NFT or Non-fungible Token, an acronym we are hearing more and more around the world.
But what is an NFT? What does fungible mean? How can it impact our lives?
A fungible something is a good that can be exchanged for another good of the same species. Money is the simplest example since I can exchange a 10 dollar bill for another 10 dollar bill without changing its economic function.
10 dollars is still 10 dollars
A non-fungible asset, on the other hand, is an asset that we can consider unique such as works of art, hand-built cars, etc.
Digital assets on blockchain fall under this last description of “scarcity” even when when in the digital world we can create thousands of the same images with the click of a mouse.
In fact, the creation of an NFT token is a technological process and not the creation of a product.
When you create an NFT you assign a distinctive serial number to something on the blockchain and there is no additional information about what that particular token is or serves.
NFT then can be applied to different product categories that may change our world.
This has created the stream of Crypto Art.
We are not art experts but we can define Crypto Art as a movement with a distinct aesthetic given the possibility of creating NFTs.
CryptoArt are rare digital artistic works associated with unique tokens that exist on the blockchain. This token allows the ‘work of art” to be bought and sold as a real physical painting, and as with a real painting, there is only one. At least it should be that the concept of buying Crypto Art.
If we take a look inside an artistic NFT token, sold on the blockchain, we would find that the NFT token or tokens do not contain the artwork because it is too big. You can upload the images on the blockchain but it would be really too expensive. In fact, the token is linked to the art pieces, but these artistic pictures are uploaded somewhere else on the network.
The correct way to link a token to a piece of art is through a hash that can be used on a decentralized darknet, which is simply a network not indexed by search engines and therefore theoretically unreachable without knowing the exact input address.
Since the hash is a unique cryptographic key, it cannot be replicated and the hash becomes the identity of the file and one can verify if the two match.
With this hash, it does not matter where the work file is located.
For example, the hash of the most famous NFT work, namely the beeple work is this:
QmXkxpwAHCtDXbbZHUwqtFucG1RMS6T87vi1CdvadfL7qA
It does not matter where the work is posted, the current owner in case of sale will have the opportunity to produce the file that will match the hash.
For those who want a copy of the work in a known place, darknets can be used for this solution. The blockchain from decentralized transactions, a darknet from a decentralized file exchange service. The most famous is bit torrent.
The link to Beeple’s work is this: ipfs://ipfs/QmPAg1mjxcEQPPtqsLoEcauVedaeMH81WXDPvPx3VC5zUz
The NFT token points to a metadata file that contains the ‘original hash” within which all the information of the work is kept and in fact as in the blockchain, we are looking at a chain of hashes
So if we ask where the artwork is, the answer is that our NFT contains an hash that points to a darknet.
But not all NFTs point to a darknet. They may point to an address that is not decentralized. This could be a problem because we don’t know how eternal that address is. The server owner could shut it down and goodbye to our work of art.
Now if you are wondering how to buy an Artistic NFT token, you should know that NFT tokens can be sold both on and off the blockchain.
In fact, Beeple’s work was sold by Christies.
The change of ownership of the famous NFT was at 0 cost and the monetary transaction was through normal banking circuit, but this was a lucrative exception.
Contracts in NFTs follow the ERC721 standard, which allows them to be managed by other smart contracts
With any NFTs you do not have the actual ownership of the thing you have paid but you have the control of the ownership.
Control over the token but not over the artwork. This issue needs specific legislation and differ from country to country.
In fact I can buy an NFT representing a work of art, but if I buy an NFT representing a tweet on twitter, do I own the tweet? Or do I own the rights of the tweet?
What if I buy a meme? Who owns a meme?
More importantly, I could buy NFTs that have no connection to the actual author of the meme, having been created by people who “stole” his work. Who owns the evolution of the meme?
The major descriptions found around about NFTs describe what they pretend to be, but not what they really are.
An NFT is a token that represents a thing. It is not the work of art. It is a token that points to a work of art. It is a receipt of purchase of that artwork, only on blockchain.
If we go into the details of the steps of the creation of Beeple’s NFT artwork
- Beeple created the artwork file
- It created the unique hash that identifies it
- Created the metadata file that includes the ‘hash of the artwork
- Created the hash of the metadata file
- Uploaded both files to the ipfs decetralized darknet
- Created a token on the ethereum blockchain
- Christies creates an auction for the token
- The auction ends at $69 million in ethereum. However, there is no record of payment on blockchain
- Beeple transfers the token to the auction winner
BUT ultimately what was bought for $69 million.
