Non-Fungible Token (NFT)
At its most basic level, an NFT is some digital data that can be uniquely distinguished from any other data.
This seems simplistic, but it enables up a lot of interesting secondary effects.
Understand that in digital terms, true uniqueness of data is rare. Normally, a byte on a hard disk and an exact copy of that byte on another hard disk are been “fungible,” or interchangeable – you can’t tell one from the other. If two sets of digital data are identical, then if someone derives value from Data A, then they would get the exact same value from Data B, and those two sets of data can be considered the same for all intents and purposes.
NFTs make data unique, so a particular sequence of bytes can be authenticated as different than any other.
The real-world result of non-fungibility is that now someone can make a private property claim to a specific set of data. This set of data is a “token” and it becomes “non-fungible,” or not interchangeable.
This theoretically solves one of the long-standing problems with digital assets: they can be copied. This is the entire basis of digital piracy – if you can make infinite copies of a picture at little or no cost, then that picture ceases to have much value. No one will pay for it because it’s just as easy to get a copy for free.
But when a set of data can be distinguished from any copy of it, then that piece of data theoretically has value, because it can’t be copied (it can’t be copied; the derived value of it might be copyable, but that specific data is not).
Once something can’t be copied, then it can be bought and sold on a competitive market.
The NFT market, therefore, is people buying and selling sets of data – “tokens.”
What data is in these tokens is up for debate. It could be anything, but as of this writing, most of the hype is about creating NFTs to represent digital media. I say “represent” because the data in the the token is not the media itself, it’s just a … ticket (?) representing the single claim of “ownership” to that media.
For example, if I create some online video of me doing something stupid, and it goes wildly viral and becomes a meme…who “owns” that video? Well, everyone, really. There can are millions of copies of it – meaning, the sequence of bytes that forms it resides on millions of storage devices – and any claim of “ownership” is pointless. Anyone who has the sequence of bytes “owns” it.
This might leave me a little annoyed. It’s my video. I want to own it. I want something that says I’m the owner of that thing.
And, if I own it, then I can sell it. Maybe you want to own it? Awesome. Let’s a make a deal…
And what is “it”? It is an NFT – a token that is guaranteed to be be unique that says the holder owns a particular piece of data. (Again, it’s not the media itself. Very rarely does an NFT contain the actual bytes of the thing. It’s just a “ticket” providing a claim to the thing.)
But, you’re thinking – who cares who owns it? If I can view the video accurately and in its entirety, then I have derived all the possible value of it, and how does owning it benefit me in any way?
…you are not the only one with these questions. The NFT market is currently full of massive amounts of hype, and a lot of the buying is ego-driven.
In fact, I found a page which listed some reasons why you might want to purchase an NFT:
- Participation in the establishment of a new cultural paradigm. NFT democratizes the digital art market as much as possible, gives way to experimenters and innovators.
- An opportunity to invest in an increasingly popular asset. The scarcity aspect makes NFT an attractive asset, as collector Priyanka Desai points out.
- With the help of these tokens, a person is able to get something “beautiful, unique and special” – a piece of the Internet that belongs only to them.
- NFTs allow you to directly support a particular creative community. For example, there are collectors supporting the crypto art of black artists.
- With the help of NFT, anyone can become a collector. You can even build your personal digital gallery with platforms like SomniumSpace and Cryptovoxels.
Note that most of these are of highly subjective value. There’s little in the way of objective value propositions in here. Besides the investment aspects, nothing in that list is of clear value to most of the human race, which is the basis of a stable market. All those reasons are very niche.
To return to the question above: why does ownership of an NFT have any value? Why is something that says I “own” a famous meme worth anything at all?
The answer seems to be that it’s worth something because – right now, anyway – someone else might want to own it too.
This, of course, is the basis of currency itself. Why is a $100 bill worth anything? It’s just a green piece of paper with some numbers on it. It only has value because someone else – everyone else – agrees that it has value and wants it. When everyone wants something which is non-duplicatible, then it’s worth something.
So what’s actually in the NFT? What is the actual data?
This page has an example (the image about halfway down) – it’s some structured data (JSON) that identifies what the artwork is and provides a location to find it (an address on the IPFS, in this case).
So who can create an NFT? If I want to create an NFT to represent my viral meme, what legal or absolute right do I have to do that? How can I claim “original ownership”? What’s to stop everyone with a copy of the bytes from creating an NFT to represent it?
Well, that’s why we have lawyers. To create an NFT for a work of media, you have to have a copyright to it. A lawyer explains:
Someone who creates an NFT using someone else’s work should ensure they have permission from copyright owner. Copyright law provides a “bundle of rights” which are exclusive to the owner of the copyright in a work. These rights include the right to reproduce, prepare derivatives, distribute copies, publicly perform, and publicly display.
For the same reason that a musician would need permission to sample or remix someone else’s music and start selling it as their own, the creator of an NFT would need permission from the copyright owner of the work which they are embedding in an NFT and offering for sale.
So do I have copyright over my viral meme? I have no idea. Again, this question makes lawyers very wealthy. You may find yourself owning an NFT that someone didn’t have the rights to sell.
Consider this tweet by a digital artist:
today I found out that searching my own name on @opensea brings up 132 instances where my art was minted as NFTs without my permission. apparently the only way to get them removed is by writing individual emails for each listing, which I literally don’t have the time for.
What happens anyone who might have paid money for those NFTs? I have no idea, and I’m not sure anyone else does right now either.
As I noted above, the NFT market is volatile and pretty irrational right now. I absolutely believe there are deep practical applications for NFTs, but I don’t think the current focus on “owning” digital media has longevity. Eventually, people are going to question the value of “owning” a sequence of bytes. (I’m sorry – I have to quote “owning” every single time…)
To be clear: the current NFT market might end up like Beanie Babies or tulips. It’s only raging because there is assumed future demand. If anyone flinches, it could all come crumbling down.
Sure, this is how all markets work. But other commodities have practical value. A car gets you from place to place. A house is something you can live in. The objective value of these things is not disputed, so those markets are stable over time.
I do appreciate that NFTs have provided some focus for digital artwork in general. And NFTs open up some very interesting philosophical questions about how humans relate to a piece of artwork. Where does the desire to own something come from? What part of the human psyche causes someone to jump from “I like looking at this picture” to “I want to have a unique relationship to this picture that no one else has.” There are some fascinating concepts there.
This blog post delves into some of the mentality:
To NFT fans, then, a right-clicker is someone who doesn’t understand NFTs and will never get that to view the Mona Lisa online is quite different from having the ownership receipt for the Mona Lisa stashed somewhere. Sure, you can look at it; you can even save a JPEG of the Mona Lisa on your computer, but you will never “own” it nor will someone pay you millions of dollars for your saved JPEG. That receipt, though, is another matter entirely.
[…] An NFT fan might call someone a “right-clicker” because they don’t “get” NFTs, and a hater might embrace the label because, hey, there’s nothing to get, and this entire idea of owning an infinitely-copyable bundle of pixels because it says so on a digital list called a blockchain is a profit-seeking farce.
I’ll keep updating this page to reflect changes in the market, public perception, and my own opinions.
Why I Looked It Up
I looked this up because if you work on the Internet, you can’t seem to get away from NFTs these days (late 2021). I wanted to figure out what all the hype was about.
This video is pretty funny.