You might have heard your friends chatting over NFTs at a weekend brunch or read about your favorite football club launching their first NFT collection. The first few questions about NFTs that come to your mind may be: “What does an NFT look like?”, “Is it Bitcoin?”, “Is it a platform?”, “Why are people spending so much money on a profile picture?” etc.
As you research more into NFTs, you come across Investopedia’s definition of NFTs that reads: “Non-fungible tokens (NFTs) are cryptographic assets on a blockchain, with unique identification codes and metadata that distinguish them from each other.”
Hmm… did you catch that 👆 or are you getting more confused now?
Understanding NFTs need not be that complicated. Let us help you unpack some of the key concepts that make NFTs, NFTs - from the classification of NFTs as an asset, to how NFTs relate with blockchain technology.
Fungible or Non-Fungible?
There are different ways of classifying assets. We may group them based on their usage (operating or non-operating assets), or convertibility to cash (current or fixed assets). Assets may also be classified based on their physical existence (tangible or intangible assets) and whether they can be replaced by an equal or identical item (fungible or non-fungible).
From an asset classification perspective, NFTs are considered intangible and non-fungible. Here’s a classification of some examples to give you a better understanding of where NFTs fit:
Traditionally, we have been able to categorize assets based on their physical existence. Assets that have a physical existence are classified tangible; whereas intangible assets are the ones we own, but they do not have a physical form for us to touch. For example, a laptop computer is a tangible asset, but the trademark to a brand of laptop computers is intangible.
What about the classification of fungible and non-fungible assets?
Fungible: being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account. (Source: Merriam Webster)
For example, a $10 note is fungible. If you have a few $10 notes in your wallet, and you want to purchase something with one note, it does not matter which of the notes you use. The seller would accept any of the notes, because all the notes are interchangeable and each has the value of $10. If you lent someone $10, you do not require the person to return you the exact same note. Also, a $10 note in your wallet has the same value as another $10 note belonging to someone else; they are not unique. Likewise, the popular digital cryptocurrency Bitcoin is fungible.
On the other hand, a car is a non-fungible tangible asset. Each car is unique with its own identifiers in the form of serial numbers for its engine and chassis. A ticket to a seated event is also non-fungible, as every ticket assigns you to a seat for a particular day and session of the event.
In short, non-fungible tokens (NFTs) are intangible, digital assets on a blockchain which have unique identities, and are non-divisible and non-replicable. Each NFT is a “one and only”, hence the name Non-Fungible Tokens.
Digital assets on a blockchain?
Conventionally, for any digital transaction to take place, code is run on a server somewhere, and you have to only trust the person or corporation operating it. However, blockchain technology allows parties who do not know each other to conduct peer-to-peer transactions using their digital wallets, using only a computer and an internet connection.
Blockchain technology enables a transparent and secure digital ledger, hosted on a network, for example, Ethereum. Think of Ethereum as a global computer, where data can be written and verified by anyone in the community, anywhere in the world. As more information is added onto the blockchain, the earlier blocks of data cannot be edited or deleted, leaving a chain of information.
When an NFT is “minted” (or created) from digital objects (such as a sound clip or a document), a digital certification is created and recorded on the blockchain.
Because blockchain transactions are transparent, you may view any NFT and retrieve its underlying information easily - such as proof of creation, ownership of the unique digital asset, as well as the blockchain address of each owner since the minting of the NFT.
So, are NFTs not Cryptocurrency?
NFTs are not cryptocurrency (e.g. Bitcoin). However, NFTs and cryptocurrency share some key similarities:
- both NFTs and cryptocurrency are enabled by blockchain technology, and exist on their respective blockchains;
- transactions of NFTs and cryptocurrency can take place between two digital wallets anywhere in the world.
Unlike cryptocurrency which we ascertained earlier to be fungible, each NFT is unique, indivisible and indestructible.
Where can we buy and sell NFTs?
You can buy and sell NFTs at NFT Marketplaces. Marketplaces are digital platforms for buying and selling NFTs. They allow people to store and display their NFTs, and some also allow users to mint their NFTs.
What does it take to transact an NFT?
When a digital art piece is minted as an NFT by the artist, the digital certificate linked to the art piece is created and stored on a blockchain. (Ethereum is one of the most commonly used blockchain currently. Other popular blockchains include Solana and Flow.) The NFT can then be placed for sale on a marketplace.
To buy or sell NFTs, you need a digital wallet to receive, access and transfer them. Via the marketplace, the transaction will be recorded and added on as data on the blockchain. This is done by a few clicks of buttons on the marketplace. The currency used for the transaction could be in cryptocurrency, or fiat currency (for example, USD).
Before you get to own the NFT, you may need to pay gas fees to execute the transfer. The amount is dependent on the blockchain and whether there are any perks provided by the marketplace. On top of gas fees, most marketplaces charge a fee for carrying out the transaction on their platform.
Why do people spend so much money on NFTs?
Some of these high-valued NFTs are digital art. So perhaps we can derive our answer from why people attach a value to traditional art such as paintings.
Every piece of art is uniquely created by the artist and the valuable pieces of artwork are most definitely authentic. No one would pay good money for a painting that is a copy of the real piece of work. There may be a history behind the creation of the work, or the artist is popular and has an interesting backstory. These reasons apply to digital art too.
Finally, can we have a summary of what an NFT is again?
Each NFT is a unique, digital certificate that is stored on a blockchain. NFTs can be used to represent digital assets such as images and videos; NFTs can also be used to track and represent the ownership and authenticity of physical assets.
We hope this article has given you some food for thought on what NFTs are and how they may be relevant to you. Now, you can join in that conversation over the next weekend brunch!
This article is part of our Gomu Learn series where we introduce and break down emerging topics on NFTs, Web3 and blockchain technology for everyone to learn and get onboard onto Web3.