Crypto 101 : What are NFTs?

(Photo: Jordan News)
I know NFT stands for nonfungible token. But what does it actually mean?

Let’s start with the words themselves. In economics, “fungible” is a term used for things that can be exchanged for other things of exactly the same kind. The US dollar is fungible, because you and a friend can trade $1 bills, and each of you will still have the exact same spending power. Most cryptocurrencies are fungible, too — a bitcoin is a bitcoin, and it doesn’t really matter which bitcoin you have.اضافة اعلان

But most objects in the physical world, such as cars and houses, are nonfungible — meaning they have unique qualities, and you can’t just exchange them for others of the same type.

Tokens, in crypto speak, are units of value stored on a blockchain. Cryptocurrencies like bitcoin, ether and dogecoin are tokens, but not all tokens are meant to be used as money. Tokens can be attached to tangible goods but they can also represent intangible goods, like access to a private chatroom or storage space on a cloud server.

So nonfungible tokens are sort of like cryptocurrencies, except they have unique qualities and they aren’t necessarily used as money. Why is that important?

Well, until pretty recently, nonfungible goods didn’t really exist on the internet.

The internet essentially works like a giant copy machine — any digital file can be duplicated an infinite number of times, and every copy is exactly the same as the original.

The infinite copy-making quality of the internet was great for making digital objects abundant. But it was horrible for making them scarce. If you were an artist who wanted to make only 100 “first editions” of your digital artwork, or a professional athlete who wanted to sell digital trading cards to your fans (and have those cards retain value the same way that physical trading cards would), your options weren’t great.

Several years ago, people realized that blockchains (the shared, decentralized databases that power bitcoin, and other cryptocurrencies) could be used to create unique, uncopyable digital files. And because these files were simply entries on a public database, anyone could verify who owned them, or track them as they changed hands.

That realization prompted the creation of the first NFTs.

But aren’t most NFTs just JPEG files that you can copy by right-clicking them and saving them to your computer? How does that solve the file-copying problem?

If it helps, you can think of NFTs as like the certificate of authenticity you might get if you bought an expensive sculpture. The sculpture could be copied or forged — or someone could break into your house and steal it — but because you have the certificate of authenticity, you can prove that you are the owner of the original.

I can see why NFTs are an interesting technology. But why would someone pay millions of dollars for one? You can at least drive a fancy car or appreciate a Picasso painting hanging on the wall — you can’t drive a JPEG.

It’s true that most NFTs aren’t valuable because they’re useful. And at the high end of the market — like the Bored Ape Yacht Club, or the NFT collections being auctioned off by Sotheby’s for millions of dollars — a lot of the value boils down to speculation and bragging rights.

But a defense of NFTs I’ve heard from people in the industry — or, at least, an explanation for their popularity — is that NFTs aren’t unique in their uselessness. People spend money on objects of no practical value all the time — maybe to feel good, maybe to show off to their friends, maybe to signal membership in a group. Some objects we buy are tangible (designer clothes, expensive jewelry) and some are digital objects (Fortnite skins, short Instagram usernames). Empires have been built selling useless luxuries to rich people, and even if all that NFTs represented was a new class of luxury digital good, they would still be worth taking seriously as an emerging industry.

And what’s with all these cartoon apes and penguins I see crypto people using as their Twitter avatars?

Those are what are known as community or pfp (profile picture) NFTs. Basically, they’re a series of unique but thematically related NFTs, released in limited batches.

Once they’re released or “minted,” these NFTs become a kind of digital collectible, and a membership card to an exclusive club. Many NFT groups have their own chatrooms on the Discord messaging app, where owners hang out and talk among themselves. Some community NFT projects even organize offline events and parties, which you can only get into by proving that you own one of their NFTs.

Aren’t NFTs going to end up being worthless?

That is the million-dollar question. (Or, to be more precise, the $40 billion question.) It’s possible that the people investing in NFTs are right — that we’re on the cusp of a revolution in the way digital goods are bought and sold, and that early NFTs will one day become as valuable as original Picassos and Monets.

But the NFT market appears to be cooling off these days, with falling transaction values and canceled auctions of high-dollar NFTs. Even some zealous NFT supporters are worried that the market has gotten oversaturated. Gary Vaynerchuk, an online marketer and a NFT mogul himself, recently predicted that 98 percent of NFTs would lose money.

That still sounds kind of shady. Are there lots of scams in NFTs? What about money laundering?

Yes, there are tons of scams in NFTs. “Rug pulls” — when a crypto developer abruptly abandons a project and runs away with buyers’ money — are a common experience. Several hyped projects have turned out to be rug pulls — including Evolved Apes, an NFT scheme whose creator vanished along with $2.7 million.

In addition, many projects are corrupted by a practice called “whitelisting,” in which certain people are invited to buy their NFTs before they’re available to the general public. Whitelisting means that many profits flow to well-connected insiders, who get their NFTs at a discount and can sell them for more once they’re released publicly. A study by Chainalysis found that whitelisted users who resold their NFTs made a profit 75 percent of the time, versus 20 percent of the time for non-whitelisted users.

Money laundering, wash trading — a scheme that involves selling something to yourself in order to inflate its perceived value — and other shady practices are almost certainly happening in the NFT market, too. It’s not clear how often this happens, but it’s a big enough risk that financial regulators in several countries, including China, have warned about the potential use of NFTs and other crypto assets for money laundering.

Of course, an NFT fan might argue that scams and money laundering happen in the regular economy, too. Crypto might just make it easier.

I saw a thread on Twitter that compared NFTs to those “name a star” gift collectibles, where all you get is an entry in a database saying that a star is named after you — not any official claim to the star itself. Do NFTs actually include ownership or usage rights?

Not necessarily. In many NFT sales, what the buyer gets is simply the unique entry in the blockchain database that identifies them as the owner of the digital good — the token, rather than the thing the token represents.

The person who bought the famous Nyan Cat NFT, for example, doesn’t actually own the copyright to the Nyan Cat image, or the right to turn it into Nyan Cat merchandise. Its creator, Chris Torres, reserved those rights. All the NFT buyer got, in essence, was an “official” copy of the image that was cryptographically signed by Torres.

NFT creators can choose to include additional rights in an NFT sale. But they don’t have to. And there have already been high-profile copyright disputes over NFTs, such as the lawsuit filed by Miramax against Quentin Tarantino last year, after Tarantino announced he would be auctioning off unpublished excerpts from the “Pulp Fiction” screenplay as NFTs.

I also heard that NFTs get stolen a lot. Is that true?

Yes, there have been a number of NFT thefts in recent months, as the price of popular NFTs has climbed. Thieves recently targeted several members of the Bored Ape Yacht Club — whose NFT cartoons of ennui-stricken apes often sell for six or seven figures apiece — by tricking them into giving up the passwords to their crypto wallets. And hackers recently stole $1.7 million worth of NFTs from users of OpenSea, the largest NFT trading platform.

Another kind of theft — the kind that involves creating NFTs out of copyrighted or protected material — is also common. Many artists have complained about their work being turned into NFTs and sold as “official” versions without their permission. And while many platforms have tried to clamp down on the sale of stolen NFTs, some theft is probably inevitable given the lack of oversight in the market.

If NFTs are so flawed, why do so many people seem to be obsessed with them? What’s the optimistic take that I’m missing?

I’ve spent a lot of time talking to NFT creators and collectors, and their pro-NFT argument generally boils down to a few main points:

— The existing internet is too centralized, and NFTs could help decentralize it. Right now, most people who make media on the internet (artists, musicians, video game streamers, etc.) put their work on giant platforms like Spotify, YouTube and Facebook. Those platforms are great for building an audience, but they’re not great for making money. NFTs, they say, make it possible for creators to sell unique digital objects directly to their fans, keeping a much bigger chunk of the revenue for themselves. An artist like 3LAU might sell one album NFT to a superfan for $3.6 million and make more money than they would have from a lifetime’s worth of Spotify streams.

— We’re entering the metaverse era — an age in which more of our daily interactions and experiences will take place inside immersive digital worlds, rather than in offline physical spaces. Just as many kids today spend real dollars on Fortnite skins and Roblox accessories, adults who spend more of their days interacting in virtual spaces will buy all kinds of digital objects to enhance their lives, and many of those objects will take the form of NFTs.

— NFTs are still a brand-new technology, and we can’t yet see all of the ways in which they will be used. Digital scarcity is a genuinely important concept that will open up an entirely new economy of unique digital goods, and we should be patient and open-minded while new we wait to see what’s going to be built with them.

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