What is an NFT and why should I care?

NFT stands for non fungible token. Lets break that down.

Non fungible, means it can’t be replaced by an identical item. Fungible means it can be replaced by an identical item.

We tend to value non fungible things way more than fungible things. An example might be a handmade chair that someone put hours into making. A factory made chair doesn’t have the same value.

Token. In the NFT world this means a piece of art that is stored on the blockchain. Although it seems a strange concept some very wealthy people seem to be spending vast quantities of money on holding onto pieces of art like the ones below.

Ok so the first question everyone asks is what is stopping me just copying the image and using it? Well, the contents of the image/video/gif etc are like any other media on the web i.e. you can copy them.

However the token itself can not be copied because it has a hash that is stored on (cue drumroll) the blockchain…

The Blockchain (boringly basic)

It’s just a chain of blocks

( ͡ಠ ʖ̯ ͡ಠ)

Ok….the key features of the blockchain are as follows:

Distributed ledger that is completely open to anyone.

Each block contains data, the hash of the block and the hash of the previous block.

Proof of work.  This means that anyone who wants to add new blocks to the chain must solve a difficult puzzle that requires a lot of computing power. Solving the puzzle “proves” that you have done the “work” by using computational resources. Doing this is known as mining. Mining is typically brute force trial and error, but successfully adding a block is rewarded in crypto. Anyone who wants to add a new block – slows down the creation of new blocks. In bitcoins case it takes about 10 minutes to do this proof of work

Blockchains use a P2P network so everyone has a copy of the blockchain. This means that everyone can verify the creation of new blocks and makes sure it hasn’t been tampered with. This creates ‘consensus’. In order to tamper with the blockchain you would have tamper to with all the blocks on the chain, redo the proof of work for all of the blocks and take control of more than 50% of the P2P network. This is basically impossible and would get noticed!

Yes this is all massively oversimplified and I will probably do a more in-depth article about blockchain sometime later 😉

Ethereum explained (extremely easily)

NFT’s are stored on Ethereum. Ethereum itself is a blockchain. Ether (ETH) is the cryptocurrency that is used to complete transactions on the blockchain.

One key difference between the Ethereum blockchain and the Bitcoin blockchain is that Ethereum is not just for cryptocurrency. It can be used for dApps (decentralised applications) such as cloud computing, gaming, banking and marketplaces. Check out https://foundation.app/ for an example of a dApp marketplace for NFT’s.

I encourage you to just click around on the Ethereum website (below in the references section) to learn more about key concepts such as wallets, smart contracts, decentralised finance (DeFi) and decentralised autonomous organisations (DAO’s).

A brief note on energy consumption

Because the more I read about Ethereum and crypto in general the more I like about it, and I don’t want to be on the side of the devils by destroying the planet in the process of creating something cool 🙂

Remember 5 minutes ago when I talked about proof of work and mining. Yeh…turns out it’s kinda bad for the planet. Like really bad.

Ethereum wants to move to a ‘proof of stake chain’ where users stake their ETH to become a validator in the network. ⁴ Miners get replaced by validators who perform the same function except that instead of expending their assets up-front in the form of computational work, they stake ETH as collateral against dishonest behaviour.

If the validator is lazy (offline when they are supposed to fulfill some validator duty) their staked ETH can slowly leak away, while provably dishonest behaviour results in the the staked assets being “slashed”. This strongly incentivizes active and honest participation in securing the network.

Ok this all sounds quite abstract and I’m not sure again why I should care? ¯\_(ツ)_/¯

Well, I’m as new to this as you are reader so I’m dipping my toes into the proverbial river for the first time as well but here’s my take on why NFT’s are interesting.

• It’s another use of the blockchain that really takes advantage of it’s verification and decentralisation. Intrinsically this is good because it shows that the underlying technology can be used effectively which will bring more attention and promote more engagement.
• It opens a whole new marketplace for creative types to create, sell, trade and collect artwork. In my mind this could be comparable to how coffee houses were important in developing and spreading ideas in the enlightenment period ⁵
• This isn’t going to go away and it will only get bigger. Unless China decides to ban NFT trading somehow like they did with crypto mining, this market will only grow. Latest news is that the global market is worth $22 billion and that the floor market cap of the top 100 NFTs ever issued – a measure of their collective value – was $16.7bn.⁶

All in all, now is definitely the time to start at least learning about this strange world and maybe if you have a spare $1.5mil investing in a Bored Ape

References:

https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq

https://www.quora.com/Is-it-possible-to-make-a-copy-of-a-non-fungible-token#:~:text=Thus%2C%20NFTs%20are%20unique%20cryptographic,blockchain%20and%20cannot%20be%20replicated.&text=No%20a%20copy%20of%20NFT’s,each%20have%20an%20Id%20number.

https://www.youtube.com/watch?v=Oz9zw7-_vhM&ab_channel=JohnnyHarris

https://www.investopedia.com/terms/b/blockchain.asp

https://www.investopedia.com/terms/e/ethereum.asp

https://www.youtube.com/watch?v=jxLkbJozKbY&ab_channel=99Bitcoins

https://ethereum.org/en/

https://ethereum.org/en/nft/

https://ethereum.org/en/energy-consumption/

https://blog.ethereum.org/2021/05/18/country-power-no-more/

1. This process called the merge will be when the beacon chain merges with the mainnet. I dont have the will to explain the jargon...just google them!
2. Definitely should start another blog just about coffee houses
3. https://www.theguardian.com/technology/2021/dec/16/nfts-market-hits-22bn-as-craze-turns-digital-images-into-assets
4. This process called the merge will be when the beacon chain merges with the mainnet. I dont have the will to explain the jargon…just google them!
5. Definitely should start another blog just about coffee houses
6. https://www.theguardian.com/technology/2021/dec/16/nfts-market-hits-22bn-as-craze-turns-digital-images-into-assets