What
exactly is an NFT?
It’s a digital asset that represents some real-world
object like music, art, in-game items, or videos. NFTs are bought and sold
online, often with cryptocurrency, and are usually encoded with the same
underlying software as many cryptos.
NFTs are becoming well-known now, though they’ve
been around since 2014, because they’re an increasingly popular way to buy and
sell digital artwork.
Conti and Schmidt report that “a staggering $174
million has been spent on NFTs since November 2017.”
NFTs are usually either one of a kind, or one of a
very limited run, so they have unique identifying codes. Arry Yu, chair of the
Washington Technology Industry Association Cascadia Blockchain Council and
managing editor of Yellow Umbrella Ventures says they “essentially … create
digital scarcity.”
This contrasts with most digital creations, which
are almost always practically infinite in supply.
So, cutting off the supply of a given asset should
raise its value (assuming it’s actually in demand at that moment).
Many NFTs, especially nowadays, have been digital
works that already exist in some form elsewhere (like securitized versions of
digital artwork that’s already out on Instagram).
Why are people willing to spend so much money on
something they could screenshot or download elsewhere?
“Because,” say Conti and Schmidt, “an NFT allows the
buyer to own the original item.”
Also, since it has built-in authentication to serve
as proof of ownership, collectors can amass an online collection. Some collectors
even value “digital bragging rights” almost more than the item they’ve
purchased.
People are starting to answer the question: how do we assign value to something that
doesn’t exist? What is a digital object worth?
“While we were all waiting for virtual worlds to
spring up,” says Joe Procopio, entrepreneur and founder of TeachingStartup.com
and GetSpiffy.com, “Facebook was selling out of Oculus.
While we were laughing or wincing at the pop culture
references in Ready Player One, Minecraft was letting its players build their
own blocky starter-kit societies.
And while we were debating the ‘realness’ of Bitcoin
as a currency, someone was paying 170,000 real dollars for a CryptoKitty.”
If you’re an entrepreneur, you can’t help but wonder
about the method of calculation on that $170,000 digital cat’s valuation.
The value of that CryptoKitty was determined by the
expectation that its value would increase over time. That same speculation
“drove the great alt-coin rush of 2017, and some painful lessons resulted in a
hardening of the rules of value for digital currency.”
Many have found that some of the “must-haves” for
almost every type of token come down to scarcity, supply and demand, ability to
transact, and tangible proof of ownership.
The digital coin is still only a virtual piece of
money, and ownership is still only in the virtual sense. But thanks to the
implicit rules in the blockchain (documented by smart contracts), virtual
ownership became “real enough.”
What’s
the difference between an NFT and cryptocurrency then?
NFT stands for Non-fungible token. A fungible asset,
like physical money and cryptocurrencies, can be traded or exchanged one for
another.
They’re also equal in value. One dollar is always
equal to another dollar and one Bitcoin equals any other Bitcoin.
In fact, cryptocurrency’s fungibility makes it a
trusted means of conducting transactions on the blockchain.
On the other hand, a non-fungible asset, even if
built using the same kind of programming as cryptocurrency, cannot be exchanged
with any other non-fungible asset.
Each NFT has its own digital signature that makes it
impossible for it to be exchanged for (or equal to) another one.
For example, say you have two different video clips
from an NBA game.
One clip isn’t even necessarily equal to the other
clip, much less to an entirely different work of art.
