Editor’s note: This is the third entry in a new series called “Blockchain Basics.” Whether you’re a regulator or operator, knowing the basics of blockchain will help you make informed decisions as suppliers create using this technology. For more information or a more detailed explanation of blockchain in your jurisdiction or on your property, contact your GLI representative.
If you’re like me, you heard about “NFTs” and learned that the acronym stood for “Non-Fungible Token,” a definition that brought little additional clarity. You then followed that up with an internet search for the word “non-fungible,” which may have cleared things up a bit, but you may still be struggling with the understanding because many sources have a tough time talking about it without an exhaustive number of examples, many of which seem vastly different.
To make things easy, I like to first focus on the “T” in “NFT,” “token”. Think of old video arcades, Chuck-E-Cheese or even casinos that implemented “tokenization” and used physical tokens. In all those examples, the tokens functioned in a similar fashion: as a physical unit representing a pre-determined value established by the business. In many cases, they represented a US quarter or US dollar, but they did not have to be as directly tied to a currency. These tokens were “fungible” because they were interchangeable, each effectively having the same value. Similarly, currency is fungible. Even though every bill is uniquely serialized, they are fungible because each denomination is worth exactly the same amount. NFTs, in an elemental way, are just like these tokens because they simply represent value, but they differ because they are each unique (non-fungible), and they typically represent a digital asset (although there is a recent trend to tie them to physical assets or goods).
Many use the term NFTs very loosely, so let’s consider the simplest application where NFTs are not the actual item but more of a proof of ownership of the item (some like to equate these to a “certificate of authenticity”). I think this distinction can help a lot in understanding the current and future applications. Many use digital art examples to explain NFTs, but let us come back to that and start with another example I think is easier to understand: Music. NFTs can allow fans/investors to purchase an original song or album from a participating artist, allowing that fan/investor to “own” the song or album while the rest of us can probably listen to it for free on Spotify, Pandora, YouTube, or other services. The artist can often still retain rights and royalties for the song, which is stipulated in the sale and can be written into the ledger. Similarly in the art world, you can go to a museum and view a painting for free (or an admittance fee), take a photo of the art (gallery rules permitting), buy a print of the art, and put it on your wall. You can even find images online that you can download and store for free, using them however you like for your own personal use. These are all examples of how you can enjoy the art without owning the original. The same goes for NFTs, and this is where many might not understand why someone would pay for something that they can get for free. The famous Beeple video sold for 6.6 million US dollars (as an NFT); everyone can view it or download it for free. This example illustrates that the NFT is the representation of the ownership of the digital asset; in this case a video, and also shows that although one person owns it, everyone can still enjoy it: no different than art in a gallery today.
“NFTs expand well beyond just digital art and music; they can represent ownership of virtual real estate, virtual pets, virtual trading cards, and even quotes/tweets.”
Many of these examples are ones where the NFT represents both the item and proof of ownership at the same time. What is interesting is that there are many NFT communities where NFTs are highly collected and traded, thus making them incredibly valuable. Communities such as CryptoPunks, Pudgy Penguins and Bored Ape Yacht Club are perfect examples. Visit those sites, and you may wonder why these crude images/icons are so valuable. It’s primarily because they were launched with a story and a vision meant to build hype and interest; often, they promised initial investors incentives or other value for purchasing. They intended to build an environment where a community could be developed, and boy were they successful. And why stop there? Communities like CryptoKitties not only allow virtual kittens to be bought/sold/traded, but their game interface also allows owners to develop, customize and even breed their kittens, allowing for custom NFTs to be created for buying/selling/trading. Communities like Upland are similar, but instead of kittens, you are buying and developing virtual real estate. When you think about it, Upland and CryptoKitties are just different structures of concepts previously introduced in video gaming as “skins” or “avatars.”
Let’s jump back to a few more specifics you should understand. Most NFTs in the communities previously described have a “Launch” strategy. As I mentioned, it starts with a story to drive excitement. Then, there are many decisions to make, such as if the designer will take royalties for resales, how many NFTs will be created or “minted,” who will mint them (the designer or the public), are the NFTs static or will they allow changes/development and will the NFTs be tied to any additional value (often real-world value such as tickets to an event) to name a few. These decisions are typically built into the smart contract design but often are made VERY public as future investors are all extremely interested in knowing these details before investing. Who wants to pay thousands of dollars on one item when they do not know how many total items there are or when they have to pay undisclosed royalties on a resale? When the NFTs are “minted”, the costs are higher to the investor if the public does the minting (these are often referred to as “gas fees”), so if that is not publicized, there are more costs in the transaction. Again, these are just some of the decisions that go into an NFT launch and are related to how successful a project can be.
Where do you buy NFTs? Anywhere that’s selling them. There are online marketplaces, sort of like “eBay for NFT,” where you can buy or sell NFTs. OpenSea, Nifty’s, and Rarible are examples of such popular marketplaces, while many of the NFT communities allow the buy/sell/trade within their own infrastructure (which could be an online marketplace or one in the metaverse).
So what are NFTs? I hope you now have a better picture. It’s important to understand that this world is under constant change. While the examples help us to understand, we should not be too tied to them as the NFT world could expand tomorrow and rewrite the definitions.
“For simplicity, I like to think of all of this as the monetization of everything digital, with cryptocurrency being the vehicle for purchase and the NFT as the proof of ownership, all of which is fueled by blockchain technology.”
As I mentioned in a previous blog, blockchains are designed uniquely with the types of information and data to be stored in the blocks. While it is not the only blockchain to support them, Ethereum is the primary blockchain used for NFTs.
Now I hope you are much more knowledgeable and can at least understand if someone were to tell you that they are on OpenSea waiting for the much anticipated Otherside Launch with their $ApeCoins.
Check back to our blog every month as we continue to help you build your basic knowledge of blockchain. Additionally, always feel free to contact your GLI representative. We’re here to help.< Back to All Blogs