The most widely spoken of items in all of 2021, NFTs. Taking the world by storm with their mysterious ways, creeping into our everyday lives, what are these little buggers? Some say a money-laundering scheme for criminals and crooks. I personally think it’s just the ultra-wealthy and their family offices having a little social experiment with society’s economies. Still, NFTs are a technology that’s existed for a long time.
Stepping back in time and looking where NFTs came from gives you a sense of why they exist today and why they are gaining notoriety. I’ll agree with you that the art market is a little nutty regarding these tokens, but that’s a whole different debate. The art market has always been nuts and always been a place riddled with fraud, money laundering, and devious schemes. What hasn’t?
To understand what NFTs are let’s go back in time and look at Blockchain.
Blockchain and the emergence of NFTs
Long before NFTs as we know it, somewhere in Arlington, Virginia, C.I.A. Chad and his brethren of Chad’s released Blockchain and Bitcoin. It was a grand scheme to lure criminals to the underworlds of the cyberland and track their every move. Much to their demise that backfired like the internet.
Really though, someone I don’t know who invented Blockchain. That person released a whitepaper spelling out the details. It was a revolutionary way for people to take ownership. A decentralized approach to society and currency. Blockchain would change the world.
To put it plainly, Blockchain is a database that can make any transaction transparent, secure, and without needing an intermediary. Blockchains help people share data and transfer value globally without trusting one another. It’s an easy way for global markets to interact as the New World Order slowly marches in. Prep your wrists for the RFID chips.
With Blockchain comes a set of standards. These standards set rules around storing data and logic, stateless data communication, and data formats used. Providing a coordination layer for digital assets.
Digital assets have no unified standards. NFTs and Blockchain allow for standardization and interoperability. The basic primitives of both are ownership, transferability, and access control. They’re even flexible in that they can be built on top of. Blockchain is the necessary building block of the digital world. Without it, we’d never have been introduced to NFTs.
In 1993, Hal Finney made remarks explaining a new type of currency. Scarce, exclusive, and come with provenance. It was an idea that conveyed the concept of digital cash. Little did Finney know that what he said would be some of the main aspects of NFTs.
What are NFTs (Non-Fungible Tokens)?
An NFT or non-fungible token is something that is not as easily exchangeable. A mutually identical item can’t be easily replaced because it’s typically something unique. Non-fungible items are more common than you think. A domain name, chair, lamp, and macaroni and cheesemaker could be considered non-fungible items. In this case, we are dealing with unique digital items with Blockchain managed ownership.
NFTs are used for various applications from collectibles, in-game items, digital art, event tickets, ownership records, albums, and more.
The simplest way I’ve explained NFTs and fungibility was to my Dad using a plastic container full of potato salad. I pointed out that the plastic container was literally a plastic container. Inside of it was potato salad. That potato salad could be anything. If I had the same potato salad and we traded, it would be the exchange of fungible goods.
Then I said that I wanted the toaster. I said I would give my potato salad and a box of coffee. If agreed and we made the exchange that would consist of non-fungible goods. We both had a set of unique items. We both decided that our things were of the same value based on the deal made. In agreement, we traded ownership of the items and carried on.
The basic structure of NFTs or non-fungible tokens starts with the relationships. There are at least two parties, sometimes more involved. There’s a connection between the hosts, creators, buyers, and/or sellers. The connecting point between the two parties is a token.
A token represents a set of keys and signifies ownership of the associated content. The content within an NFT is a file consisting of metadata. Metadata is a list of everything. Full explanations, associations, and relationship descriptions. Think of it as a manifest.
In that manifest is the asset associated with the token and where it’s located. There are also rules regarding licensing and requirements related to purchasing, licensing regulations, and royalties payments.
What is an FT (Fungible Token)?
An FT or fungible token is an easily exchangeable item able to be replaced by a mutually identical item. Fungibility allows for the exchange or replacement of a token for other types resulting in no value change. Fungibility is relative when comparing multiple items; think tickets for classes of airlines. Fungibility is subjective when sentimental value is present; think collecting pennies.
What is an SFT (Semi-Fungible Token)?
An SFT or semi-fungible token is the new kid on the block. It’s a bunch of developer magic, if you ask me. Containing both fungible and non-fungible tokens, these SFTs can be traded for other identical SFTs. Once redeemed, value is lost, becoming non-fungible. They get their name from their creation process. ERC-1155 combines ERC-20 and ERC-721 contract standards.
The early days are still upon us, and there is a lot to be learned about this industry. With limitless possibilities, standards can set rules that guarantee assets behave a specific way, provide specifics on behavior and describe how to interact with the functionality of an acquisition. They also open up the ability for more developers to get in on the action.