For the uninitiated or the crypto-curious, non-fungible tokens (NFT) represent one of the most colorful sectors of the cryptocurrency industry.
How come seemingly duplicable and often wacky digital artworks can fetch extraordinarily high prices, and why do people flock to buy these intangibles?
This is certainly a difficult subject to understand, but let’s try.
What exactly is an NFT?
First, it’s important to point out that when you buy an NFT, you’re actually buying a digital token that simply points to a specific computer file that exists elsewhere on the internet.
It can be anything from a music file to a game costume or a cartoon animal image.
Think of it as a digital act on a pitch. The deed represents ownership of that particular property but, in real terms, the deed is not the plot itself.
Similarly, the NFT is NOT the numeric element itself.
So while it may seem like one thing, there are actually two separate components involved.
- THE digital item itself (an image of a cartoon monkey, a GIF of an animated cat with a Pop-Tart torso, etc.)
- THE non-fungible digital token which contains unique identifying metadata pointing to the above item, i.e. file location, item name, unique characteristics, contract address, etc.
An NFT is simply a negotiable digital token that stores important metadata (digital information) relating to the associated digital item. This information is unique, so even if you were to capture or duplicate the intended file and create a new NFT to represent it, it would contain different metadata and therefore it would be easy to identify which was the original and which was a copy. .
Just as you cannot “copy” real estate described by a deed, you cannot simply copy the digital object described by an NFT. Sure, you can take a picture of a plot of land or right-click on a funny cat NFT, but the object the NFT relates to remains the same.
This ease of authentication is due to the immutable, transparent and publicly accessible nature of blockchain technology on which all NFT tokens are stored.
When you purchase an NFT, the data indicating that the specific digital token linked to that specific item is linked to your crypto wallet the address is stored on the blockchain as part of the transaction. If you choose to sell the NFT, the blockchain data is updated to reflect the new owner’s crypto wallet address.
With this reminder in mind, return to what you own.
What do you really own when you buy an NFT?
The ownership part of NFTs is not as simple as you might think.
For one thing, when you buy an NFT, you’re essentially buying a token that gives you bragging rights so you can tell everyone “there could be hundreds of copies of this digital image on the internet, but I own the original one and here is the immutable proof (in the form of a unique digital token) to prove it.
But on the other hand, while you may be the “owner” of an original digital item, that doesn’t necessarily mean you have any rights to that item, for example, to use it as a company logo or create and sell souvenirs based on it. Often these intellectual property rights belong to the person or persons who first created the article, but this often differs depending on the NFT collection.
That’s not to say there aren’t NFTs that grant the use of open licenses, because there are plenty of them. It’s just that most of the time, unless expressly stated by the creator, buyers shouldn’t just assume that these rights are automatically assigned upon sale.
So, in short, what you own is a digital token that immutably points to an original digital item that gives you the exclusive right to resell it. Beyond that, holders of certain NFT collections such as Bored Apes Yacht Club (BAYC) found ways to increase their usefulness by establishing their own exclusive communities. These private channels allow like-minded people to share ideas, information, and receive perks like early access to new NFT drops.
Progress in Challenge also means that holders can now rent their NFTs to others in certain cases.
What happens if the digital file is deleted?
If you only own the NFT and not the digital file itself, what if the original creator decides to delete the file or if it is accidentally deleted?
This is one of the main drawbacks of NFTs today. In a rush to capitalize on the growing NFT trend, many creators fail to adequately secure their NFT data. This means that if this data is lost or corrupted, the NFT will not point to anything and will be rendered worthless.
A recent example of this is the widespread loss of many NFTs minted on the now defunct FTX exchange. Instead of hosting NFT data using a decentralized blockchain-based storage solution like Storj Or sia, FTX hosted them on FTX US servers which are no longer operational. As a result, the affected NFTs are no longer linked to their original files, but instead direct users to an FTX webpage that describes the company’s insolvency. Unfortunate events like this again illustrate the importance of decentralized storage of NFT metadata and will hopefully set new standards for collections in the future.
Learning how NFTs work now will help you navigate the future of the metaverse and digital property. Many are betting that we could end up buying and selling digital goods the same way we sell physical goods. After all, we’re always going to need cool shoes, t-shirts, and jewelry whether we’re hanging out in a real bar or a virtual bar.