A token. Which redirects you to an internet address.
So, now the owner of the token have the rights to transfer the token to someone else.
There is no mention of rights, copyright or even the artwork. Even beeple could create a copy of it with imperceptible changes and sell it with another token. Which I don’t think he will do, but purely not to jettison his good name in the art world.
This leads us to understand the value of things based on an objective and subjective point of view. In fact, subjective value depends on preferences, beliefs, perceptions and our habits.
In case of collections, collectibles, subjective value is everything.
In fact, this kind of market has always existed, but hype is high with NFTs. Collectible figurines have always been sought after, and in the digitizing world, the NBA has tapped into NFTs by going on to create a market for tokens featuring the most beautiful clips of the best plays of basketball players.
In this article we talked about art and then moved on to collectibles. Technically any asset could be tokenized via NFTs given their representation on Blockchain, assuming legislation goes hand in hand with technology.
In fact, blockchain would solve many real-world issues because of its 6 key properties, namely :
Standardization, interoperability, tradeability, liquidity, immutability, programmability.
Let’s go into the details of these key properties that we will need in the future:
Standardization:
Digital assets have existed since ‘the beginning of the computer age on different platforms that are not compatible with each other. Think of the video games we would have liked to play….
Creating NFT tokens on the blockchain, any creators applies the same type of contract to all tokens creating uniformity of the standard
This allows NFT ownership, tranfers and access /control unified in one common system
If I buy 3 NFTs on 3 different platforms but with same standard these can or could interact with each other.
Where are NFTs?
The most developed blockchain today is ethereum.
There are 3 types of token standards most commonly used on the blockchain and they are ERC 721, ERC 998 and ERC 1155
ERC stands for Ethereum Request for Comments and is similar for BIP or Bitcoin Improvement Proposal.
ERC is basically how developers can propose improvements to the network. The numbers refer to the identities of the unique ones proposed
ERC 721 was used in 2018 and became famous with cryptokitties, a game on blockchain in which people could buy and sell kittens and each cat was an NFT token
The 721 standard allows the creation of tokens with different values and attributes, with various differences on the same smart contract and the token can be transferred into the same ecosystem
ERC 998 is a token that allows to create a bundle,to group separate, unequal ERC 721 tokens that can be bought and sold in one transaction.
Assume a car video game, where I will have 50 unique parts such as engine body etc. with which I will created my dream car. All of these parts will be ERC 721 tokens that I will sell in a single transaction since the all 50 NFT create my car in the video game.
ERC 1155 initially created for Enjin, an ecosystem on ethereum where applications can be created by developers. This standard allows the creation of both fungible and non-fungible tokens and their coexistence and interaction. Imagine again the car game we take example before, where all players start with one standard car and then as they progress, the users can buy cars that are only limited in number. Like the player starts with a Mazda Miata. but there are only 10 ferrari 250 GTOs in the game.
This is the standardization
Interoperability:
Since all tokens use the same standard, they run on the same platform. So anyone who creates an NFT of any kind, will be able to sell it a the marketplace of their choice or on all those on the enabled platform.
This pushes tradeability, it allows anyone to have access to a free and open marketplace and an operator can create, launch and sell an entire NFT into the “ecosystem”. This could revolutionize video games because anyone could participate in adding content to video games
Liquidity, a fast and efficient market leads to liquidity. Liquidity indicates a level of activity in the market, how many people are buying and how often in that market.
Immutability, a piece of data when confirmed and written on the blockchain is immutable, so this leads to the demonstration of authenticity of the digital asset as NFT and demonstrates its scarcity
Programmability. NFTs are totally programmable so they are extremely complex and creatable everything.
The sky is the limit with programming, developing and using the tokens.
Another one problems that we can find in platforms dedicated to artists and sales of their works is the forgery and double sale of their works.
In fact, it is very easy for a scammer to copy profiles and works of a famous artist on another selling platform, sell real but stolen tokens, and pocket the ethereum.
If we are interested in works of a certain cost and depth, the most useful thing to do is to check the artist’s social and website and check that we are buying an NFT on a platform with a legitimate profile of him.
What has happened to the NFT market? Summer 2022
Like all markets affected by a huge rise in price and popularity, the market deflated, prices collapsed, and speculation came to a halt. Now there is the prospect of a clean sweep in what the next NFTs will be.
This is not necessarily a bad thing; on the contrary, this cleansing will bring out the real projects that bring value and are worth keeping in the portfolio.
In addition, NFTs will also begin to be used for other initiatives in the near future.
Updated 13/10/2022