What recently started as an Internet hobby among a subset of tech and finance enthusiasts has catapulted to the mainstream.
NFTs are being auctioned off by Christie’s, recording artists are selling albums as NFTs, and an NFT of LeBron James making a historic dunk recently sold for $200,000.
So, what is an NFT?
NFT stands for “non-fungible token,” meaning you can’t exchange it for another thing of equal value.
The token refers to a unit of currency on the blockchain, how cryptocurrency like Bitcoin is bought and sold.
Still, what exactly do you get when you buy an NFT?
The answer is complicated.
You’re basically purchasing a kind of barcode, almost a certificate of authenticity that serves as proof that a specific version of something is uniquely yours.
“The underlying thing that you’re buying is code that manifests as images,” said Donna Redel, who teaches courses on crypto-digital assets at Fordham Law School. “You’re buying a different format of art.”
What you’re also buying is an Internet trophy, clout, and a digital collector’s item.
However, what you’re not getting is the copyright or trademark of the item. And just because you own an NFT doesn’t mean there aren’t endless other versions of it on the Internet.
Still, NFT enthusiasts say owning a piece of code in a blockchain has shown itself to be an incredibly valuable thing.
“You’re not buying the picture; you’re buying the property rights to the picture,” said Jake Brukham, founder of cryptocurrency investment company CoinFund.
You may be asking, “why don’t people just right-click on an image instead and save it to their desktop for free?”
Well, that’s true, but like with other collectibles, whether it’s fine art or baseball cards, having an original is special.
To be clear, there’s no visual difference between an original and a copied version.
And to make it all even more confusing, not all NFTs are originals.
Several are the digital equivalent of a reprint. But in this case, the reprint has what is essentially a unique barcode or “token” on the blockchain, which is a type of decentralized record keeping.
In other words, instead of one institution, like a bank, having a ledger of transactions, a blockchain uses a vast network of computers that all hold each other accountable on a shared public record.
That makes it difficult to remove an NFT from the web entirely. It also means there’s a way to trace an NFT’s origin and transaction history.
So, how do you buy an NFT?
Once there, you can bid on an NFT and wait for the auction to end. If you’re the highest bidder, the NFT belongs to you.
Why the hype?
Tens of millions of dollars in transactions have poured into NFTs recently, and enthusiasts say NFTs will soon expand beyond trading art, music, videos, and memes. One startup lets people use their NFTs as collateral for loans.
Silicon Valley investors say the possibilities in the NFT world are limitless.
“At the time the iPhone was created, nobody would’ve thought that one of the killer apps was going to be hailing a ride,” said Haun with Andreessen Horowitz.
Is it risky?
Short answer – yes.
Like any tech frenzy, NFTs could be a fad or a speculative bubble. If you’ve purchased a high-priced NFS and enthusiasm suddenly plummets, you could be in for a significant loss. However, NFT backers say the system’s built-in scarcity should keep values up as long as the surge of interest persists.