WTF is an

NFT?

What does NFT stand for?

NFT stands for Non-Fungible Token. Let's break down what it means to be Non-Fungible, and how these “Tokens” came to exist1

1
Don’t worry, we’ll start from the beginning.

What does Non-Fungible mean?

Wikipedia describes fungibility as the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part.1 By contrast, something that is non-fungible is NOT interchangeable and IS distinguishable from other similar goods or commodities. This chart gives several examples of things that are fungible and those that are not, what is digital and what is not, and where these traits intersect. Take a moment to let that soak in.

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https://en.wikipedia.org/wiki/Fungibility
four quadrants showing the difference between fugible and non-fungible assets, as well as digitcal and non-digital assets

So what does the 'Token' in ‘Non-Fungible Token’ mean?

To understand what 'Tokens' are1, you have to understand the blockchain.

To understand the blockchain, you have to understand how other computer systems work.

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(in this context)

What is the Blockchain?

Blockchain technology is a new way for computer networks to function. What makes the blockchain so special is that it is DECENTRALIZED1 - meaning that there is no single computer, server, or file that holds all the information exclusively. That’s what a CENTRALIZED network is. If the “center” of a CENTRALIZED network gets compromised, the entire network can fail. Blockchain technology takes the network functionality and tasks, and shares them among the network.2

1
If you’re going to describe blockchain in two words, it's a DECENTRALIZED LEDGER. More on ledgers to come.
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Just checking to make sure you're reading the footnotes.
a diagram of a centralized network with a central node, and a decentralized network with no central node.

What’s an example of a CENTRALIZED transaction?

Let’s say User A wants to send User B $5 from their account at Bank Z. User A has an account balance of $10 according to Bank Z’s database. So when User A attempts to send $5, Bank Z’s Database allows the transaction, because it is the sole keeper of the account balances of all users. Bank Z’s database is the CENTER of the CENTRALIZED network. However, if Bank Z’s database is hacked, destroyed, or otherwise compromised, User A and User B are in big trouble1.

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But not as much as Bank Z
a diagram showing how a bank mediates a transaction between user A and user B

What’s an example of a DECENTRALIZED transaction?

Now let’s say User A wants to send User B 5 Crypto Bucks1. In this example, Crypto Bucks is a unique blockchain that User A and User B use to pay and get paid in Crypto Bucks. When User A wants to send User B 5 crypto bucks, the transaction needs to be verified.2 But because there is no Bank Z on the DECENTRALIZED Crypto Bucks network that keeps track of the account balances of its user as a means to validate all transactions, Crypto Bucks uses a Distributed Ledger in place of a a centralized database.

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Crytpo Bucks are a fake digital currency that we're only using as an example.
2
This is achieved through cryptography, and deciphered using the Users public and private keys. Users public and private keys are comparable to a website's user names and passwords.
a diagram showing how the blockchain mediates a transaction between user A and user B

What is a Distributed Ledger and what is its role?

A distributed ledger1 simply means that every user of Crypto Bucks has a record of how many Crypto Bucks every other user has at any given time. That way, if User A tries to send User B 5 crypto bucks but they only have 3, then the transaction will not go through because the transaction will not be verified by the network. There’s a lot of ways that blockchains use cryptography and other advanced security measures to ensure transactions are valid, but the main point is that transactions occur without a CENTRALIZED network like Bank Z, and the users of the Crypto Bucks network rely on one another to ensure security and validity of each transaction.

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A ledger is a book or collection of accounts in which account transactions are recorded.
shows several different users all having a copy of the distributed ledger.

What else can you do with Blockchains?

Blockhains are built with a specficic purspose in mind. The Bitcoin blockchain was built to serve as a digital currency and a store of value. But is there a way to leverage all the benefits of the Blockchain outside of a digital currency? Of course, with Blockchains like Ethereum1. Instead of only having a decentralized ledger on a Blockchain, you can build decentralized applications2 on Ethereum, as well as create smart contracts3. These types of Blockchains are what enabled NFTs to exist.

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Similar blockchains include Cosmos, Algorand, Polkadot, NEAR, FLOW, Tezos and more.
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aka DAPPS
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NFTs are smart contracts. Smart contracts are computer programs that contain all the information and control all of the tasks that are necessary for an NFT to exist and function.
shows several different users all having a copy of the distributed ledger.

