The technology behind NFTs

The technology behind NFTs

There’s a pretty good chance that, by now, you’ve heard or read the term NFT. The acronym stands for the non-fungible token, but that title does not explain much about what this recent phenomenon actually is.

An NFT is a completely unique token that represents ownership of some sort of asset is it art, a video clip, or even a tweet. Non-fungible means that it cannot be traded with something else of equal value, because it is one-of-a-kind.

A $1 note, for example, is fungible because you can trade your note for another $1 note and still have $1. Your NFT cannot be switched in such a way because there is nothing else like it, and that’s exactly the point of them.

NFT marketplace like that of DraftKings is where these are bought and sold online, and they are then stored on a blockchain to provide proof of ownership. So, the NFT itself isn’t actually a piece of media – for example, a piece of digital art – but rather a digital stamp of ownership, for lack of a better term.

The blockchain is visible to everyone online, meaning that proof of ownership can quickly be found. An NFT doesn’t necessarily grant you copyright ownership of the piece of media – in some cases, this remains with the artist or creator themselves – and copies can be made of it, however, you will own the original.

A blockchain is a decentralized network of public participants and they primarily serve to create and maintain digital records of transactions. These records can only be added to; once they’re on the blockchain, they cannot be changed or deleted.

The NFT is stored on the blockchain, but the digital piece of media purchased is not. Most NFTs are stored on the Ethereum blockchain; Ethereum is a cryptocurrency, like bitcoin, but its blockchain also supports NFTs. In fact, it’s the world’s second-largest cryptocurrency behind bitcoin.

The blockchain is essentially a public digital database in which a wide range of people who monitor it will assess and approve transactions and additions to it. These people use computing software and hardware to run and monitor the blockchain and are paid a small fee – in Ether, the cryptocurrency of the Ethereum blockchain – for their work in keeping it running.

As these entries then remain unchanged, there’s no need for a third party, like a bank, to be involved. This keeps the blockchain a peer-to-peer platform and limits the potential for corporations or even governments to exert control on the marketplace.

This makes the process of using a blockchain for transactions, like using cryptocurrency or buying and selling NFTs an efficient one. It also means that when you buy an NFT, your personal details are not then publicly available online as you can register your transaction under a pseudonym.

With a decentralized platform, blockchains are also notoriously difficult to hack, as hackers would have to take control of a huge chunk of the system in order to do any damage or access information.

Over the past few years, the NFT market has exploded and there have been instances of some eye-watering sales. Earlier this year, Beeple sold a piece of digital art for a staggering $69.3m.

Jack Dorsey, the founder of Twitter, auctioned off the NFT for his first-ever tweet for $2.9m and donated the proceeds to charity. That tweet is still available to view (for free) on Twitter, but the person who purchased the NFT now ‘owns’ that tweet.

NFTs are being picked up and adopted by major organizations like the NBA, which recently launched their own marketplace, NBA Top Shot, where people can buy and sell NFTs of short video clips from the league.

Some people are getting involved just to be a part of the community and enjoy the ride, while others – particularly those able to spend huge amounts of money on digital art – have been doing so as a status symbol and, to an extent, for some publicity.

However, NFTs also offer investment opportunities. Like cryptocurrencies, the value of the NFT market often fluctuates and it’s an investment that comes with plenty of risks but also the potential for significant rewards.

The NFT landscape is still in relative infancy and to get on board now could produce hefty returns down the line.

This new technology also provides new avenues for artists and creators to earn more money and gain more exposure. To an extent, the transition of art into the digital realm is a democratizing influence as it is relatively easy to add your digital artwork to large NFT marketplaces like OpenSea.

Of course, this is all still very new and it’s unclear whether the NFT phenomenon is a flash in the pan or a long-term gamechanger. Plus, concerns have been raised over the environmental impact of NFTs and blockchains, as they require enormous amounts of computing power to run.

This use of electricity and power uses up a lot of energy, and there are worries that this system simply isn’t sustainable.

The technology behind NFTs is undoubtedly complex but it’s also an exciting development for digital marketplaces. Closely tied to cryptocurrencies, NFTs are bought and sold on blockchains, providing higher levels of protection but also unparalleled efficiency.

Back to top
%d bloggers like this: