NFTs took a hold of headlines earlier this year.1
With the NBA, CNN and Marvel getting in on the action, it’s likely NFTs will continue to make headlines. So...
What is an NFT?
In 2017, I was driving home from work when I noticed a police officer with his radar gun pointed right at me. Knowing I had been caught speeding, I pulled myself over.
The officer asked for my identification, insurance and vehicle ownership. Back at the cruiser, he used that information to look me up in a database.
After seeing my vehicle was in the system and linked to my identity, the officer could be confident I was the rightful owner.
The ownership document references a particular vehicle and identity, which is why we can’t simply swap our document with a friend. This non-exchangeable characteristic is what people refer to as non-fungible, or the NF part of NFT.
On the other hand, if I had a $5 bill, and you had a $5 bill, we would be fine with exchanging them because they represent the same value. They are fungible.2
The T means token, and it’s just an abstract word for the ownership document.
An individual can prove ownership of an item by presenting an NFT, a document with a corresponding record in a database.
NFTs use a new type of database called a blockchain because they have a couple attractive features:
Anyone can use it (i.e. it is public); and
No entity has complete control of it (i.e. it is controlled by users).
In poetic terms:
“[a system] by the people, for the people, shall not perish from the earth.”
— Abraham Lincoln, Gettysburg Address
So, that’s all an NFT is: a record of ownership of a particular item, stored in a new type of database called a blockchain.
What items can have an NFT?
Digital Artwork
To get some first-hand experience, I created an NFT for my friend’s iPad artwork.
OpenSea is one of many online marketplaces (similar to eBay or Etsy) where creators can sell their work as NFTs.3 Below is a screenshot of the posting details:
Here’s what those details mean:
Contract Address: this is a reference to the computer code that created the NFT
Token ID: this is the unique identifier of the NFT, or ownership document
Blockchain: the name of the public database where people can view this information
Whoever buys this NFT will be able to say “If you look at the Ethereum blockchain, you will see that I am the rightful owner of token 8788414588464460… which corresponds to this awesome drawing of a ‘64 Chevrolet Impala.”
The blockchain database also indicates that you bought the NFT from the artist, providing you a way to prove its authenticity.
The reason someone paid $69 million for an NFT is the same reason why a prince of Saudi Arabia paid $450.3 million for a painting. An individual valued an authentic item at a high price.4
Collectibles
To provide a more familiar example, consider a signed baseball. When your friends come over, you might find it difficult to convince them it’s real.
Unless you have a picture of the player signing the ball while you hold it, there’s really no way to prove the ball was autographed by the real player.
However, if you could point to a public record and say “look, Derek Jeter issued a signed baseball after the game and transferred it to me,” your friends would have a hard time doubting you.
In October 2020, Dapper Labs, in partnership with the NBA and the National Basketball Players Association, launched a digital collectibles platform called NBA Top Shot.
Instead of signed baseballs, NBA fans can purchase NFTs representing ownership of GIFs of their favourite players. Ownership of the NFTs are tracked on the Flow blockchain, developed by Dapper Labs.
Simply put, the NBA is selling basketball cards fit for the Digital Age. And just like normal basketball cards, some are worth more than others:
Music
In February 2021, Kings of Leon, in partnership with Yellow Heart Factories, became the first band to sell NFTs linked to their music.
Anyone can still listen to the album on Apple Music or Spotify, but the fans who purchased these NFTs got some added perks:
The sale was recorded on a blockchain, meaning owners can prove they own a legit copy of the album;
There were a finite number of them, similar to limited edition records;
A portion of the proceeds went directly to the band;
By design, the remaining proceeds were donated to charity automatically; and
Owners of higher-tier NFTs will receive front row tickets to a concert!
Summary
To prove ownership of a vehicle, we carry around a unique document with a corresponding entry in a database controlled by the state.
If you want to sell your vehicle (i.e. change ownership), you need to have the DMV or similar government organization update their database.
An NFT is a digital record that establishes ownership of a specific item. The record is stored on a new form of public database called a blockchain.
Rather than have a central entity control the database, blockchains claim to create a system for the people, run by the people.
Art, collectibles and music are just some of the applications of NFTs. As people explore the technology, they are likely to find more and more use cases, meaning this acronym might be around for a while.
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Please contact me at justin@nojargon.org if you have any questions, comments or suggestions for future topics: I’d love to hear them!
I am always looking to learn new things, refine my understanding, correct any errors and expand on the sources that influence my thinking.
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Why an Animated Flying Cat With a Pop-Tart Body Sold for Almost $600,000, New York Times
What is an NFT - and should you buy one?, Forbes
What are NFTs and why are some worth millions?, BBC
People have spent more than $230 million buying and trading digital collectibles of NBA highlights, CNBC
NFTs Are Shaking Up the Art World - But They Could Change So Much More, Time
Believe it or not, the word “fungible” is not related to mushrooms.
On July 20, 2021, OpenSea announced they received $100 million dollars from investors to grow their business, which is to say real money is flowing into the NFT space. Among these investors were a16z, a reputable firm from Silicon Valley, as well as Kevin Durant and Ashton Kutcher.
Maybe so they could flex it to their peers.