If you’ve been paying attention to the crypto industry, you’ve probably heard everyone talking about ‘NFTs’. And it’s not just hardcore crypto-enthusiasts that can’t stop blabbering on about them – mainstream culture has been investing in and trading these digital assets.
In this guide, we’re going to provide you with some foundational knowledge around NFTs, blockchain, and why so many people are hyped up about three letters.
Before we jump in, let’s start by defining what the letters N-F-T stand for.
Could they not have made this an easier term to understand? We are going to break this term down because as soon as I hear the words ‘fungible’ and ‘token’ you’ve lost me.
To understand the concept of fungibility, bear with us and change the words to Non-Replaceable Token.
*You can’t replace it, there is only one of them, it is unique.
Examples of non-replaceable items:
Examples of replaceable items:
Non-fungible/ non-replaceable items are WAY MORE valuable than fungible items.
Makes sense right? Because there is only one of them – which is what we call scarce.
Scarcity = something valuable.
Now that we’re across the basic concept of fungibility, let’s dive a little deeper and look into ‘tokens’, blockchain, and finally, NFTs.
What is a token?
This is advancing a little beyond where we are with our existing modules though bear with me as I explain what a token is.
Tokens are typically the term used to describe every asset in the cryptocurrency space. Sometimes, you’ll hear people say ‘coins’ too, although this isn’t technically correct, nor is it truly appropriate to say that every asset is a token.
Tokens are digital units of value that sit on top of and work within blockchains. They can serve many different purposes, for example; accessing platform-specific purposes, and holding them to receive rewards.
This is a pretty huge topic so if you want to learn more, you can read our blog; Tokens v’s Coins (Coming soon).
Next, we will tease out what a blockchain transaction looks like.
I feel that one of the easiest ways to explain blockchain is to look at how transactions between two people differ when they are conducted via the traditional banking system versus on the blockchain.
Let’s outline both scenarios below.
Note: If you want to get a deeper understanding of how crypto works, you can read Topic 1: A crypto story.
History has shown us that banks and financial institutions don’t always do what they should with our money. A great example of this can be seen with the Global Financial Crisis of 2008… With this in mind, enter “the Blockchain”.
Blockchain technology has allowed these kinds of transactions we mentioned above to occur without a bank/middleman – they occur publicly (anyone can view them) with complete reliance on technology (blockchain technology).
Now, let’s tease out what a cryptocurrency transaction on the blockchain looks like.
Now that we’ve covered all of that, we are finally ready to move onto how NFTs work in more detail.
In our banking example, we demonstrated transactions between people using the traditional banking system, where they transferred fiat (another term for your local currency—USD, AUD, GPB, YEN).
From there, we showed the same example, but we looked at how the value is transferred using cryptocurrency on a blockchain.
We’re now going to show you a third transaction example that focuses on NFTs. An important distinction to note is that with NFTs, users are transferring asset ownership, not currency.
NFT transactions using the blockchain are transferring ownership of an asset rather than actual currency/money.
A Typical NFT Transaction
Let’s use the ‘Sarah’ example again, and this time, she’ll be selling you her digital art.
There are some cool things to take away from the above example.
Digital art isn’t the only thing being linked with NFTs. Lots of different assets are being tokenized: music, art, NBA top shots, tweets, and more.
We love useful stories at Clutch, so here is another one for you. This time, we’ll look at a recent musician’s use case for NFTs.
Doja Cat – Using NFT’s To Sell Digital Experiences
Doja Cat: the female musician who on Saturday 11th September, launched her first NFT collection, selling ‘digital experiences’.
What does that mean?
Doja Cat has a large audience who values her and what she creates: music, art, clothes… She was able to create a collection of 26,000 items that are available for purchase from a specialized site she has made. Each item is represented by an NFT token, and interestingly, the NFT’s have different rights, and perks attached to them. Unlike our previous example, they aren’t just simply ownership rights to an asset… Doja Cat is using NFTs to also provide experiences to her audience.
Marketed as a “digital token experience” – Her audience can purchase these unique NFTs, which range in price from $5-$2,500. Depending on what you buy, the NFTs give you the right to certain ‘perks’. For example:
Have a browse through her website and see all the different things you get access to, depending on what NFT you buy.
We wanted to share this story because it’s an excellent example of how tokens and the blockchain are being used on a range of assets, and experiences. Doja Cat’s discord group, music festival, and competition giveaway are all valuable to Doja Cat fans who are willing to pay to have exclusive access with a token (NFT) that represents that.
You might ask: can’t you just do this with tickets or normal membership?
To that we say, yes, but:
Blockchains are transparent, immutable, and decentralized, and by using them, we don’t have the above issues.
In summary, NFTs can be thought of as a metaphor for how humans value things, and to date, we have not had a technology that helps us attribute an ‘identifier’ to all objects’ value that we can transact on.
So now when someone says, WTF is an NFT? You can reply with:
“Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.”
“Non-fungible tokens or NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.”