In the past few weeks, the concept of NFTs, or nonfungible tokens, have become mainstream. With high-profile sales of digital assets, including some weird and others fairly normal, the term NFT has become one that many people have heard of. However, not everyone knows exactly what they are - in fact, few people really seem to know what the term really means.
What is an NFT?
An NFT is a specific token that exists on the Ethereum blockchain. They share a common technological DNA with the Ethereum cryptocurrency but represent something different. Rather than representing a single portion of the overall value of a cryptocurrency ecosystem, NFTs represent a single point in time. That representation can be thought of as a digital certificate of authenticity for a particular digital asset.
These assets are most commonly artwork, music, or video clips. However, there have been some other oddball items, such as tweets. Recently, a nonfungible token representing the first ever tweet, a post from founder and CEO Jack Dorsey on March 21, 2006, sold for $2.5 million. As if that's not crazy enough, shortly after, Christie's auction house sold an NFT for $69.3 million. That token represented a piece of digital artwork named Everyday: The First 5000 Days by artist Beeple.
If I own the NFT, do I own the item?
Headlines about recent NFT sales have not been entirely clear about exactly how they work or what the sale represents. With a traditional certificate of authenticity, you get it when purchasing an item. With NFTs, however, this is not the case. Owning the NFT does not mean that you are the owner of the original digital asset. It's the most difficult part of the concept to understand. Jeffrey Thompson, associate professor at the Stevens Institute of Technology in Hoboken, New Jersey explained it, saying,
NFTs challenge the idea of ownership: digital files can be reproduced infinitely and you do not (usually) buy the copyright or a license when purchasing an NFT.
Another strange NFT sale is for the Nyan Cat meme, which sold for $590,000. The owner of that token does not give ownership of the meme to the owner, nor does it allow for them to prevent others from downloading or using it. What it does is gives the owner a unique token theoretically tied exclusively to that meme.
While it doesn't exactly work this way, you can think of it like going to a convention and buying a print of an artwork. You own that print, and only you can own it. But, it doesn't mean that the artist no longer uses it, and does not mean that you can reproduce it and make money from it.
But, why are they so valuable?
Just like any item, the value comes from people's belief in its value. And, like many collectables, value will be variable over time. People might remember the comic book craze of the 80s that collapsed by the 90s, or the Beanie Baby craze of the 90s that crashed by the 2000s. Those markets crashed because people lost faith in the value of the products. Marvel almost went out of business because of this loss of perceived value. Some collectables, however, maintain their value. Baseball cards, Magic: The Gathering, and Pokemon are all good examples of collectible commodities that have maintained for decades.
For NFTs, the future of value is unpredictable. It could go the way of Beanie Babies and Pogs, but it could be more like Pokemon and persevere. The fact that it is blockchain-based will help it maintain its momentum, at least among blockchain diehards. However, it is going to need to make a play for general acceptance, like cryptocurrency has, in order to maintain its growth.