About Non-fungible Tokens

KALM-150x150"Tom explores the utility and novelty of NFTs.

Featuring Tom Merritt.



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Episode Script
My friend says I need to get in on NFT, is that some sort of sportsball league?…

It sounds like a scam or really bad DRM…?

So why are so many people into it…?

Are you confused?

Don’t be.

Let’s help you Know a Little more about Non Fungible Tokens AKA NFTs

NFT stands for Non-fungible token. It can REPRESENT any digital item from a work of art, a video or even a tweet, but it actually IS just a unit of data stored on a digital ledger called a blockchain.

We never require a pre-requisite for an episode of Know A Little more but if you have listened to the episode about Blockchains you will understand some of this a little faster.

For those who don’t already know, a Blockchain is a system for recording digital information in a way that makes it very difficult to alter or fake. It does this by using some cryptography combined with a distributed network. So it’s hard to crack, and even if you do, changing it one place doesn’t change it in all and the oddities get tossed out.

A good example of how that second part works is Wikipedia. People used to worry that Wikipedia would be inaccurate or defaced. But we’ve seen that with enough eyes on the content Wikipedia is about as accurate as a centralized encyclopedia and defacements don’t last long at all. Wikipedia has a central server. though Blockchains don’t. Making them even harder to alter.

But we’re here to talk about NFTs. The reason I went through all that Blockchain stuff is you need to understand that the blockchain, while digital, is very difficult to change, otherwise NFTs make no sense at all.

Because in addition to certifying a digital asset as unique, the central value of an NFT is that it can be used to create a permanent record of who owns a digital thing, most famously, digital art. It’s important to understand that the NFT is not the thing. The thing may or may not be included somehow in the token, but the important part of an NFT is the record. When you buy an NFT there is a permanent recording on a blockchain that you bought it and nobody else.

As we mentioned, NFT stands for non-fungible token. What does fungible mean? Fungible means interchangeable. It is something that is easily replaced by another identical item. It’s usually used in economic terms and money is the common example. A 5 Euro note is identical to every other 5 Euro note and you can exchange one for the other. One share of stock in US Steel is identical to another share.

Non-fungible items are things like your house. You might get lucky and find a house that’s valued the same as yours but they’re not identical. You can’t just take a house and swap it for any other.

So that’s the non-fungible part, what about the T in NFT? A token in cryptocurrency terms is usually a fungible unit, like money. Each token is meant to be the same value as every other token. The value of one token may change in a day but each token will change value along with every other token. One bitcoin is always equal to one bitcoin whether it’s worth five dollars or a million. Same for ethereum, dogecoin and others.

So you probably see where this is going. The non-fungible token is designed to be exchanged on a blockchain like any other crypto token but it is not fungible. Each token is unique and can be valued independently from others.

OK so I’ll give you a minute to wrap your head around that. You have a digital token recorded on the internet in a blockchain as belonging to someone. But unlike most coins, each token is not worth the same as another. When I transfer that token I will want to get compensated for it.

That’s the original concept of NFT.

Now on to what it is used for.

The first NFT ever created was called “Quantum”. Anil Dash and Kevin McCoy created it in 2014 calling it “monetized graphics” at the time. The idea was used for digital trading cards. In 2017 Larva Labs released tradable cartoon characters called CryptoPunks on the Ethereum blockchain. That paved the way for CryptoKitties, which launched on Ethereum in 2017 and became the first NFT viral hit. It involved adopting and trading virtual cats. Because, the internet is built of cats.

Nike got on board in 2019, selling NFTs to verify the authenticity of actual pairs of shoes. And in 2020, Dapper Labs – the folks who had brought us CryptoKitties, released NBA TopShot – collectible NBA highlights like slam dunks — on the Flow blockchain. The next thing you know it’s March 2021 and Beeple is selling an NFT called “Everydays: The First 5000 Days” for $69.3 million through the venerable Christies Auction House founded 1766.

So NFTs were conceived with lots of uses but they have become most popular for digital collectibles. I go on an NFT platform, like OpenSea, Rarible, Grimes or one like that, and I post my digital item for sale.

Let’s say I go to OpenSea and make an NFT of the first photo I ever posted to Flickr. A sandwich, of course.

I can set a price or run an auction. But the idea is that whoever buys it can point at the blockchain and prove that they bought the rights to claim ownership over my first Flickr image. And OpenSea will make that easy to point to.

I may include the actual image in the blockchain record or, as is common, just a link to the image. But that part doesn’t matter as much as the record which says You paid me on this date for a token that says you own the image.

