NFTs (non-fungible tokens) hit the headlines recently when an artist named Beeple sold a digital image collage for $69 million. Depending on your taste in art, you might find Beeple’s image compelling, but would you pay millions for it? After all, you can “own” a copy of Everydays — The First 5000 Days by downloading the constituent images (although you might violate copyright laws).
That’s the problem NFTs are intended to solve. The Mona Lisa is worth about a billion dollars, but an exact digital copy is worth next to nothing. What does the canvas and oils original have that the digital copy doesn’t? It’s not information; modern cameras collect more data than your eyes can process. It’s not the painting’s physical material; you could make similar paints and canvas with a bit of research and a few hundred dollars.
The Mona Lisa is valuable, in part, because it’s unique. In economic terms, it’s a scarce resource. Scarcity alone doesn’t make something valuable: rocks are unique too. But a scarce item many people want to own, like a well-regarded work of art, creates sky-rocketing values.
Digital art is the opposite of unique. It is infinitely reproducible. It’s impossible to tell the original from a copy of a copy of a copy to millions of iterations. That’s a problem for artists, musicians, and other creatives—not to mention collectors and investors who want to create a market in digital assets.
NFTs make digital art economically valuable by making it unique. Or, more accurately, by associating it with something that is unique: a non-fungible token, allowing creators to sell the ownership of an item that can be easily replicated. Online creativity dominates our lives, but until NFTs, a digital Mona Lisa was impossible.
What Does Non-Fungible Mean?
Fungibility is a term of art from economics. An asset is fungible if it can be exchanged for another of the same type. Money is fungible. The $20 bill in my wallet is the same as the $20 bill in yours. We could swap bills, and nothing would change. We’d have the same amount of money.
Non-fungible assets can’t be exchanged in this way. A house is non-fungible; we could swap houses, but we’d each have something different. The same is true of cars and furniture and many other items. If I borrowed your car and returned a different one, you would have something to say about it—even if the car I gave you was worth the same as the one I borrowed.
What Is an NFT?
An NFT is a non-fungible token, a chunk of data that includes a unique identifier and a record of ownership underwritten by public-key cryptography. They can’t be copied or manipulated, and each token is unique, so it can’t be exchanged for another token in the way money can. However, NFTs can be bought and sold.
So far, NFTs sound about as interesting as rocks: unique but not especially desirable. But NFTs have other, more exciting properties. They can be used to certify the ownership of digital assets, such as a work of art. An NFT represents ownership. When someone buys an NFT linked to artwork, they are, in a sense, buying the artwork. The work itself can be copied, but the token and its association are unique.
With NFTs, it’s possible to create a market for digital assets. People can support their favorite artists by buying NFTs associated with their works. Collectors and speculators can buy NFTs as an investment. And it’s not just art: any digital asset can be linked to an NFT. Do you want to own your favorite meme? Meme stars like Ermagherd Girl (Maggie Goldenberger) and Scumbag Steve (Blake Boston) turned internet fame into money by creating and auctioning NFTs.
How Do NFTs Work?
If you’re familiar with Bitcoin and other cryptocurrencies, you may have recognized our description of NFTs. They share many of the same qualities as cryptocurrencies because they are both based on blockchain technology.
A blockchain is a digital ledger that records transactions as a series of blocks. Each block includes a cryptographic hash linking it to the previous block. The result is an ever-growing list of cryptographically linked records. Blockchains are distributed across thousands of computers, each with its own copy. Because blockchains are distributed and cryptographically linked, it’s all but impossible to alter the data they contain, making them a reliable way to store transactions without a central authority.
Blockchains were initially developed for fungible assets such as cryptocurrencies. But the Ethereum blockchain, among others, also supports tokens that include information about digital assets. When Vignesh Sundaresan—also known as MetaKovan—paid $69 million for Beeple’s digital art, he bought the right to transfer the relevant NFT to his digital wallet to prove he “owns” Everydays — The First 5000 Days.
What Are NFTs Used For?
We’ve already looked at two uses for NFTs, digital arts and memes, but there are many more, from Cryptokitties to Cryptokicks, Nike’s virtual collectibles. Games companies use NFTs for in-game assets. The musician Grimes sold a 50-second video for $388,000. Perhaps most famously, Twitter CEO Jack Dorsey used an NFT to sell his first tweet for almost $3 million.
How, as a creator, can you get into NFTs? First, you’ll have to figure out how to create one and associate it with a digital asset. Then, you’ll have to choose a blockchain to store your NFT. Ethereum is the most popular, and the most straightforward way to create an Ethereum wallet is with one of the large cryptocurrency exchange platforms, such as Coinbase. Finally, you’ll connect your wallet to an Ethereum marketplace such as OpenSea or Rarible, and upload the asset. Most NFTs are sold by auction, but there’s nothing to stop you from selling them directly to buyers.
NFTs are a fascinating evolution of both the blockchain and the market in digital arts and collectibles. Currently, the focus is on multi-million dollar headline sales, but NFTs also create a sustainable economy for artists, writers, videographers, and musicians who struggle to monetize their work.
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