NFT stands for “non fungible token”.
What Is A Non Fungible Token?
“Non-fungible” means two items are not interchangeable. They have attributes that make them unique.
For example, one house isn’t interchangeable with another house. One house might be a mansion, another might be a shack. They are different items, even if they are both classed as houses, but if you swapped a house with a friend, one of you might gain and the other may lose due to the difference in attributes.
“Fungible” means an item is interchangeable with another item.
For example, a one dollar note can be replaced with another one dollar note. They are essentially the same thing and if you swapped one with a friend, neither of you would lose or gain anything.
Meanwhile, a token is something that represents value. For example, a gift-card is a token. The gift-card is just a piece of plastic that doesn’t have any value, but it represents value and can be exchanged for that face value.
So, a NFT is something that represents value and exhibits non-replaceable characteristics. A NFT could take the form of a digital token that represent a collectible piece of digital art.
What Is An Example Of An NFT?
Here’s a valuable Cryptopunk NFT:
This Cryptopunk sold for $5.33m on August 24, 2021. Here is the record of ownership of this NFT.
You could copy this image. You could paste it somewhere else. But that doesn’t mean you own the original. Likewise, you could photocopy a valuable baseball card but that isn’t the same as owning the real thing, even though it looks identical.
NFTs offer a way to own and exchange digital assets.
What makes An NFT Valuable?
Some of them are valuable.
Some of them are not.
Is a baseball card valuable? It depends. It depends on the subjective value other people place on it.
Some old, rare baseball cards are listed on Amazon for 100s of thousands of dollars. This one is listed on Amazon for $363,000:
Other cards end up in the rubbish bin.
They are both just bits of cardboard that can be reproduced easily. Yet one is valuable, the other is not.
The same value proposition applies to NFTs. The value of these collectables is subjective. They are literally worth whatever someone else is prepared to pay for them. If they are rare and in demand, then their value increases.
In the case of NFTs, the value lays in the bragging rights of ownership. The code that underpins an NFT proves ownership.
What problems do NFTs solve?
NFTs bring real-world properties like scarcity, uniqueness, and proof of ownership to the digital world.
NFTs also provides a mechanism whereby an item becomes platform independent. For example you can’t re-sell a Kindle book you’ve purchased, or you can’t exchange your in-game credit for real-world store credit elsewhere.
This becomes possible using NFTs as you can create a tokenise items and make them digitally portable.
How can NFTs be used?
Collectables are the first use case. But there are many other possibilities including:
- Gaming. Economies within a game could be handled via NFTs. If you create a unique costume, you could sell it within the game.
- Musicians could register an NFT to manage performance rights. An NFT is programmable, so this could automate payment to the artist, for example.
- Tracking proof of ownership of real world items.
- Academic credentials. A University could confer a degree NFT. If you need to prove you have a degree for a particular University, you could cite the blockchain record as proof.
How Do I Buy An NFT?
The process to buy an NFT is typically:
- Purchase Ethereum, or appropriate currency. At the time of writing, most NFTs are on the Ethereum network.
- Download Metamask.
- Connect Metamask to an NFT marketplace.
- Bid on or buy an NFT.
- The NFT will be sent to your Metamask wallet address.
- You store and trade your NFT just as you would a cryptocurrency.