Multiple blockchains, including Flow and Tezos, support NFTs, but most NFTS are recorded on an Ethereum blockchain. Ethereum calls them “contracts” and they can include just the ownership or other stipulations and benefits.

It’s important to note that the token itself is not a legal instrument. Laws may yet catch up with this but right now the validity of the claim rests on the perceived validity of the seller and the platform and any stipulations added to the “contract” included in the token. That contract does not have to confer any rights. Simply owning the NFT of my first Flickr image does not give you a copyright on that image, unless that is included in the “contract.” Art sellers will commonly include some basic rights, like setting it as your profile picture, but rarely do you get the copyright.

So a few caveats are in place for all you emptors out there.

Technologically speaking, anyone can go on any platform with any infinitely copyable digital item and sell it. So you could all try to sell my Flickr sandwich.

And nothing is stopping me, technologically speaking, from selling my Flickr sandwich to other people on other platforms or even on the same platform.

So you need to choose the platform you buy and sell on carefully. MOST platforms work to provide verification of sellers, and combat duplicate sales. But the buyer is taking a risk when buying an NFT. It’s not likely that Jack Dorsey will go sell his first tweet multiple times. He’d get exposed and ridiculed if he tried that. But lesser known sellers might try. You need to make sure the platform has done its due diligence AND you should make sure yourself that you’re buying from the actual artist and that the artist is trustworthy.

That said most NFTs are legitimate and not fraudulent.

Also, you’re often buying NFTs with cryptocurrencies. That means it’s not always as straightforward as putting in your credit card info. You’ll often need to have a cryptocurrency wallet and transfer the currencies to the platform. That’s true for the sellers wanting to cash out too. And cryptocurrencies take a percentage of transaction every time you make a transfer. With Ethereum coins this is called “Gas.” It’s used to compensate all the machines out there verifying the transaction on the blockchain. So you would always end up paying a little more than the cost listed if you’re paying in cryptocurrency.

And a lot of people are worried about how much electricity is used by all those machines processing all these NFTs and what kind of environmental impact that could have.

So why buy one?

This is where it becomes less fact-based. The fact is lots of people are buying them and even re-selling them. My take is it’s the same thing that causes people to buy any collectible. You want to show it off. I’ve described it as bragging rights and I think it is often, but it’s also that satisfaction you get from being the “owner” of a thing. Even if the thing is infinitely copyable. You get to show a special relationship to it that others don’t. This is similar to a low-numbered collectible. The Jaina Solo figurine you have is identical to every other made, but if yours is numbered 1 of 10,000 you may take a special pride. If all you cared about was having the figurine you wouldn’t care about the number.

That’s what I think is going on with NFTs. In many ways it’s the concentrated form of numbered collectibles.

But whatever it is there is also a speculative element to it. Because there are people who *do* want to buy them, other people are buying them in the hopes that they can re-sell them for more. How much is actual desire to own an NFT and how much is financial speculation remains to be seen. You can make your best guess but nobody yet knows.

And there are sometimes other reasons to buy an NFT. Since a token’s contracts can include more than just the recording of the transaction, as I mentioned before sellers can attach other benefits. Kings of Leon sold an album as an NFT. There were a limited number of copies of the album sold as NFTs. So some of the value was in being one of the few to “own” the NFT but in this case it wasn’t just about exclusivity. The band took full advantage of how token contracts work

One token was the album package with exclusive content and vinyl for $50. Six tokens included exclusive audiovisual art . But there were also 18 “golden tickets” with exclusive art which offered four front-row seats for life, a personal driver and concierge service and backstage access at shows.

And because of the nature of token contracts, Kings of Leon included a term that gave them the right to require that some of the money from any future resales of tokens will go to a charity that helps out of work touring professionals. And maximum prices for resale can also be set to deter scalping.

But if you don’t get special perks like that, and most NFTs don’t, what do people do with their NFTs once they have them?

Some platforms also include a “gallery” that you can let people “visit” to see your acquisitions. BUT remember that such galleries are under that platform’s control. If the platform goes out of business, the gallery may disappear. The NFT would still exist on the blockchain but you’d have to work to show it off yourself. And if the NFT only included a link to the item, the link may no longer lead to anything. In fact some platforms use that as a way to deter fraud. The NFTs all link to gallery images and platforms can pull the image from the link if they determine the seller was fraudulent.

And while the blockchain record may be forever, the token can be stolen without altering the blockchain. For example someone could get your OpenSea account and transfer your tokens to themselves. So standard security practices, as always, apply.

In the end, just like paper money, NFTs are worth as much as we all agree they are.

I hope this helps you understand the shared hallucination that is a non-fungible token.

In other words, I hope you Know A little More about NFTs.