What exactly are NFTs?

Updated: Jul 5

On the 11th March 2021, an artist known as Beeple sold this digital artwork for $69 million (nice) as an NFT:


The buyer paid Ξ42,329 ether, which was worth $69M USD at the time. (Ether is the cryptocurrency of a blockchain platform called ethereum.)


What the hell did the buyer receive in exchange for this ridiculous amount of money, you wonder. A freaken jpeg?


Yes, he did. He received a high resolution file of the digital artwork itself. But he also received the means to launder his $69M illegally-acquired drug money… uh, just kidding. He actually received the ownership of the artwork itself, as recorded in a blockchain-based smart contract which contains metadata about the artwork. In most cases, the artwork isn’t even stored in the smart contract itself; instead the metadata provides a link to the artwork hosted on an external decentralised file system. If you’re confused, you won’t be by the end of this post.


This is what it looks like. Here is the metadata tied to the NFT for grumpy cat sold for $83k USD:

(Source because I apparently CBF getting my own screenshot)

And here is the nyan cat meme selling for Ξ300 (worth ~$600,000 USD at the time of sale, now worth nearly $1M):


And just to rouse some sort of indignation in you, or awe, here is an NFT of a red square listed for ~$900k:

Note: no one has purchased it so far. My sanity restored upon learning that.


Okay... you’re probably thinking... wtf?


How is this different from selling any other digital artwork and attaching a simple txt file about the artwork?


Why are NFTs selling for such insane prices?


Are people paying for the artwork’s intrinsic value or is it all speculative (i.e. people only buy the NFT because they believe in its resale value)?


Is this all a scammy mcscamscam?


I’ll try to answer all these questions.


If you already understand the basics of NFTs & blockchain, please skip ahead to the opinion parts of this post:

Why NFTs Are Not Scams

Why NFTs are Great for All Art, Not Just Digital

But Why NFTs Kind of Suck at the Same Time

How NFTs Could Revolutionise the Ownership of Non-Art Assets

What is an NFT?


NFT stands for Non-Fungible Token.


To understand what that is, let’s break this down into first principles:

  1. What is fungibility?

  2. What’s a “token”, exactly?

It’s important to understand these because I want to argue that the potential for NFTs expand far, far beyond the art world.


WHAT IS FUNGIBILITY?


To understand the idea of non-fungibility, you have to understand fungibility first. Let's take a look at money.

Here are the 5 main characteristics of money:

  1. Portable. Should be easy to carry around.

  2. Divisible. Can be easily divisible into equal units.

  3. Durable. Should be hard to destroy.

  4. Scarce. Should be rare enough that it remains valuable.

  5. Fungible. Its units can be interchangeable with each other.


The $5 bill in your jacket pocket is fungible. It can be interchanged with any other $5 bill. A $10 bill can be exchanged for any other $10 bill. Same with a $50 bill, $100 bill, etc.


Something is fungible when it can be exchanged with a unit of the same value.


Diamonds, on the other hand, are non-fungible because each diamond is unique and cannot be randomly exchanged with another diamond.


So, a simple way to see it:

fungible assets = interchangeable assets.

non-fungible assets = unique assets.


So then we can also infer:

  • Bitcoin is a fungible coin.

  • Ether is a fungible coin.

  • Litecoin is a fungible coin.

  • ADA is a fungible coin.

  • Etc, etc.

  • Cryptocurrencies are fungible coins.

Ok, so those are fungible coins. What about fungible tokens?


Wait, aren’t they the same thing?


Hmm, nope.