What are NFTs
NFTs or non-fungible tokens are digital assets presented in various forms, from digital art, to digital sports cards, digital real estate and digital clothing. This might sound pointless at first, why would you want to own digital real estate or digital art? And why are individuals paying upwards of $15,000 for digital art, something that may just seem worthy of a screenshot to most people.
How they work
I’ll go into more detail on why NFTs are so valuable later, but essentially their entire value is derived from the fact that you are purchasing a collectable item of some sort that is not only unique to all other NFTs but can be easily verified that you have the original. So, how does it all work?
Similar to how cryptocurrencies use blockchain technology to verify transactions to avoid the “double spend” problem, NFTs using blockchain tech to verify and track original and unique content. Think of NFTs as a concert ticket, concert tickets have unique information like your name, seat, and the barcode they use to scan etc. Each concert ticket is unique and can’t be traded for another due to the information on the ticket. This is where the “non-fungible” aspect comes in.
Fungible tokens like Bitcoin can be exchange for one another. Although Bitcoin’s value may fluctuate overtime, you can exchange Bitcoin for someone else’s bitcoin as you guys are essentially holding the same thing. NFTs on the other hand cannot be exchange for one another as they are unique and similar to the concert tickets, the information within their smart contracts means that cannot be exchanged for one another. Fungible tokens can also be broken down into smaller amounts, for example 1 Bitcoin is broken down into Satoshis, with 100 million Satoshis equaling 1 Bitcoin. NFTs can’t be broken down as their value comes from the existence of the entire asset. I can’t trade you half of my digital artwork for half of your digital sports card, obviously this wouldn’t make sense.
Why is this worth so much?
As I alluded to above, the value in NFTs comes from its ability to distinguish the original copy of an asset. Lets use the Mona Lisa as an example to illustrate where the value in this comes from. With the advanced technology that exists today, I can get a replica of the Mona Lisa created that is virtually indistinguishable from the original. Despite the fact that they may be indistinguishable, the original, painted by Leonardo Da Vinci is worth millions and the replica is worth nothing. This means, that the visual aesthetic of the painting isn’t what gives collectibles and art value, its the original pieces from the original creator that creates the value. Once we understand this, the value in NFTs becomes very apparent for those that it appeals to. Not everyone will value digital art highly, just like how not everyone will value the Mona Lisa highly, the value behind these items is completely subjective and open to interpretation. It’s the technology behind NFTs that make is so valuable, the fact that you can easily prove that the copy of the artwork or collectible item you possess is in fact the original is groundbreaking. NFTs are verifiable, think of a signature on a painting that can’t be replicated. Blockchain technology has allowed collectors and individuals who want to purchase digital assets, a way to protect the value of their investment.
In the end, digital assets only have value equal to what any one person is willing to give it. Someone might be willing to pay $10 for the Mona Lisa, another $5 million. The value in the specific art work is subjective and varying. The value in the technology of NFT is only just beginning, its the spawn of a new industry that most of us haven’t caught on to yet.
Thanks for reading!