As we move closer to embracing Web3, there are more and more terms for new technologies emerging. Getting to grips with a new technology or phrase can be daunting. Perhaps you’re one of the millions of people who began to hear the term ‘NFT’ in 2020-21 and thought, “what the heck is an NFT?” Or maybe you know a little but would like to learn more. We’ve got the basics covered!
What does the word ‘fungible’ actually mean? Fungible is “an item which is replaceable by another identical item; [an item which is] mutually interchangeable” Let’s use clothes shopping to illustrate this meaning.
We love a particular pair of sneakers, we can order these from an online retailer or buy them from a physical store. When we buy them, the retailer can pick any box and sell them to us. It doesn’t matter which pair they pick off the shelf as they’re exactly the same. Once they’ve been worn, and worn out, we can buy another identical pair. We could even stockpile them because we love them so much; there are thousands of pairs in the world, after all.
So, fungible = replaceable.
Now to look at the opposite – non-fungible. As you’ve probably guessed, this means something which is irreplaceable. For example, the painting ‘Sunflowers’ by Vincent Van Gogh is irreplaceable – there is only one of these in the entire world. Were this painting to be destroyed, there would be copies of it in existence, but they are not the Van Gogh masterpiece.
So, non-fungible = not replaceable.
An NFT is a strictly digital item, it only exists digitally, there is no physical version, though it can represent something from the physical world. The NFT is basically a token; an alphanumeric code that tokenises the digital item turning it into something you can own. Imagine it as a signature on a painting, the token represents Van Gogh’s signature declaring the NFT as the original.
The token exists on the blockchain and, via the alphanumeric code signature, it can be tracked and traced via public records to show that you own it. We’ll come back to the blockchain soon.
One of the major arguments against NFTs is that the image or gif can be ‘right-clicked’ and saved to a PC or mobile phone. This argument is usually used to show that you can’t ‘own’ the item within the NFT.
Hopefully, you’re old enough to remember film-based cameras because we’re going to use them in this example (if not, it’s time to imagine!):
Before digital cameras became mainstream, film cameras were used by everyone. Once you snapped a photo the image would be stored as a negative on the roll of film. You’d send off the film for printing and receive a package of photos along with the original negatives.
Using that negative, you could feasibly produce hundreds of thousands of copies of a particular image, but only you own the negative – the original source of the image. That photo could be given to everyone in the world, be photocopied, scanned and reprinted infinitely, but the negative is the original and you own it. So, if for example, those millions of copies somehow were destroyed, you’d still have your original negative.
Buying an NFT of a tweet, or a digital Banksy, doesn’t stop others reproducing the image, but the token in the NFT declares to the world that you own the original as bought from the creator, you hold the negative. It’s no different to the physical art world; Sunflowers is hanging in the National Gallery London and it can never be replaced, but the gift shop sells imitation posters to take home. Remember:
Sunflowers = Non-fungible.
Poster of Sunflowers = Fungible.
How does the blockchain work?
For an in-depth look at blockchain technology, please see our accompanying tutorial. For a fast and dirty explanation, we’ll get into it now.
The blockchain is a huge spinal cord, where each vertebra is a computer. Those computers are owned by people the world over. These computers exist to crunch numbers and verify transactions. When somebody buys something, the computers all talk to each other to establish the buyer has the money and the seller has the product. Once the purchase is complete, it adds a new block to the chain filled with information about the transaction.
Where this differs from a centralised business is in the public records. Every single transaction on the blockchain is open to the public, plus there is no middle man. There is no art gallery to take a cut of the profits. It’s also incredibly difficult, on the largest blockchains, to steal or commit fraud, because if just one computer notices a bad transaction, it won’t create a block and the money will not be transferred.
What can be an NFT?
Pretty much everything. Yes, an NFT can be a computer-generated image of an ape or a kitten; it can also be a music track, a short video or gif, or it can simply store information and data. If it’s digital and, most importantly, original, then it can be an NFT.
