NFTs - all you need to know to sound smart on the internet
NFTs have taken the world by storm. What started as a niche crypto-dudes-only fad has turned into a global phenomenon, even coming off of the internet and being a topic of conversation at my extended family's dinner parties. This 'digital art' has been sold for millions of dollars, leaving everyone asking "What on earth is an NFT?" and "What should I learn so people think I know what I'm talking about?"
This article is going to help you answer both those questions. I won't try to convince you one way or another - I myself am still not convinced by either side. I want you to make up your own mind, so social media can be less flooded with controversy and instead discussion. Ha, as if.
No one on the internet actually knows what an NFT is
There are seemingly hundreds of definitions to what an NFT actually is, and unfortunately none of them are right nor wrong. Some people claim that they are digital art without going into any more details about what that means, while others describe it as a 'certificate of ownership.' I've even heard people say it's a cryptocurrency. None of these are wrong, but they're not getting the complete idea either. So that's what we're going to do.
As I'm sure you know, NFT stands for non-fungible token. Let's go through each of the words in this acronym to help you get an understanding of what this actually means.
Token: a token describes basically anything of value on a blockchain. It can be the number of XP points in a video game, a painting, a music track on a streaming service, and oh yes, even a cryptocurrency. Generally a token is trade-able and can be transferred between accounts or traded for other tokens.
Fungible: something that is fungible means that every instance of that thing is of equal value to every other instance of that thing. The perfect example of this is currency - your dollar holds the same value as my dollar. And cryptocurrency - your DAI is equal to my DAI. XP points in a video game are examples of fungible tokens too.
Non-fungible: when something is non-fungible, it is unique in its value. A painting is non-fungible, or a skin in a video game. You can't trade any painting for any other painting - they are not equal in value.
And that's what an NFT is. An NFT is a token that exists on the blockchain and is unique in value. That's it. An NFT, by definition, has nothing to do with art or a certificate of ownership.
So what do people actually mean when they talk about NFTs?
Admittedly, the definition of NFTs that we've come to is pretty vague. When people are talking about NFTs on social media today, they are generally talking about something a bit more specific.
When someone says they have an NFT, they are most likely trying to tell you that they own a certificate of ownership, existing on the blockchain, of a piece of art, existing off the blockchain. There are cases in which the art itself exists on the blockchain, like with Pastel, but this is very uncommon.
The definition of ownership however is something that even NFT nerds can be a little confused about. Legally, ownership is actually a very complex subject. Owning an NFT is not equal to owning the copyright of the art, unless the seller has explicitly (and legally) agreed to this transaction. So just because you own an NFT doesn't mean you can do anything you want with it. In fact, they are almost completely separate things - oftentimes, NFTs are minted with an artist's work without any permission from the artist. Or the art is replaced by something else after it's been sold as an NFT, and the buyer is left holding a token that points to a watermarked JPEG of a rug. NB: to mint means to add a new token to the blockchain, in this context to create an NFT.
The conversation around ownership is something that needs to be had, and in future NFTs may end up changing the legal definition of ownership. I think this is the eventual hope; owning an NFT of the asset means owning the underlying asset and everything related to that. But for that to happen, blockchain needs to be a much more prominent aspect of our lives, and the people who mint NFTs need to prove ownership of the asset in the first place. You may see people (especially on Twitter) claim that even real estate will eventually start using NFTs to dictate ownership - we're a long way from this, but only because of legality, not because of technology. The legal world moves a hell of a lot slower than the technological world, and who knows? Maybe by the time the legal system catches up, NFTs will be a thing of the past.
Anyway - it's important to note that the average person who owns or trades NFTs does not care about ownership. They'll tell you they do; they don't. They care about money, and really, that's where we are with NFTs right now. They have value for a variety of reasons - sometimes they're sold by an original artist, or they mark an important time in the internet, maybe they're used for money laundering, or there is a trend on social media, or the NFT contains rare attributes for that specific collection, or there are promises for the NFT project in the future like passive income or gaming. The majority of people who trade NFTs are jumping on the hype and trying to make money from it. And there's nothing wrong with that - it's always the money-makers and grifters who pioneer a new technology.
NFTs aren't new
It may seem that NFTs are a new use case of blockchain, but they've been around for years. The most famous project before now was Crypto Kitties, a game for buying, selling, and 'breeding' cats on the Ethereum blockchain. Each cat was an NFT. Crypto Kitties ended up being so popular by the end of 2017 that the Ethereum blockchain was severely congested and it slowed down transactions to the point that the game was almost unplayable.
The big question is - if NFTs have been around for years, does this mean NFTs aren't a fad? Are they just a trend that pops up every now and then? Or are there real use cases for NFTs and we're just seeing the beginning? Realistically, no one knows. In my opinion - because of marketplaces like OpenSea and Rarible, NFTs are becoming more accessible, which explains the current trend, but I have not yet seen good use cases. Let me know in the comments if you've found any projects doing awesome things though.
