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- What is an NFT?
GM and welcome back to Decentra Daily, the web3 newsletter that leaves no one behind!
We put the “fun” in non-fungible
Today's story:
What is an NFT?
NFTs? You’re into NFTs now?
Spending how much on Tired Monkeys and Crypto Crunks?!
Oh god Jason, your father was right. You’re a fool. As gullible as your aunt Sheila.
...Hey, it’s ok.
Your mom still loves you. She's just worried.
Not everybody understands NFTs. We’re talking about a new way of storing information and proving ownership – it’s complex stuff.
Just like Bitcoin and cryptocurrencies hope to revolutionize finance, lots of people think NFTs will transform the way we own things on the internet.
And, like crypto, NFTs are slowly infiltrating the mainstream.
That means you’ve probably had to sit through your dad laughing at “stupid internet pictures” during Thanksgiving.
Or you've nodded along while your tech-savvy friend intensely tells you about mints, DAOs, and Rug Pulls.
Sound familiar? You’re in the right place.
Here's what we'll cover today:
What is an NFT (non-fungible token)?
How do NFTs work?
What makes NFTs valuable?
What’s the point of NFTs?
What is an NFT?
NFT stands for non-fungible token. They are unique parcels of data that live on a blockchain.
NFTs let people add information to secure, permanent, and decentralized lists. So they're great for making digital deeds, receipts, data logs, and contracts.
Those "deeds" can be used to express ownership of an asset – like a collectible artwork, a concert ticket, or a house.
NFTs = crypto?
NFTs are similar to cryptocurrencies, which also live on blockchains.
The main difference is that crypto tokens are identical to each other (so can be swapped like dollar bills) while NFTs aren't:
Today, most NFTs are used to prove ownership of unique media – things like art, video game items, and profile pictures.
But there’s a great potential for using NFTs to represent all kinds of unique items and identities – even physical goods.
Seriously, WTF is an NFT?
Ok, I get you. Here are some ways to think about NFTs:
Permanent digital deeds
Pieces of information on next-gen servers
The code behind digital trading cards, art, and collectibles
A way to track digital ownership
Remember, non-fungible tokens prove that people own assets – they generally aren’t the assets themselves.
How do NFTs work?
NFTs, crypto, and blockchains are three closely connected concepts.
Just as blockchain tech was harnessed by the inventors of crypto, the first NFT creators built on crypto programming to make a new type of information token.
So how are NFTs related to blockchains?
It would take lots of energy and data to store everyone’s digital goods directly on the blockchain. Instead, NFTs can be entered onto chains to provide a permanent, efficient record.
NFTs first began emerging around 2015, but really took off thanks to a blockchain token innovation called the ERC-721 standard.
ERC-721 tokens are a standard way of coding unique information onto blockchains. They were originally made to support online games, but early innovators spotted their potential for use in other spaces.
What kinds of things have been "tokenized" so far?
NFTs (in the form of ERC-721 tokens) have been used to represent loads of things!
The NFT landscape mostly consists of digital collectibles. But there are also Fine Artists, events management companies, and entrepreneurs using NFTs.
Collectibles
The most widespread type of NFT collectibles are PFP (profile picture) collections.
You've probably heard of some of these: Bored Apes Yacht Club, CryptoPunks, Doodles, etc.
They use generative programs to create thousands of images – usually headshots of cartoon aliens, robots, monsters, or other cyber creatures.
You can buy one of these characters and own a piece of a popular franchise.
Other types of tokenized collectibles include digital Nike sneakers, famous photographs, and pieces of internet history.
Art collections
Fine artists also operate in the NFT space.
Probably the best-known NFT artist is Beeple, responsible for Everydays: The First 5000 Days, a collage of digital paintings that sold for over $69 million in 2021.
Video & card games
Video games like Axie Infinity are tokenizing weapons, outfits, and other in-game assets, letting players sell items on marketplaces and import them into playthroughs.
Other NFT games include Sorare, which combines soccer trading cards and fantasy teams, and Gods Unchained, which lets players battle using strategy and XP.