Because of this, you’ll have noticed that NFT marketplaces are overflowing with NFTs of varying media and seemingly every major company is looking for a way into the market. It’s also very easy to mint (create) an NFT, meaning a lot of people are hoping to create the next big movement in the space.
Whenever a transaction is started on a blockchain – it can be any of the blockchains, Ethereum, Bitcoin, Tezos, etc – an amount is paid to the miners who own the computers computing the transaction. Imagine it as tipping your waiter. They didn’t cook the food, but they were an integral part of the chain in bringing it to your table.
Miners usually receive a small fraction of the transaction cost, though this is determined by the cryptocurrency prices. If a crypto is generally expensive to use, then the cost in gas fees will feel more expensive, because it’s a percentage of the crypto price.
In some instances, gas fees can be lower for the buyer. A general rule of thumb is: if you want the transaction to be computed swiftly, the gas fees will be higher, as it will take up more energy to process at speed. Slower transaction checking means lower gas fee totals. In many situations, the gas fees will be proportionately lower than usual middleman fees found in transactions today.
What are the Upsides?
NFT technology has the potential to completely revolutionise the internet and the way data is stored and transferred. Because anything can be an NFT, the blockchain can store the data forever, and that data can be constantly referred to. The technology can vitally change the sale of goods.
For example, we want to buy a house from our friend. Our friend owns the property – the deed has been digitised and minted as an NFT – and they want 23 crypto for the selling price. We have 23 crypto in our digital wallet and begin the transaction to buy the NFT deed.
Once the blockchain has confirmed that our friend indeed owns the house (digital deed) and we have the 23 crypto, the exchange is done and recorded on the blockchain. Everyone can see we now own the deed to the physical house, our friend has their funds which can be withdrawn or spent and now we can move in. In this example, the agency that would usually deal with this transaction is completely removed. There’s no need to pay fees or fill out reams of paperwork.
NFTs can also open up creator economies, allowing artists, musicians and millions of other creators to sell directly to their audience. They can also be used by governmental bodies to track information in utilities, population, building and traffic data, eliminating email chains, paper backups and miscommunication.
What are the Downsides?
Firstly, NFT technology can be very confusing – hopefully, we’re helping to eliminate this. There’s blockchain, tokens, types of cryptocurrency, wallets, gas fees, minting… the list goes on. Any emerging technology is going to feel initially overwhelming, but with time these processes will become easier to deal with or be streamlined.
Secondly, the NFT market and cryptocurrency generally, can be very volatile. One minute prices are low, the next minute they’re very high. Like the stock market, there will be fluctuations constantly. Buying an NFT isn’t only about whether you like or appreciate the content, it’s also about getting a fair price. Whenever you want to buy an NFT, you must research the artist, the market, the crypto costing, the gas fees, all to ensure you’re getting the best deal.
Lastly, there’s the environmental impact. All those computing decisions and transaction checks use energy and, of course, that energy is normally generated by burning fossil fuels which spew carbon into the atmosphere and impact the Earth via climate change. However, we are at a crossover point – if this technology begins to be used widely, other systems like gold mining and global banking will depend on fossil fuels less, hopefully balancing the usage.
We also need to remember that as the energy industry changes and embraces cleaner options the environmental impact will decrease. On top of that, some blockchains are using much less energy than others – for example, the Tezos network – or applying a carbon offset into their business.
We can see the yearly approximate energy breakdowns as follows (TWh = TerraWatthour) for 2021:
- Gold industry – 240.61 TWh
- Global Banking System – 238.92 TWh
- Bitcoin Network – 113.89 TWh
- Ethereum Network – 44.5 TWh
- Tezos Network – 0.001 TWh
Hopefully, this has helped you learn more about NFTs. Now you should be able to navigate this new phase in the evolution of the internet and the digital economy. If you’d like more information or want to go into more detail with NFTs and Web3, keep reading gmw3.