NFT Art has stolen the headlines in the blockchain and cryptocurrency world for several months since the start of 2021. It is the latest application of blockchain technology.
Blockchain is a decentralized ledger system that enables users to create, store, and manage data safely and transparently without the need for a centralized authority. Applications of blockchain include cryptocurrencies, such as bitcoin, and NFTs.
NFTs is an abbreviation of non-fungible tokens. But what are these non-fungible tokens? How do they work? And what are their features? Let us first define fungibility before we delve deeper into NFTs.
Understanding the Concept of Fungible Assets
Fungibility is the ability of an asset to be easily replaced by another asset of the same value. Fungible assets are those that are mutually interchangeable. For example, if I borrow your $10 note and later pay you back with another $10 note, you will have no problem with that because you will have the same value as what you gave me. Alternatively, I can give you two five-dollar notes to settle the debt. Still, you will be okay with that because you get the same value as what you gave me. Therefore, dollar bills are fungible assets since they can easily be swapped for other dollar bills of the same value. Cryptocurrencies such as bitcoin are also fungible assets.
Non-fungible assets, on the other hand, are those assets that cannot be replaced with another identical asset. Think of a diamond. Every diamond piece is unique, therefore, they are not easily interchangeable. You can also think of arts such as Mona Lisa. There is only one original Mona Lisa, and only one person can own it at a time. Such assets are also indivisible, and any attempt to divide them makes them worthless. Imagine if we could cut Mona Lisa art into quarters so that we can have four owners each possessing a piece. That would be a silly idea, wouldn’t it?
NFTs Explained in a Simple Language
NFTs are distinct digital assets that represent a variety of non-fungible items, both physical and non-physical. They represent unique items such as digital arts, video highlights, gaming collectibles, music, virtual land, and other digitally stored items. NFTs are created and stored in a blockchain network. As the name suggests, NFTs are tokens, meaning they are tradable assets that reside on their own blockchain hence the holder can use them for investment or economic purposes. Therefore, ownership of these NFTs art can be transferred from one person to another.
Illustration 1: A piece of land and Property Deed
Think of an NFT as a property deed for a piece of land. A property deed represents a distinct piece of land that is indivisible. This document contains an accurate description of the piece of land and the ownership. If the owner of the piece of land wants to sell it, the property deed has to be transferred to the new member, and the piece of land will have new ownership. NFTs work similarly as property deeds, in a primary sense.
NFTs Art is a digital token. Property deeds may be counterfeited since they are physical. NFT Art, on the other hand, exists in an immutable network (blockchain) hence cannot be duplicated, destroyed, or lost. Here is a summary of the characteristics of NFT Art.
Illustration 2: Monalisa Art
Let us assume Mona Lisa had an NFT representing it (in reality it still does not have an NFT token yet). In this case, Mona Lisa NFT will be a digital token in a blockchain network that contains details about the art such as its description and ownership. The NFT token will not be a replacement for the art, but a proof of its existence and ownership. Therefore, the Monalisa NFT Art can be traded in a blockchain environment while the real art is in a museum.
Once someone has bought the NFT Art, they take ownership of the art. In this case, Mona Lisa NFT Art makes trading of the art easier. It also promotes trustworthiness by fighting to eradicate identity fraud. No one can change the data about the art as it is indicated in the NFT token. There is also only one NFT token representing the original art. Therefore, there is no room for counterfeiting.
- Indivisible: NFT Art cannot be split into smaller denominations. They exist as a whole and dividing them makes them useless.
- Non-interoperable: an NFT can only work on its ecosystem. For example, in-game items such as gaming characters can only function on the game software they are designed for and not any other game.
- Indestructible: the underlying blockchain network where NFTs are built uses smart contracts to ensure that the data such as the item description and ownership remains immutable against destruction, removal, or duplication. Smart contracts are computer programs that automatically execute, control, and document contract terms or agreements without the need of a third party. They only execute the contract upon meeting all coded requirements.
- Verifiable: Any user of the decentralized network can easily authenticate NFTs on the network without the need of a third party.
Whether or not NFTs are here to stay, they have certainly become a new craze in the blockchain and cryptocurrency world. The technology is creating possibilities of a massive scale with potential for application in a wide range of industries. Currently, NFTs are leveraged in the gaming, collectible, and digital art industry, where it has given a new meaning. We can only expect more industry to embrace this novel blockchain application.