What is an NFT?

What is an NFT?

At this point in the course we have a sense of what an NFT is, or at least what an NFT can look like and how blockchain serves to make NFTs possible. It is now useful to explore the special properties of NFTs, how they differ from cryptocurrencies, and what they can allow us to do.

Fungible vs Non-Fungible

You are probably aware by now that NFT stands for Non-Fungible Token. Like cryptocurrencies, Non-Fungible Tokens are forms of recorded data underpinned by blockchain technology, and are represented by ‘tokens’ in a similar way that cryptocurrencies are tokens in that they are representations of ownership rights encoded on a blockchain digital ledger. NFTs, however, have important characteristics that differ from cryptocurrencies. The most fundamental is the concept of non-fungibility. To understand what non-fungible means, we must first understand what it means for something to be fungible.

Fungible and fungibility are terms from economics that describe the ability of things to be perfect substitutes for each other. Fiat currencies are by their nature fungible – for example one US Dollar is economically indistinguishable from any other US Dollar. Even though individual notes might be identified by their own unique serial numbers, it does not matter which note we use to buy a cup of coffee, lend to a friend, or invest in a stock. One British Pound or one Australian Dollar is, economically, indistinguishable from any other of its kind in your pocket, in your bank account, or over a shop counter.

This property of fungibility also holds for Bitcoin, Ethereum, or any other cryptocurrency – one Bitcoin is economically indistinguishable from any other Bitcoin, and so on. The underlying digital ‘token’, as a form of money, is designed to be that way. If cryptocurrencies were non-fungible, they would not be very useful as money.

Non-fungible tokens, however, do not have this property. While they are digital tokens – representations of ownership rights encoded on a blockchain digital ledger – they are coded with unique identifiers that make each ‘one of a kind’. A useful analogy is a one-of-a-kind trading card – if you trade it for a different card, you have something different, with different properties, and economic value. It is the properties of blockchain technology that make the non-fungibility possible. Tokens can be coded with unique identifiers that distinguish them from other things, even very similar things.

Transactions involving NFTs are validated by cryptographic proofs, so that the authenticity and provenance of the NFT are ensured. This makes them very hard to copy or fake. Another way of describing this is to say that NFTs can ‘create digital scarcity’ for an item.

What can become an NFT?

Anything that can be represented digitally can be minted as an NFT. This can include property rights (even fractional property rights), credentials, video clips, and more but the main growth recently has been in digital art and collectibles as we have seen in earlier sections and will further explore later.

It is clear NFTs are here to stay and the growth in the digital asset marketplaces for them shows no signs of abating. Overall, the NFT industry grew by 299% in 2020. So far the biggest surge in the NFT market was when the NBA Topshots marketplace hit its stride in early 2021. The NFT market leapt 2,100% to $2 billion in sales within the first three months of 2021 – almost triple the amount that NFT start-ups raised the previous year. Digital Collectible platforms in the US like “NBA Top Shot” have reached over $500m in annual sales while European platforms like Sorare are selling player cards for up to hundreds of thousands of Euros apiece.