NFTs, the basics
NFTs are a hot topic at the moment, but what are NFTs. I wrote this post as if the reader knows nothing about a “NFT” and will give a basic understanding of the term. Let’s start with the very basics, what does the abbreviation NFT stand for? NFT stands for “Non-Fungible Token”, alright, so what is that?
Fungible vs Non-Fungible
To understand NFTs, we should first define “Fungible” and “Non-Fungible” in terms of non-digital definitions.
Fungible
A raw definition of the term ‘Fungible’ reads as follows
(of goods contracted for without an individual specimen being specified) replaceable by another identical item; mutually interchangeable.
source: Oxford Dictionary
Meaning, one fungible thing can be traded for another fungible thing, and you will end up with the same thing. The easiest form of fungible would be money. If we trade a five euro banknote for five one euro coins, we both still end up with 5 euro of value. To buy non-fungible assets, you use fungible assets.
To summarize:
- Interchangeable
Examples
- Euro
- Dollar
Non-Fungible
We gave fungible a raw definition, so let's also give ‘Non-Fungible’ a raw definition.
Not easy to exchange or mix with other similar goods or assets.
Source: Cambridge Dictionary
As you probably guessed, non-fungible is the antonym of fungible.
So, what are examples of non-fungible assets in the real world. Well, non-fungible assets would be unique and not interchangeable. The best example would be ‘Pokémon Trading Cards’. We could trade a “Charizard” for a “Mewtwo” and we would both have something different. They are both one-of-a-kind. Other examples of non-fungible assets would be: a house or art.
To summarize:
- Not interchangeable
Examples:
- Art
- A house
- Pokémon Trading Cards
Digital
So, those were some real life examples of fungible and non-fungible assets, but how does this translate to the digital market and especially on the blockchain.
Blockchain
To understand NFTs, we should first understand the technology where NFTs are built on: ‘Blockchain’. I will try to keep this short. (Blockchain could be a whole blog post by itself)
Again, let us first examine the raw definition of ‘Blockchain’.
A system in which a record of transactions made in bitcoin or another cryptocurrency is maintained across several computers that are linked in a peer-to-peer network.
Source: Oxford Dictionary
What does this mean in layman’s terms?
A block in the blockchain would be a collection of transactions recording, for example, person A traded one cryptocurrency with person B. When a block is created they are chained to the previous block. When we calculate the current balance of person A, all we need to do is check all blocks on the chain and add up all transactions in these blocks.
The cool thing about this technology is that the creation of blocks is not done by one centralized system. There are multiple ‘computers’ verifying transactions and creating blocks. In return for creating a block on the blockchain, the ‘computers’ are rewarded some cryptocurrency. This is called “proof-of-work”.
Fungible tokens
As for digital fungible assets, a “Fungible token” would be ‘Bitcoin’, ‘Ethereum’ or any other cryptocurrency. These are interchangeable, trading one bitcoin for one bitcoin would leave both parties with the same amount after trading. All cryptocurrencies are verified using blockchain technology, the exact implementation varies per currency.
Non-Fungible tokens
The new kids on the block are NFTs (Non-Fungible tokens). Just like the Fungible tokens these are verified on the blockchain, the blockchain stores trades of NFTs between users in a block. An NFT can be anything digital. The most common NFTs are images, but they can be (a): video, song, digital real estate, weapon in a game, etc…
A digital wallet
Because the blockchain verifies transactions of NFTs, they are stored in a so-called wallet. A wallet consists of every transaction a specific address made. Using all transactions, all tokens a user owns can be showed. A very basic example of what this would look like would be:
0x3c2762e8e7105c83aaa6e02955d2411b2988e881
- Asset 1
- Asset 2On the website, OpenSea collections of NFTs can be viewed in a more visually pleasing form.
This example shows a profile of the user ‘Oliveallen'. Because the blockchain stores all assets, they are publicly viewable by everyone.
Ownership
Why would you buy an NFT, I can just screenshot an image and save it in on my computer?
While yes, you could screenshot an NFT and save it on your computer, it would not exactly be the same. People are spending real money on NFTs to “own” the original.
I like to compare it to art. There is only one Mona Lisa, and it is hanging in the Louvre in Paris. The real Mona Lisa is worth millions, but you could just buy a good copy and hang it in your home. Doing so does not mean you ‘own’ the Mona Lisa.
Conclusion
After creating digital fungible tokens like Bitcoin and Ethereum, a new kind of asset is getting popular, the so-called NFT (Non-fungible token). Digital assets that are not easily exchangeable with one another, “digital Pokémon cards”. In my next post, I will explore the media that is sold as an NFT.
