What are NFTs?

In short, an NFT is a “non-fungible token,” a type of blockchain token that acts as a certificate of ownership for a particular item.

At present, this is often art. However, this technology can be used in various applications such as video game items, direct-to-artist sales, and creating digitalized versions of physical assets.

As these NFTs cannot be reproduced, and their authenticity is verifiable by default, these items can then be sold on the blockchain and converted into your currency of choice.

But let’s start at the beginning.

What does non-fungible mean?

Fungibility is the ability for an object to be traded for another of the same value.

For example, a single dollar can be traded for any other dollar and would be worth equal value.

Alternatively, a diamond is non-fungible as each has a different quality, cut, size, shine, etc.

Due to these unique characteristics, it is impossible to trade for a diamond identical to yours.

Similarly, due to their unique identifier and being permanently logged on a blockchain, NFTs are non-fungible because there will only ever be one copy of that exact card that cannot be traded for another identical copy.

Imagine NFTs as collectible cards in the real world.
For example, factors like the number of cards produced, the number of the individual card, and the edition can dictate how valuable each card is relative to all the rest.

Even if their price matches, like diamonds, their characteristics are still slightly different. This means they are non-fungible, and one NFT is not always worth the same as another.

An easier example of this might be Pokemon cards.

There is a reason why a 1st edition shiny Charizard is worth more than a 25th edition non-shiny Charizard.

But, physical cards can be damaged, making the collection rarer. I hear you say. While this is correct, this is also where the “burn” mechanic can come into play.

On some blockchains, such as Wax, you can “back” a small amount of WAX tokens to each NFT you mint.

Then, when someone “burns,” which is just crypto jargon for destroy, this “backed” NFT, you receive the amount of WAX it was backed by.

This creates an interesting mechanic, as a digital copy would usually exist forever. But, imagine the price of WAX went sky-high, and suddenly 1 WAX token was worth $1 million.

In that case, many people would sell out the 1 WAX token for the cash reward.

However, as a consequence, the value of the remaining NFTs in that collection became rarer and, as a result, more valuable, just like physical cards.

So, is this what gives NFTs their value? Not always.

Currently, NFTs are treated more like high-end art than Pokemon cards, and their value comes from whatever someone is willing to pay for it.

Although, as the asset class ages, expect more mechanics like the one implemented with Wax to be more commonplace, and NFTs just backed by the value someone is willing to attach to them decrease.

Which leads us to our next question, what else could this technology be used for?

For most of us, limited physical space in the real world is a real problem.

It would be convenient if I could convert all the CDs, comics, and collectibles I couldn’t buy as I had no available space with a digital copy.

A digital copy that comes with permanent, provable, and irremovable ownership that I could access and enjoy anytime.

Unlike traditional platforms like it, where media can disappear if licensing agreements end or international sanctions are imposed.

Sure, NFTs won’t replace your favourite physical items, but they could replace many of the things you want to buy but don’t have room for.

Plus, as it’s backed by a blockchain running on many computers worldwide, it cannot be lost, damaged, or stolen.

Essentially, one use for this technology could be to make your own permanent Spotify and Netflix, minus the monthly subscription fee.

NFTs in gaming

Anyone who has played a video game has likely seen a cosmetic item, meaning one that doesn’t affect gameplay, being sold for money.

Now, you don’t need the blockchain to release 1000 copies of a special item, number them, and then let the players sell them on a marketplace for real money.

But what you do need the blockchain for is the prevention of item hacking.

When an item is backed by an NFT, if someone discovers your in-game password, logs into your account, and tries to sell or give away your items, they would be unable to do so as they only have access to the in-game file.

This is because they do not have the actual NFT, which is kept in a crypto wallet. So, unless they have access to your crypto wallet too, your valuables are safe, unlike if you are hacked in a typical game, where it’s simply game over for you and your items.

NFTs as a permanent copy of a purchase

No one likes to keep receipts, but they are needed if anything goes wrong, especially if they are for something significant, like the deeds to your house.

Keeping these receipts in a digital format would be more convenient as they couldn’t be lost, damaged, or stolen.

But why stop with receipts? You could apply this logic to important documents like birth certificates, passports, or any document you want a permanent copy of that you can access at any time.

NFTs supporting artists

In a perfect world, artists would sell directly to their fans and keep all the money.

Of course, this is not how it happens, as money is always taken before it reaches the artists themselves.

At the moment, it is often expressed as a piece of art, but it could also easily be an album, movie, or access pass to an event, club, or community.

By selling these directly to their fans, the artists get the highest possible share of the revenue, and the fans receive a permanent copy to keep that can never be damaged, broken, stolen, or denied access to.

In short, an NFT is just data secured by a blockchain that isn’t the same as any other bit of data. This could be expressed as art, video game items, digital collectibles, and important documents like your identity card, through to a boring contract or document.

The benefits are its provable ownership, irremovable access, and permanent storage for the users, while it offers an alternative model for generating revenue for creatives.