Blockchain History 101

Bitcoins are for sale

The first Blockchain is born

July

2010

A Bitcoin is worth $1

As of April 2021, a Bitcoin is worth $60,000

February

2011

Ethereum is launched

The blockchain's utility is diversified by an order of magnitude

July

2015

An ERC-721 is created

The most popular type of NFT is live on the Ethereum blockchain

January

2018

A NFT sells for $69 Million

Beeple's Everydays: the First 5000 Days crushes all previous records for digital art.

March

2021

Before we talk about NFTs, let’s recap what the blockchain is...

It’s a decentralized ledger. It does not rely on a central network or database to store all the necessary information.

Instead, every user (or node1) on the blockchain has a record of the entire history of transactions, smart contracts, applications, etc. on the blockchain.

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Sorry, I know we didn’t talk about nodes at all, but imagine that nodes are just one dot on the diagram of the network and, in this case, a node is the user.

Okay, now that we know the fundamentals of the Blockchain and how it’s different than normal computer networks, databases, banks etc., we’re ready to talk about NFTs.

So WTF is an NFT?

An NFT is a lot like a Crypto Buck. But, Crypto Bucks are fungible. NFTs are non-fungible because they are unique. Crypto Bucks1 are not unqiue . And because NFTs are unique AND live on a blockchain, their ownership can be verified better than anything that has ever existed. Now that we know NFTs live on the Blockchain and the basic functions of how the Blockchain works, let’s talk about what an NFT can be.

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And other crypto currencies, as well as fiat currencies (like the dollar)
a chart showing that bitcoins are fungible digital assets that are interchangable, and NFTs are not.

Where do NFTs come from?

For an NFT to exist on the blockchain, it must be minted. What does it mean for an NFT to be minted? It means that a smart contract is created on a blockchain that says what the NFT is, who owns its, and any other special terms1. The smart contract also says what the NFT represents ownership of. Next, we’ll see (step by step) how NFTs are created...

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Like royalty fees, licensing agreements, temporary ownership terms, and much more
a stork carrying an NFT in a bundle

How are NFTs made?

An asset is created or already exists

It could be art, a house, anything

Step

1

A NFT is minted

The newly minted NFT represents ownership of the aforementioned asset.

Step

2

The NFT lives on the blockchain

The blockchain is immutable, and its contents can never be erased.

Step

3

The NFT is bought, sold, and traded

It can appreciate or depreciate in value like any asset.

Step

4

The asset can be admired by anyone

...but only the owner of the NFT has the rights and values associated to the NFT

Step

5

NFTs are digital assets that represent ownership of something. Verified by the blockchain, leveraging all the revolutionary features of blockchains.

The blockchain’s decentralization, security, immutability, authenticity, etc. makes it a revolutionary tool that will outlive us all.

What is an example of an NFT?

NFTs are most commonly used to represent digital ownership of art or collectibles. A photograph of the Winkelvoss twins can be admired by all, but an NFT of this photo minted by the creator allows its value and ownership to be transferred to a buyer.

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Photo by Miller Mobley
The Winkelvoss twins in a row boat. One is yelling a bullhorn and yelling at the other.

How much is an NFT worth?

Like any non-fungible asset, NFTs are worth as much as anyone is willing to pay for them. And some people are willing to pay A LOT for NFTs. For example: on March 11th, 2021, Christie’s auction house sold an NFT for the digital work of art “Everydays - the first 5,000 Days” for $69.3 million dollars. Another popular NFT is CrtypoKitties, virtual collectible cats that have sold for as much as $390,000. NFTs are already collectively worth billions of dollars, and their trajectory shows no signs of slowing down.

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image source: https://www.christies.com/media-library/images/features/articles/2021/03/beeple/beeplesopusthefirsteverpurelydigitalartworknftcomestoauction880x550.jpg
an example of a decntralized transaction where the bank is crossed out, and instead peers on the network verify the transaction.

You know what else is an NFT?

This website. It lives on the Ethereum blockchain.1

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Scan the QR code to see for yourself.
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Contract Address: 0x495f947276749Ce646f68AC8c248420045cb7b5e
an example of a decntralized transaction where the bank is crossed out, and instead peers on the network verify the transaction.

One more time, WTF is an NFT?

An NFT is a unique, on-chain token representing ownership of an off-chain asset. The token is backed by a social contract from its creator and a surrounding community.

By assigning a unique token to a thing, its ownership becomes programmable, verifiable, divisible, durable, universally addressable, composable, digitally secured, and easy to transfer.

So you’re taking something that’s tangible or non tangible and assigning it a unique token (NFT) which creates a record of ownership. This record is kept on the blockchain.

But this is only the beginning. NFTs are the future of digital record keeping of ownership. Soon, every type of asset imaginable will be bought and sold via NFTs.

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