You have probably seen articles discussing the latest multi-million dollar sale of an NFT, but it can be difficult to understand exactly what it is that people are paying for. Is it art? Technology? Tulipmania-style media hype? The answer is that NFTs are a bit of each of these things, and perhaps more besides. So, let’s take a look at what NFTs are and how they work.
What are NFTs?
NFT stands for non-fungible token. The “non-fungible” part means that an NFT cannot be exchanged for something else of equal value. For example, a 20-pound note is fungible. In other words, one 20-pound note can be exchanged for any other 20-pound note. A painting by an artist, however, is non-fungible. If you traded one painting for another painting, even one by the same artist, you would have a completely different painting. In the same way, each NFT is unique.
The word token indicates that NFTs are part of a blockchain. In fact, they work on the Ethereum blockchain. Ethereum is a cryptocurrency, like Bitcoin, but its blockchain also supports the exchange of NFTs as well as Ethereum coins. Other blockchains support their own version of NFTs.
So far, so good, but we still don’t know what exactly an NFT is. Well, an NFT can be anything – a drawing, a doodle, a piece of music, text – as long as it is digital. In fact, most of the excitement around NFTs is about collecting NFT artworks. In fact, one way to look at NFTs is like collecting fine art, only digital.
The digital aspect can be hard to get your head around. After all, digital files are easily copied. For example, the digital artist, known as Beeple (Mike Winkelmann), created a an NFT called Everydays: The first 50000 Days, which sold at Christie’s for almost £50 million. Everydays was a composite of 5,000 drawings, which were all viewable online for free, as was the final composite.
Why are NFTs valuable?
So, if most NFTs can be viewed by anyone for free, why are they worth huge sums of money? The answer is that owning an NFT gives the buyer ownership of the work. It’s like buying an original Van Gogh as opposed to buying a print. Both look the same, but the original is more valuable because it is the original.
Of course, the original Van Gogh is also more valuable because it is in a different format from the print, a format that shows the artists’ skill and style in much greater detail than any print can offer. The buyer of the Van Gogh can appreciate the physical object, with an NFT, any copy is the same quality as the original.
That said, what many are really buying with an NFT is the bragging rights of saying you own an NFT. The value of saying that you own the rights to Jack Dorsey’s (the founder of Twitter) first tweet (“just setting up my twitter”) is apparently worth €2.5 million. That’s how much it sold for, despite the fact that the buyer essentially paid that money for a digital certificate of the tweet, which is unique only by virtue of it having been signed and verified by the creator. The tweet itself can be viewed for free on Twitter (I looked at it while writing this).