Understand NFTs in 6 Steps

We’ve heard a lot about these digital products lately from our newsfeeds, mostly because of the seemingly crazy price some of them have recently been sold for, but what exactly are they? Here’s a plain-language explanation.

What does NFT stand for?

NFT stands for Non-Fungible Token. That doesn’t help anyone.

What is a token?

A token, in this context, is a unit of data, like a file (pdf, doc, etc.). Another example of a token is a unit of cryptocurrency like bitcoin. If you’ve heard anything about NFTs, you’ve heard them be compared to cryptocurrency. The difference between an NFT and a bitcoin is that each unit of bitcoin is exactly the same, whereas each NFT is completely unique.

So that’s what non-fungible means?

Yes. Fungible means “mutually interchangeable.” Money is fungible. Bitcoin is fungible. Logically then, we can understand “non-fungible” as “uninterchangeable” or “unique.”

To compare to something more familiar, let’s think of bitcoin like we think of stocks. A stock’s value is exactly the same as any other stock in the same company. But an NFT is like a fingerprint or - as we’ve heard already - a painting, completely unique from any other of its kind.

But how is an NFT different from the jpeg of the same image?

Imagine someone creates a song in Garageband and turns it into an NFT. Now, you could take that NFT and turn it into an mp3. You could even turn it into another NFT. But the two NFTs would not be exactly the same. They would sound the same, but their blockchains would be different.

OK - what’s a blockchain?

A blockchain is a type of database. Most databases are structured so that the information they hold can be easily searched and retrieved. But a blockchain stores data to record the order in which said data enters the chain.

Think about it like a library. Libraries are organized so that you can find what you’re looking for, like a traditional database. Looking for Robert Munsch? Hop over to the Children’s Fiction section. Trying to diagnose the weird growth on your ankle? Anything that can help you will be found between numbers 610 and 618 in Non-Fiction. But if your library was organized in a blockchain, the first book on the first shelf would be the first book bought and shelved in that library.

Remember that scene from High Fidelity where John Cusack organizes his record collection autobiographically? That’s a blockchain.

Now you might be thinking, that’s a dumb way to organize information. Not if the goal of your database is to organize the chronology of that data. The autobiographical record collection is actually a perfect metaphor, not just for blockchains in general, but specifically for NFTs. The data that comprises a bitcoin is all the same. That’s what gives each bitcoin the same value. But each piece of data in an NFT is unique, just like my autobiographical record collection will never match someone else’s exactly.

Why are they being sold for so much money?

That’s a tougher question to answer. The short answer is - they’re not. At least most of them are not. The only ones being auctioned off for 6+ figures have external value to them: they are made by someone already well-known in the digital art world or they hold historical value in some way. It’s the same thing with physical art. You can buy a canvas painting at a farmers market with the cash in your pocket, while a Van Gogh will go for $82.5 million. Art is always worth what people are willing to pay for it.

People will argue that there’s a difference in the value of the medium because physical art can’t be replicated visually the same way that digital art can. If I look at a jpeg and an NFT of the same image, I can’t see the difference, whereas looking at a poster of the Mona Lisa v. seeing the real thing in front of me are clearly different experiences. That’s true, and they’re entitled to that opinion. But the people buying NFTs believe that the value of a piece of art is more than the experience of looking at it.

Buying an NFT is a bit like buying limited-pressings in the vinyl world. You could probably stream that David Bowie outtake on Spotify, but owning the piece of plastic connects you to the song in a different way. It’s probably worthless to the average joe who doesn’t care about this type of thing, but to another vinyl-junkie, it’s priceless. The same thing goes with NFTs.