What is an NFT?
“Non-fungible” more or less means that it’s unique and can’t be replaced with something else. For example, a bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. A one-of-a-kind trading card, however, is non-fungible. If you traded it for a different card, you’d have something completely different.
In the real world, good examples of non-fungible assets include football trading cards and plane tickets. Although two plane tickets may look the same, each one will have a different destination, seat number and airline class, meaning they cannot be swapped like for like.
If bitcoin is a ‘digital currency’, then NFTs are the equivalent when it comes to ‘digital collectables’, especially art. An NFT allows buyers to purchase ownership of a digital good, for example, an artwork, as a unique digital token living on a blockchain.
One of the main USP’s of NFTs is that once created, it cannot be duplicated, giving it a similar value proposition as an original artwork. But it’s not limited to that – NFTs can encompass pictures, videos, music, or anything else that can be digitally represented. In a nutshell, they are “one-of- a-kind” assets that only exist in the digital world and have no tangible form of their own.
However, they can be freely bought and sold, like any other piece of property, with the NFT acting as a digital certificate of authenticity.
How do NFTs work?
At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs, which store extra information that makes them work differently from, say, an ETH coin. It is worth noting that other blockchains can implement their own versions of NFTs.
In March 2021, the first sale ever by a major auction house of a piece of art that does not exist in physical form was held by Christie's.
Created by digital artist Beeple, it sold for $69.3m (£50.3m). Earlier this week, an online sale of NFTs by the digital artist Pak fetched a total of $16.8m (£12.2m) at Sotheby's, including an image of a single pixel which sold for $1.36m (£987,000).
In each case, no physical object changed hands - the NFTs exist exclusively in digital form, with blockchain (a digital record) acting as a public ledger to verify ownership status. While critics argue that these works can be copied and shared, the experts say this is no different to the physical world. Copies are not the original.