So, if you had a spare $390,000, would you use it to buy a computer graphic of a cat? Someone did a few months back…
Actually what they purchased was an NFT – a “token” or bit of code permanently embedded in the worldwide Ethereum blockchain. As a bonus, they got a cute pic of their CryptoKitty sent to them to represent that token/purchase.
Not this picture – this is a copy. How do I know? I don’t own the NFT for CryptoKitty #896775 Dragon, so any picture I put up is just a duplicate (or “forgery” as they would say in the art world if I tried to sell the above pic as the real thing.) In addition, an NFT isn’t really the piece of art being sold. The art is just a cute way of getting you to buy the token.
Welcome to the brave new world of cryptocurrency and collectibles.
How about we start with a primer?
Think of it as “digital money” – you can use it to buy and sell things with, or invest, but it only exists as an encrypted program on one or more computers as part of a “blockchain,” unlike physical money, such as a dollar bill you can hold. Bitcoin and Ethereum are two examples of the most popular forms of “crypto” currently. You use dollars or another form of crypto to buy and sell the “tokens” that represent the type of crypto you want to own.
Note: crypto behaves like the stock market as well as acting like currency. Crypto can go up and down in value depending on hourly/daily trading volumes. So you can make (or lose) a lot of money sometimes very quickly, depending on the type/amount of crypto you own. Also, like stocks, there are associated costs to buy/sell/trade crypto. (See “Gas” below.)
Think checkbook register, only electronic, and much, much bigger. Each form of crypto, like Bitcoin or Ethereum, has its own blockchain. However, instead of being all recorded in a single place, the “register” is stored all over the world on 1000s of computers (distributed), and the “bank account” is shared by all that crypto’s users. It’s one long continuous ever-growing ledger of all the transactions affecting that particular crypto-currency. Because the newest entries are added to the string and checked against the previous copies worldwide to prevent changes to any earlier ones, the integrity of the entire blockchain is maintained. That means your transactions are “etched in electronic stone.” By the way, to get yours recorded, it may cost you “gas.”
The cost of transacting “contracts” on most of the blockchains. To get your buys/sells/trades written into your crypto’s blockchain, people who own computers on the worldwide system currently have to use lots of electricity and computing time to verify that the transaction is encrypted and added correctly. They need to make money to cover those costs. The “miners” (people who create/manage blocks and verify data on the blockchain) grab transactions and process them for a price, called “gas” – it’s sort of like an auction for handling buy/sell/trade contracts. Usually, the contracts offering to pay the most gas get processed the quickest and the constant ever-changing “bidding” drives the prices up and down throughout the day. You can end up paying a lot of gas depending on how complex the tasks are as part of your contract and what time of day you try to get them pushed through… (You can use a site like gasnow.org to see what a transaction might cost you.)
You “store” your personal crypto transactions in a “digital wallet.” It keeps track of all your “trades” on the blockchain, your buys, sells, transfers, and so on. Just as in real life, you can have multiple “currencies” in a wallet, as well as multiple wallets. It depends on the level of security and ease of use you need for your trading. Companies like Coinbase and Metamask are just two of the most well-known to offer digital wallets.
A “Non-Fungible Token” – This one is a bit harder to understand for some people.
Fungible generally means interchangeable for something of equal value. Like if I have a generic dollar bill and you have a generic dollar bill, when could trade them with each other and we would each have $1 still. Or I could trade my $1 for your four quarters and we each still have $1 in value. They’re mutually substitutable and represent a certain value at that moment in time.
Non-fungible would be if I owned the original Mona Lisa, and you replaced it with a copy. It would look like the painting I had paid for, but it wouldn’t be the original. They’re not truly mutually substitutable. I would be able to show with provenance and previous authentications(s) that the one I owned was the original and thus much more valuable than the copy. (Hopefully, I can also prove it’s never left my hands and been replaced by a really good copy somewhere in there…)
When you purchase an NFT (Non-Fungible Token), you’ve put an “authenticated” transaction permanently into the blockchain saying you now own that original NFT. Since it’s permanently recorded (“minted”) in the blockchain register, it can’t be altered and so you have a rock-solid provenance, as do all future buyers/sellers of the NFT.
So what are you actually buying when you pay $390,000 for an NFT like a CryptoKitty?
What you really own is a piece of code that you can sell or trade because you can prove it’s the “original” one-of-a-kind chunk of crypto-code representing your purchase. What people don’t get, however, is you don’t actually own the piece of art the NFT represents (unless the person offering the NFT also transfers the copyright/physical piece of art to you.) You only own the “token” for the purchase.
The original creator/owner, if they kept the copyright, could go out and make 1,000 posters of the “collectible” and sell them, but you own the “collectible” NFT (token) showing yours is the “original” item making it the most valuable one. Its “scarcity” – the original token – is what gives it its perceived value. (And someone thought owning the Dragon token was worth $390,000 back around December 2020!!)
BTW, since that CryptoKitty sold for 600 ETH (Ethereum) which at the time equaled $390,000, the value of Ethereum has increased considerably. So, if the current owner turned around and sold it for the same 600 ETH they bought it for, it would get him or her about US $1.33 million (give or take the gas fees to record the transactions on the blockchain.) Not a bad little investment for one small piece of sellable code and a single cute JPG…
Note: the current record holder for an NFT sale is Beeple aka Mike Winkelmann for his NFT called EVERYDAYS: THE FIRST 5000 DAYS which sold on Christie’s in March 2021 for Ethereum worth US $69 million at the time.
Now, doesn’t all that make you want to go out and “mint” a few NFTs? I know it does me.
That is if I can figure out ways to keep my NFT gas prices down as well as try to minimize the associated environmental costs that people’s “mining” blockchain blocks causes. (That’s a whole other subject.)
I already wash clothes in cold water, rarely drive my car, recycle paper/cardboard, and only have LED lights on in the room I’m in to reduce my carbon footprint… So maybe I’ll just “mint” a couple NFTs to dip my toes in, eh, and see where it leads? Opensea looks like a likely site for me to start – they offer “lazy” (gasless) minting at the moment which as a “creator” would save me potentially a lot of start-up money.
Hopefully, by the time I really get a handle on how it all works, the blockchain will change over to the less intensive 2.0 blockchain (using less processing power and electricity) and I can go hog wild without worrying what my NFTs might be doing to the planet.
(NOTE: My posts may contain affiliate links. If you buy something through one of those links, you won’t pay extra, but I may get a small commission, which helps keep the lights on here.)