NFTs in Plain English: Explaining the Concept of Non-Fungible Tokens.

10 min readApr 12, 2021

The first time I heard about NFTs was in 2017 when I learnt about Bitcoin and researched the blockchain space. I came across the CryptoKittens video game; it was the first NFT developed on the Ethereum blockchain network, the game allowed players to buy, collect and breed unique virtual cats. I tried to play the game, and as you can imagine, this only worsened my confusion. I didn’t understand why I had to pay real money in the form of some Ethereum tokens to buy a kitten and “breed” it to create other unique kittens? I recently discovered the most expensive CryptoKitten ‘dragon’, sold for 600 ETH in 2018. 600 ETH is about $1,200,000 today. After Beeple’s historical art sales at Christie’s, I went back to my research. I am happy to announce that after studying at the University of Youtube, the concept of NFTs no longer confuse me.

Now, what are NFTs? Why are people paying so much for them?

NFT = Non-Fungible Tokens. In straightforward terms, Non-Fungible Tokens refers to unique digital assets registered and verifiable on the blockchain network.

Now, let’s break this concept down to its first principles;

Fungibility
Non-fungibility
Blockchain

Zachary Crockett’s rendition of the fungible versus non-fungible worlds appeared in The Hustle.

In economics, Fungible goods are goods or commodities where individual units of such commodity hold the same value. Because of this, these units are interchangeable and economically indistinguishable from each other, i.e. they are the same. Currencies are fungible items. The value of $10 is the same regardless of form. It can either be presented as 2 $5 notes or 1 $10 note. It doesn’t matter because the value remains unchanged, and thus they interchangeable, i.e. fungible. Another example of fungible items are commodities like ounces of pure gold or barrels of oil. The unit price of fungible items remains the same at every point in time. Now let’s focus a bit on intangible fungible items like Cryptocurrencies, e.g. Bitcoin. Cryptocurrencies are visually represented by cryptographic hashes like this (#8653hjbsgvhksa86814837254327974t0927hnhvk). In its basic form, cryptographic hashes are encrypted digital data generated on the blockchain network after solving a challenging mathematical problem. Every bitcoin has a unique hash value, but regardless of this, one bitcoin still retains the same value as another bitcoin and can be interchangeable at any point in time.
Non-Fungible items refer to items whose values are determined by their individual properties. Non-fungible objects are not interchangeable because of their intrinsic unique properties. Houses are non-fungible items; a three-bedroom bungalow will not have the same value as all three-bedroom bungalows in the same city. Each house’s value will be determined by its individual properties, e.g. age, location, style, interior design, architecture or builder. Art is perhaps the most famous example of non-fungible items. Let’s use Da Vinci’s painting as an example here. All his paintings are unique and are valued differently because of their individual properties. Domain names are examples of intangible non-fungible items. Creating a domain name is extremely straight forward and uniform across the internet. Still, the prices of domain names are determined by the perceived value of the particular words that have been used in registering the domain name. Domain names are like internet real estate, with famous and well recognisable words having a lot more value. The most expensive domain name to date, Voice.com, sold for $30 million in 2019.
In its simplest form, Blockchain technology refers to an online, decentralised, immutable ledger or records book where transactions or information are recorded permanently. The records cannot be edited or erased, hence their immutability. Decentralised means that the ledger or register is not domiciled with a central authority; instead, its distributed to different participants on the network who verify and input the records of transactions in real-time. Once the transaction is inputted in the ledger, it cannot be edited. When a transaction happens on the blockchain, all the network participants see the transaction and verify the transaction’s authenticity by solving a series of complicated mathematical questions. Once the mathematical problem is solved, the transaction is validated and added to the blockchain.

Now that we have a basic understanding of the main components of NFTs, we will focus on how NFTs work and the implications of this technology for digital assets.

NFTs are created on the (Ethereum) blockchain network, and they are visually represented by a series of unique cryptographic hash programmed into a digital item. In cryptocurrencies, the cryptographic hash created on the blockchain network is the coin itself, but for NFT, the hash must be attached or programmed into a digital file. An NFT is created by linking this hash to a digital file, which registers the file's ownership and unique properties on the blockchain network. This record is permanent, visible to all and cannot be changed. When NFT is purchased, the new ownership is recorded on the blockchain.

What is the big deal with recording the ownership of digital items or assets on the blockchain?

With the advent of the internet, digital files such as pictures, songs, videos, graphics, designs, drawings, animations, gif, memes and so on became easily replicable and shared seamlessly across the web. A simple “save image” option or “copy and paste” option would distribute digital files around the world in a short time. With NFT technology, a digital file's originality and ownership can be stored and verified on the blockchain network. Once ownership of a digital file can be verified on the blockchain network, it becomes easier to sell the work because anyone buying such an item is confident they are purchasing the original. It won’t matter if the file is shared a million times across the web (N.B, the first and third pictures in this article are copies of NFTs, I can use them, but I don’t own them). It’s similar to how anyone can print a high-resolution copy of Mona Lisa by Da Vinci, frame it and hang it on their wall. Still, everyone knows that the original, valued at almost $850M, is on display at the Louvre museum in Paris.

NFT is the process of converting a digital file into a digital asset. Before NFTs, most digital arts were just files, but now the creators can convert them into liquid assets via NFT. Previously, digital artists didn’t make money directly from their art; they usually posted their art online for free, built a community, fame and a portfolio. Now, digital artists can make money directly from their art by converting them to NFTs and auctioning them NFTs platforms. I should note here that art is not the only use case of NFT; any digital file can be converted into NFT, any digital file at all. Emphasis has been placed on art in this post because it's the most popular use case of NFTs for now.

