dollars and bitcoins are the same; You wouldn’t mind trading a dollar bill with me because your dollar and mine are worth the same (Disclaimer: ignoring other factors that affect the value of a physical dollar). This is not the case with NFTs. A non-fungible token or NFT is a unique digital asset that represents an entity (real-world objects like art, music, in-game items, videos, and more). This native characteristic of uniqueness gives each NFT a unique value. Like cryptocurrencies, a blockchain (online ledger) keeps a record of authenticity on each NFT in the network and does not allow modifications to be made to the entity, as well as, ensures there’s only one owner at a given time. In other words, it’s heavily protected.


There are numerous blockchains implementing ways to create and manage these unique tokens, however, the most popular one is the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs. Unlike regular cryptocurrencies, NFTs cannot be directly exchanged with one another. As you know by now, no NFTs are identical – even if they exist on the same platform, game, or are part of the same collection. Therefore, NFTs can't be exchanged like-for-like.

"When you think about digital goods, like the moments, you still have a sense of ownership but I got none of the hassles, you know? There’s a marketplace there to give me value. I don’t have to worry about grading it, I don’t have to worry about shipping it or receiving it, I don’t have to worry about who’s the buyer on the other side and who’s trustworthy and who’s not. All those things are taken care of.” - Mark Cuban, Owner of the Dallas Mavericks

“Ariel, but why should I care about NFTs?” Here are a few characteristics of Non-fungible Tokens:


NFTs are inseparable


If you were a baker selling delicious cakes, you could make more money selling the cake in individual pieces rather than the whole cake at once. Fortunately or unfortunately, NFTs cannot be divided into smaller denominations. They exist exclusively as a whole item. For the most part, you cannot split an NFT.


NFTs are indestructible


Unlike physical Pokemon or Sportscards, NFTs are digital assets so there is no physical tear on them. Digitally, all NFTs are stored on the blockchain via smart contracts. So, each token cannot be destroyed, removed, or replicated. During an episode of The Quest with Justin Kan Podcast, Mark Cuban (Owner of the Dallas Mavericks) illustrated “I sold stamps when I was a kid. And, what I learned then, still holds now. You got to manage this thing *as he’s holding a sports trading card*. You gotta protect it. Particularly with stamps, they tear this and that. Your kids get at them or mess with them. And then when you want to sell them you have to get them graded. What's the quality of it and then you have to physically deal with the transaction itself and then the financial side of the transaction and the trust elements of it… There’s so much hassle in dealing with physical goods.” He continued, “When you think about digital goods, like the moments, you still have a sense of ownership but I got none of the hassles, you know? There’s a marketplace there to give me value. I don’t have to worry about grading it, I don’t have to worry about shipping it or receiving it, I don’t have to worry about who’s the buyer on the other side and who’s trustworthy and who’s not. All those things are taken care of.” Mark Cuban has invested millions into NFTs Platforms and thinks it is the next big thing.

NFTs enable artists to get paid


We should see an upward trend of artists releasing music and art as NFTs and here’s why: NFTs allow artists to sell artwork in digital form directly to a global audience of interested buyers without the need of an auction house or gallery. Furthermore, NFTs not only allow artists to keep a significantly greater amount of the profits they make from sales, but they also have full control of getting royalties. Royalty is a sum of money paid to a patentee for the use of a patent or to an artist or composer for each copy of a record sold or for each public performance. Royalties can also be programmed into digital artwork so that the creator receives a percentage of sale profits each time their artwork is sold to a new owner. These royalties feature in NFTs is powerful for numerous industries especially the music and art industry as passive royalty income comes in every time one of their NFTs is resold.


NFTs criticism


“NFT is essentially a digital asset. What stops me from just screenshotting it and downloading it on my phone? Or just look at it for free on the artist's website?” The answer is simple; Because an NFT allows the buyer to own the original item. Anyone can view the NFT—or even the entire collection online for free. But, do you own it? Do you get paid every time it's resold? Can you sell it? NFTs contain built-in authentication that serves as proof of ownership and as a collector, those digital rights are where the value lies.


NFTs are growing in popularity and value


Timothy Berners-Lee is an English computer scientist best known as the inventor of the World Wide Web and he sold the source code as NFT for over $5 million. The source code NFT included time-stamped files of the source code, a letter from Sir T