NFTs: What is Non-Fungible Tokens? Explained and dissected.

What is a Non-Fungible Token and why does it make a tweet worth $2.5 million? Or a GIF of an animated cat worth $500,000?, or a picture of a Rock that is worth $1,000,000.00 Posted by erwinkarim on 8:52 AM, March 8, 2021 Last updated on 2:12 PM, March 4, 2022 Filed in: crypto, digital money,

Jack Dorsey, CEO and co-founder of Twitter put up his earliest tweets for sale. It is handled by a platform called “Valuables by Cent”. This tweet, shown below, now is open for bidding as of 8-Mar-2021, the highest bid is $2.5 million. What?

A drawn picture of a rock can be bought for 10,000 ETH tokens or $31.4 million dollars as of January 2021. Why? Because of NFT.

The tweet itself is available publicly, even after the sale, but what is the person buying? Enter NFTs of Non-Fungible Tokens which is a new method of claiming digital art.

Interest in NFT is climbing, especially when assets is bought and sold at a very substantial price

Executive Summary:

  • NFT stands for Non-Fungible Token
  • The concept of fungible is how things can be easily exchanged. Commodities like oil, gold and even money, are fungible since one unit of commodities are like any other unit.
  • Non-fungible are things that are unique, like artwork.
  • NFT brings the concept to the digital work, bringing the idea of digital “scarcity”
  • NFT is created by the process of “minting” where a digital file (like a picture) is tied to a blockchain (like the Ethereum cryptocurrency)
  • You don’t “own” the file, but the rights to the original file. And the rights can be transferred from one person to another.
  • Created new markets, where using digital currency.

What is NFT?

An oversimplification of what's NFT is.

NFT stands for Non-Fungible Token. Let’s break down what that means. Fungible is something that can be traded for one thing to another for the exact same value. Like a dollar bill. All dollar bills are the same and you can exchange the one dollar bill with another just like that. Non-Fungible is the opposite. Like art, a unique piece that is worth a lot for some people. The token in the NFT refers to the cryptographic blockchain token, and in most cases, based on the ethereum crypto-token.

So how this all works is that in the Ethereum block chain, one of the tokens is assigned to a unique digital item like a picture. And now that token is a unique token because it represents something unique instead of a commodity like money. And that’s how NFTs are born.

The idea behind NFTs is a way to trade digital arts. Not the arts itself, but the rights to the art. According to Wikipedia, NFTs are a way to create digital scarcity by making ownership of the asset non-fungible.

Non-fungible tokens are used to create verifiable digital scarcity, as well as digital ownership, and the possibility of asset interoperability across multiple platforms

There are a few examples of digital assets that are being sold for huge sums of money. One example is the Le Bro James topshot which is sold for $200,000. Another is the “deal with it glasses” that is sold for $8,000 and exchange hands until the price went up to $27,000. A meme featuring the Nyan-Cat has been sold for over $500,000.

As any system that started out as a decentralized, no-holds-barred, anything-goes system, order and outliers found their way to the top and things started to self-organize. With the boom of NFTs, many NFT marketplace started to pop up and OpenSea come out on top with at least a few billion dollars in transactions as of August 2021.

Being sold for $8,000 with NFT.

So with NFT, you do not own the pictures per se, but own the rights to the pictures. The picture itself can be viewed and copied with impunity and there’s nothing to stop anybody from doing that, but you will own the right to the original version of the art.

This 'Nyan-Cat' has been sold for 300 ETH or more than $500,000.

In NFT, it will be based on a cryptocurrency and in the case of Valuables by Cents, it is based on Ethereum or ETH. The transaction will be done on the Ethereum blockchain. The difference between the ETH coin and NFTs on ETH is that you have to “mint” the NFT. This will create a unique token representing the digital art. Inside the token will have information about the art like the creator messages and addresses.

This artwork - 'First 5000 days' by Beeple sold for $69 million using NFT.

Why NFT?

NFT means a lot of different things to different people. We go through a laundry list of what does NFT means to different groups of people

… for the digital economy NFTs create artificial scarcity on digital goods, so NFT can pump up some value on certain items.

… investors With a picture of a rock sold for hundreds of thousands of dollars, there are a lot of investors flocking to NFT in hopes to make a quick flip. So the early days of NFT such as 2021 and 2022 are considered the NFT mania session.

… for artist Artists always create a unique piece in the real physical world. NFT provides a way for artists to create unique digital piece of art and get paid for doing it. There is a remarkable report that a 12 year-old is making 6 figure incomes from NFTs.

… for money launderer Art is always a channel for some organization to launder money. As the popularity of NFT is growing, so it attracts the attention of money launderers too. There were reports that cryptocurrency is being used for money laundering and NFT just amplifies this pattern.

… for companies Some companies are jumping on the NFT bandwagon by selling unique digital art as a new income stream.

Revisiting the Concept of Fungible

Fungibility is an important concept in economics. Fungibility means the property of goods or commodities that is essentially interchangeable. For example, the US dollar can be exchanged easily, thus it is fungible. So it is pure gold. One pure gold bar is exactly the same.

Revisiting this chart to explain about fungibility.

Fungibility is not the same as liquidity. Diamonds are an example of a commodity that is liquid and not fungible. It is easily bought and sold in the market, but each individual diamond is not the same as the next diamond. Each diamond has their own quality in terms of clarity and gemstone grade, thus it is not fungible.

So by the very nature of zeros and ones, digital assets like a MP4 file or a JPG file are very fungible. You can literally copy them bit for bit as a perfect copy. So how do you make something that is digital non-fungible? Just like in the art world, ownership matters. An extremely good forger can copy Van Gogh Starry Night brush for brush, but there’s only one original. In the case of digital art, the original file is the non-fungible item. You tie that original file with a blockchain, make a unique token that bounds to the file and now, that digital item is non-fungible. There will be many copies, but there can be only the original one.

A good forger can copy Starry Night brush for brush, but there can only be one original. In digital art, there can only be the original copy

Why is it attractive?

NFT is attractive in the digital art world because there’s money to be made. In Valuables by Cent, the company that auctioned off Jack Dorsey tweet, the original artist gets a cut even in secondary sales. And if the asset exchanged hands constantly, the artist will get a cut out of it.

Another complaint about the art world is there are gatekeepers to the high art world. New artists like Banksy and Beeple can bypass the gatekeepers by publishing their art online and get them sold via NFTs. Due to this, auction houses like Christie’s have joined the game by selling digital and physical art through NFTs. A painting by Beeple sold at Christie for a record breaking $69 million, which is the highest for a digital art.

In Valuables by Cent which allows you to sell your tweets, you get income from secondary sales. Other NFTs have similar setup in which the original artist receive a cut for future secondary sales.

The future?

Predicting the future is a very difficult business to get it right because anything can happen that will change our calculus. A new feature or product will crop up and might expand or decrease the use of NFTs for digital art. It might be the future or it might be fad, as for now, we will never know. What is known for now is that NFT is gaining acceptance in the near future for a selected segment of the population.

There’s a dedicated site that allows you to buy and own the rights of digital art in NFTs that is based on ETH.

  • opensea become the major player


Support this free website by visiting my Amazon affiliate links. Any purchase you make will give me a cut without any extra cost to you


Share this article:


Bitcoin, block chain and other cryptocurrency explained

The history, the myth, the legend. How did we get here and where are we going with Bitcoin?

How to Maintain Your Apple Ecosystem (the Apple Upgrade Guide)

The game is an ecosystem. Purchasing it will get you in the garden, but it takes some to stay in the garden
Tags: crypto, digital money,