Core Properties of NFTs

This Image is programmed to update its appearance daily to reflect day/night cycles. Source: Opensea

Tradeable

The ability to trade NFTs freely across the web is one of its key features. People can trade NFTs on different platforms or websites. People can buy and sell their NFTs from any crypto wallet the same way anyone can buy and sell cryptocurrencies across platforms. NFTs are not just digital assets; they are tradable crypto assets.

Immutable and Provable Scarcity

NFTs differ from typical digital assets because their ownership is recorded on the blockchain, and once a new sale happens, the new owner is recorded on the blockchain. The properties of NFTs display the history of all transactions that has ever occurred on the NFT. NFTs derive their value from the perception of scarcity since each NFT is unique.

Programmable

NFTs can be fully programmable to reflect the creators’ desire; One popular example is that the background colour of digital art can change if certain conditions are triggered. Another example can be found in the game CryptoKittens where every cat in the game are programmed with specific properties, and when the cats breed with other unique cats in the game, they birth a kitty that has a mixture of their unique properties (cypto DNA). One really exciting example of software that can be written into NFTs are royalties; an NFT can be programmed to pay a specific percentage of the sales as royalties to the creator every time the NFT is resold, this is super exciting because for perhaps the first time in the art world, artist are able to earn a commission on every resale of their art work.

Some (Practical) NFTs Use Cases

Video Games

In 2019, Video game players spent 87 billion USD on in-game virtual items. A vast bulk of this money went to the video game corporations. Epic Games, the Fortnite game creators, accrued more than $2.4 billion in revenue selling virtual costumes to their players. The market for in-game purchases in video games is enormous. With NFT gaming, players can sell their unique in-game items on a peer to peer basis, and the prices of these virtual in-game items will be purely market-driven, i.e. based on demand and supply. For example, if you have an item you no longer need in a game, instead of leaving the item dormant on your profile, you can trade it and use the money to get another virtual item, or you could cash out. As a video game player, you earn real-world cash by playing and obtaining virtual items that you can sell to a fellow gamer at any time.

Games where NFTs are already being used: CryptoKittens, Decentraland, God’s Unchained and so on.

2. Digital Art

Apart from the ability to frame digital artwork and print versions, you can also display these artworks in the gaming world, virtual art collections or virtual reality profiles. For example, Nike has a few NFTs for their digital sneakers. You can buy these limited-edition sneakers, and your game or VR avatars can wear these sneakers in the digital or gaming world.

3. Virtual Reality

Virtual Reality is exploding, and research has estimated that investments into VR will be upwards of 15 billion Euros by next year. Many museums around the world have adopted VR and are showing their impressive museum collections through VR. In the coming future, we are going to see a growing number of digital galleries offering NFTs. Apart from galleries, NFTs can also be used to build up and beautify your virtual reality hangout space. To see how this works, refer to the movie (Ready Player One), but I am getting ahead of myself here; we are still in the very early days of this tech.

The future of NFTs

NFTs as a tech innovation is terrific for the digital space, and I believe we are just scratching the surface of how far this tech can go in expanding the economy for digital assets. While the hype surrounding NFTs is excellent for the blockchain space, I believe we are currently in the middle of a bubble. We will probably see a very steep crash in the prices of NFTs in the coming months because the supply will surpass demand.

If you are considering the purchase of an NFT solely as an alternative vehicle of investment, do your research and try to make only ‘value purchases’. As a newbie in the NFT space, you have to ask yourself some specific questions; ‘what gives value to this piece of digital asset I intend to buy?’ ‘What's the story behind it?’ If you want to learn more about art valuation and the valuation of NFTs in general, this Youtube video will be beneficial to you. Try to buy NFT from a creator you believe in because when the mimetic desire (which is at an all-time high) for NFT reduces, the primary metric for its resale value will be tied to the creator of the NFT and not its previous price.

The NFT space is growing exponentially, and this growth has created avenues for fraudulent people to operate. There have been multiple reported cases of people fraudulently uploading stolen digital art as their NFTs. Due diligence is paramount when operating in this space because the sale of NFT doesn’t transfer copyrights to a buyer. It only transfers the right to use and resell. So the purchase of a stolen NFT might be invalidated at any point in time. I don’t foresee these fraudulent activities continuing for very long because these are still the early days of mainstream NFT awareness. There are loads of intelligent people working in this space and I'm betting that a more robust due diligence procedures will emerge in the next 12 months.

As an artist, if your objective is to derive a sustainable income from the sale of NFTs, building a great community and pushing the boundaries of programmable art will be a fantastic way to create long term value for your work. Digital art has gotten the attention of the traditional art world; the historic sale of Beeple’s ‘First 5000 days’, which sold for $69.3M at a Christie’s auction, gives clear credence to this fact. Traditional museums like the British Museum have deployed virtual reality technologies for some of their exhibitions. Apart from the rise of core digital museums and galleries that will buy NFTs, It won’t be surprising for traditional galleries and museums to start operating in the NFTs market in the nearest future. Art is going to be a mix of physical and digital.

Many people might not make sense of NFTs. They probably think it's absurd for anyone to pay such massive amounts of money for digital files that can be easily duplicated and used by literally anyone on the web. This argument can also be applied to traditional paintings, but people have been shelling out mind-blowing amounts of money for paintings for centuries. Art is highly subjective, and people derive value however they want from art; it can even be used as a status symbol. If traditional artists are rewarded for their craft, why should digital artists be left out? I know that NFTs are here to stay, and we are currently in the exploration stage of how far this tech can go in changing the digital landscape.