Unless you have been hiding under a rock in the music and art world you will have heard the term "NFT" flying around seemingly everywhere. So what’s an NFT?
An NFT is a non-fungible token. So much clearer, right?
Let’s start with trying to explain fungible.
Cash is fungible. If I give you a 10 dollar bill, then you give me back a different 10 dollar bill, it’s considered the same as far as value. Same as if you gave me two 5 dollar bills, or 10 ones. It’s 10 dollars.
If I lend you my car, and you give me back another car, even if it’s the same make and model - it’s not the same car. It has characteristics which make it unique and therefore of different value. Same with a limited edition item, or collectable with a serial number of 00001.
So, something fungible is just something that is unique and not interchangeable. This creates value. Fungiblity, like in our cash example implies equal value between the assets. NFTs are just digital tokens, or abstractions used to represent assets that are one of a kind.
Now, that token is kept on a - 2nd buzzword alert - a blockchain. Don’t panic- it’s not that complicated.
A blockchain is a kind of database, typically used to record transactions which is decentralised. Decentralised means it exists on a huge network of computers at the same time so nobody can control it. Data is collected in groups, aka blocks. When a block is full, new records are always chained onto a previous block. So there you go - blockchain. Transactions happen in order, you can’t erase transactions and everything is publicly viewable and stored multiple times across this decentralised network. It’s very secure because if someone tried to change a record, it would instantly be flagged as wrong and would identify which node is wrong by verification of all the other copies of the data. You’d have to change 51% of records at the same time to get away with fraud.
An original work has intrinsic value, digital or not. The Mona Lisa is valued at £860 million; You can go to the Louvre and take a picture of the Mona Lisa, and it’s not the Mona Lisa. You can hire the best forger in the world make an exact copy…and it’s still not the Mona Lisa. The same goes for digital art; this technology allows you to verify the authenticity of the item securely even if there are a thousand copies.
The Gold Rush
Right now we are at the dawn of the NFT gold rush. You probably know Mike Shinoda, even if you don’t *know* Mike Shinoda. He was the in-band producer, and guy doing the rap sections all in those Linkin Park songs and the man partly responsible for that whole Nu-Metal phase in music.
Back to the point - he recently sold a piece of digital art for $30,000 on the digital art platform Zora. It’s a 30 second file, of some black and white art, with a loop of music. And to Mike’s credit, he took that 30k and put it into an art scholarship Art Centre College Of Design, so he is totally forgiven for anything he ever did.
Now what did he sell? He still owns the IP for the art, but “minted” a unique NFT, which acts as proof that the file the buyer purchased is the only, real, unique piece of art.
He has applied scarcity in this case, a one of a kind artwork.
The starting price was zero - which brings us to an important point - value is what people decide it is. The value of an item might change over time because of its ownership history. If a Stratocaster was owned by Hendrix, it’s more valuable that if I owned it. The same principle applies to this artwork.
On the sale page there is also something interesting; on the left side you’ll see a small box noting a creators share of 15% - this means he’ll get 15% of all future resales of that art! This is part of what is called smart contracts, that automatically manage these things in the back end. This could be huge for producers, and artists royalties. Now imagine in the old days you bought a used record or book, or CD; the artist or writer didn’t get a slice of the pie on the resale - but now they do. All of this exists AWAY from the control of the record company.
As far as art, you can in theory sell graphic art, music, parts of music, stems, samples - if you imagine it, it can all be done. Even the NBA has jumped on the bandwagon taking the sports memorabilia space into this world recently selling a clip of LeBron James for 200K USD.
Yeah, but is it real?
It’s no accident that NFTs are becoming a phenomenon during this pandemic and lockdown, when so many aspects of our lives exist online - our offices exist on on Zoom, we stream as entertainment on Twitch, we converse on Clubhouse, and even our food is delivered to our door from an online delivery service.
Video games have had digital economies for a long time now. In-game items don’t exist physically but people buy everything from weapons, to houses, to purple unicorns to a new hat for an in-game character, or avatar - sometimes itself a representation of digital us.
The father of cyberpunk, novelist William Gibson described cyberspace, or what we know and experience as the internet as a consensual hallucination. Currently, digital reality is just as real as anything else. NFTs merge that idea with our acceptance of the virtual so something without obvious value IS actually precious and fungible via technology. Ultimately this boom is all about demand, and timing.
Is this all a bubble? Quite possibly, but it’s likely at the very least aspects of the technology will stay and in some way at the very least provide traceability of IP ownership, and perhaps the system of credits and royalties can be improved for all of us creators. Until then, enjoy the wild wild digital west!
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