Jack Dorsey just sold his very first tweet as a non-fungible token, or NFT, for $2.9M. Snoop Dogg has amassed $15M in NFT fortunes since 2020, while Ellen DeGeneres donates all the proceeds from her NFT sales to charitable organizations.
It’s easy to call these hard-to-describe digital tokens the latest celebrity fad, but applications for NFTs are far-reaching and increasingly practical. To understand what an NFT is, you’ll need to know a little about how blockchains work.
In this article, we’ll demystify these esoteric bits of code, and define the differences between non-fungible and fungible tokens, to help you understand how this blockchain-enabled technology is being employed now, and into the future.
Blockchain Explained
A blockchain is a type of distributed peer-to-peer database that stores data in linked “blocks” bound together chronologically. Almost any type of information can be stored in a blockchain; however, their most common application is as an online “ledger” to track cryptocurrency transactions. Think Bitcoin.
Once stored in the blockchain, the data becomes an immutable and permanent record. This immutability helps to prevent fraud and allows anyone with access to the blockchain to see the entirety of a transaction. Moreover, because of its distributed nature, a blockchain is far less susceptible to cyberattacks or threats from acts of nature.
Fungible vs Non-Fungible Token
A fungible token is a type of digital currency with an equivalent value to all other fungible tokens. Think Bitcoin again. One Bitcoin, or any fraction thereof, is equal to all other Bitcoin, just as a dollar is equal to all other dollars – whether it's a single bill or 100 pennies.
Conversely, a non-fungible token is unique, and indivisible, with a fluid value based on demand. Consider Leonardo da Vinci’s Mona Lisa as non-fungible, meaning, this unique, one-of-a-kind painting is singular — and irreplaceable — and valuable to those who appreciate art or its historical relevance.
It’s this “fan base” that attaches value to the Mona Lisa.
In short, an NFT is a digital “marker” for a physical — or digital — asset authenticating its provenance, and have these three characteristics:
- They are a digital file
- They are completely unique
- They are hosted on a blockchain
Your dog is non-fungible. You can’t replace one Black Lab with another and expect them to be the same dog. It was the cats, however, who cornered the digital pet NFT space. Think Sony Aibo — but in the matrix.
Current and Popular NFT Examples
Here are some current examples of non-fungible tokens.
Cryptokitties Craze
CryptoKitties were among the first non-fungible tokens. This online cattery catalog allows CryptoKitties' owners/holders of the NFTs to buy, breed, and sell their unique digital feline offspring to others.
Each subsequent “litter” of digital kitties are cataloged by lineage, generation, and ownership all saved as metadata in perpetuity in the blockchain.
Jack Dorsey’s First Tweet and the Mona Lisa
Sina Estavi, the owner of this momentous Tweet (and its authentication token), equated his acquisition as “the Mona Lisa of Tweets.” Da Vinci might crack a smile at the analogy. But, just like the real Mona Lisa, Estavi may own the original, but everyone can see it.
However, if someone were to try and sell a counterfeit $2.9M tweet, the blockchain would sniff them out as frauds.
Non-Fungible Tokens in Real World Applications
Aside from the high-flying world of A-lister digital assets and collectibles, blockchain technologies continue to evolve beyond gaming and speculation. As more non-fungible token exchanges are created, more crypto platforms are accepting NFTs, lending them further legitimacy.
The real estate industry represents an ideal case study for NFT adoption — and a potentially major disruptor to this monolithic industry.
Savvy home buyers are looking for streamlined, cost-effective, and online real estate experiences. By simplifying the redundant “authentication” (underwriting) process of the same property for each sale, NFTs could eliminate the intermediaries and shorten the process to a matter of days, not weeks.
With an NFT, a property’s ownership history is stored as metadata within the blockchain, providing a chronological view of a home’s succession of ownership, and any other relevant information.
Moreover, as a comprehensive digital "library" of meta-information, using NFTs to conduct real estate sales will greatly reduce, or eliminate the voluminous paperwork associated with each transaction.
Are There Downsides to Non-Fungible Tokens?
Like stocks, NFTs are speculative and may lose their value. Think Great Dutch Tulip Bubble. Moreover, like other blockchain currencies, their creation and maintenance are enormously energy-intensive.
How Small Businesses Will Use Non-Fungible Tokens
In this day and age of fraud, NFTs are becoming increasingly useful in unexpected ways. Early adopters are using NFTs to safeguard their collectibles, fine art, antiquities, or even valuable wine collections. Blockchain technology lends inherent immutability and quantifiable provenance making them ideal for ensuring the authenticity of rarities.
An entertainment or sports venue might employ NFTs to protect against ticket counterfeiting. An art dealer might include an NFT whenever artworks are sold. This "digital deed" will transfer to the next owner, and the next, and the permanent up-to-date metadata associated with it — stored in the blockchain.
Lastly, NFTs capitalize on the reach of social influencing, making them ideal for loyalty programs, charity, and cause-related marketing, or as a crowdfunding tool to raise capital.
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