Tickets
The NFL is in the process of rolling out NFT tickets that turn your admission stub into a take-home souvenir (that could have resale value).
Physical items
Patron tokenized 150 bottles of their rarest vintage, allowing owners to manage their Tequilla while the bottles stay locked in a climate-controlled Singapore vault.
Americana is a startup that’s creating microchips that can be embedded into physical objects to link them to the blockchain.
Digital real estate
NFTs have also been used to tokenize domain names, creating unique, permanent internet addresses – as well as plots of virtual land in metaverses.
Where can I find NFTs?
Not all blockchains are compatible with NFTs. For example, the Bitcoin blockchain doesn't natively support them.
By far the most widely used platform for NFTs is the Ethereum blockchain. Other popular options include Polygon (which itself is built on top of Ethereum) and Solana.
NFTs representing digital art and collectibles are traded every day on secondary marketplaces like OpenSea.
What makes NFTs valuable?
Still with us? You're a trooper.
There are three main ways that NFTs can hold value:
An NFT can be used to represent ownership of a valuable object
An NFT can grant its owner access to valuable things
An NFT collection can become a speculative asset on secondary markets.
In #1, the NFT essentially acts like a digital deed, with its value closely tied to the value of whatever it represents.
Legal systems need to recognize NFTs for them to hold value in this way – something that's being worked out across courtrooms as you read this.
In #2, the NFT is a ticket or key, which could be used to access community events, shows, experiences, or other gated content.
In #3, the NFT is part of a series designed with collectors and traders in mind.
Often, creators of these NFTs will give their collectibles rarity traits – different features programmatically applied to make some NFTs scarcer than others.
Depending upon the collection, traits can look like anything.
Characters might have different clothing options, tools, or body parts – while more functional NFTs could offer different perks or features.
What’s the point of NFTs?
If anyone can right-click save an NFT, what’s the point of spending money to be listed as its owner?
Some people call this the “right-clicker” mentality – it’s one of the most common questions asked by newcomers to NFTs.
Because owning an NFT doesn’t prevent other people from accessing the digital content it represents, you might feel like there’s no value to that ownership.
It all depends on how you think about ownership versus control.
Ownership vs control
Fans of NFTs believe that they offer a more modern form of ownership, where the right to property doesn’t equal the right to control how people use that property.
Increasingly, NFT creators let holders use the brand, characters, or other elements of a collection in their own projects.
Many even have CC0 copyright licenses, which means their content is entirely public.
Speculation & physical goods
Most right-click save talk refers only to digital art – and doesn’t take into account the profit NFT owners can make from buying assets at a low price and selling them when they become part of the zeitgeist.
It also fails to acknowledge that NFTs can be used to prove ownership of physical or non-market goods.
What is NFT “utility?”
Focusing on ownership and control makes it easy to forget that NFTs can mean whatever their creators want them to mean.
When the NFT community is talking about the point of NFTs, they often use the word “utility.”
Utility describes the benefits that NFT holders get for investing their money – and they can be as varied as your imagination:
Party with friends. Annual ApeFests give Bored Ape NFT holders the chance to see acts like Eminem and LCD Soundsystem.
Help run a project. Many NFTs give holders voting rights and access to project governance systems called DAOs.
Travel. Travel Toucans provides NFT holders with access to boutique hotels.
Expand your hobbies. Join an NFT wine club or indulge your love of basketball.
How will NFTs be used in the future?
NFTs will allow us to own and control more of our digital lives.
They'll let us keep, sell, and get more utility from the assets we collect in online environments.
As NFT technology becomes more widespread, we'll probably hear less about it.
When everybody knows how to access a webpage or send an email, you don't need to keep explaining the underlying technology.
The same goes for NFTs and blockchains. When the concept of tokenized digital goods becomes normalized, designers will step in – creating browsers, apps, and systems to make the user experience intuitive.
So you won't need to hear the letters N, F, and T said in that order ever again.
Liked this content? Keep following Decentra Daily for more on blockchains, NFTs, and the latest from the wild world of web3. 👩‍💻