Issues, questions, myths
You may have heard the argument that NFTs are bad for the environment, but it's likely that you haven't heard why. The reality is that, right now, most NFTs are stored on the Ethereum blockchain, and right now, the Ethereum blockchain is terrible for the environment. However, not all blockchains are created equal. Both Bitcoin and Ethereum use an algorithm called Proof of Work, while other blockchains like Solana and Cardano use more eco-friendly algorithms to verify transactions.
In the Proof of Work model, miners run hashing software on their computers to solve complex math problems to create a new block on the blockchain. The computer that succeeds in solving this problem first gets a reward in the form of crypto, which encourages miners to use more and more powerful computers and even group together into mining pools.
Ethereum is moving towards a more energy-efficient algorithm called Proof of Stake. PoS is a lot more difficult to implement, but it won't just solve the environmental issue - it's also part of Ethereum's scaling strategy. Proof of Stake does not require as much computational power as PoW because there is no competition to create blocks. Validators are picked at random and given rewards for proposing new blocks or attesting to them. It's called Proof of Stake because it requires you to have some Ethereum as stake and if you attest to a malicious block, you'll lose your stake.
Cardano already uses Proof of Stake, and Solana uses another algorithm entirely called Proof of History. If you're concerned about the environmental impact of Ethereum and don't want to wait until it implements Proof of Stake, you can get into NFTs on these blockchains instead. Solana is my go-to and has some great marketplaces, the biggest being Solanart, Digital Eyes, and Magic Eden.
Is it really decentralized?
Unfortunately, I haven't heard anyone combat this question - are NFTs truly decentralized? The point in NFTs is that they exist on the blockchain, and one of the main purposes of the blockchain is that it is decentralized. So this is an incredibly important question that seems to fly under the radar.
For me, there are two main concerns here - the fact that the art the token is referring to can be changed, and marketplaces that take a cut and almost defeat the point of web3.
As we talked about earlier, the seller of the token can change what the token is pointing to, even though this is not changing the token itself. Blockchain is supposed to be immutable, which makes it trust-less, which is the entire purpose of the blockchain. Does replacing the art with something else mean replacing the NFT itself? And if so, is it actually decentralized if after it is sold it can be changed by the person who originally owned it? These are complicated questions that no one seems to have answered, but it brings back the question of what do you own when you own an NFT? We can't rely on a technology to answer these questions when the actual art itself is not stored on this technology.
Secondly, marketplaces. One of the beautiful things about web3 is that it is supposed to cut out the middleman - you can refer to my article Why web3 matters to read more about this. When we have marketplaces, especially monopolistic ones (and, let's face it, OpenSea pretty much has a monopoly on Ethereum NFTs), we end up paying a company for a transaction that could have been done between just two parties. The company makes money in a variety of ways, normally either by charging you to sell on their website, or by taking a cut of your profits. This doesn't threaten the fact that they are decentralized... yet. But with companies like this comes accounts and data and all of the nonsense that goes on behind the scenes, and that threatens decentralization. It removes transparency and credibility. However, the marketplace argument gets into the question of human nature - we most likely will never get rid of marketplaces, so we just need to rely on the people who use those marketplaces to hold them accountable.
There are also issues with blockchains themselves not being centralized, and there has been a lot of talk around Solana's centralization issues in particular. The concern is that this blockchain still heavily relies on one group (The Solana Foundation) with most of the circulating supply being owned by insiders. But this will be resolved with more adoption, and realistically Solana has become a lot more decentralized in the last 6 months, so in my opinion this is not a true issue.
One of the biggest reasons Solana NFTs are starting to grow is because of Ethereum's crazy high gas fees. Without getting too technical, gas measures the amount of work miners need to do in order to add transactions to a block. Validating and confirming transactions on the Ethereum blockchain requires a certain amount of gas, depending on the size of each transaction and how congested the network is. A gas fee then is the amount of Ethereum (or gwei) that you will have to pay to undergo a transaction, including trading an NFT.
This gas is given to the miners as a reward for successfully validating a transaction. And just like miners compete to solve a problem, users compete to have their transaction executed (i.e. validated by the miners). This explains why gas fees are so volatile - it's simply supply and demand. When there is more demand for miners, i.e. there are more users interacting with the blockchain, the price goes up. Similarly, when there is less demand, the price goes down.
Top tip: to avoid paying high gas fees, you'll want to buy and sell your NFTs when the Americans are asleep. This is when the blockchain has the fewest users.
Gas won't be this expensive forever. Not only does the price fluctuate depending on how many people are using the blockchain, but when Ethereum implements Proof of Stake, this will drastically improve this problem too. Miners currently set the price for validating transactions, so without them, gas fees won't be as high.
Cool NFT projects and how they get traction
You may already be familiar with some NFT projects, like Crypto Punks, which have replaced many profile pictures on Twitter. They may seem to go against everything I've talked about here - they are not created by some famous artist, and in fact are entirely algorithmic. So why are they so important?
Before we can understand why specific NFTs are cool, we need to understand the culture surrounding them. NFTs are often released as Collections. These can be an artist's collection of their work of a specific theme, but more commonly, they're a collection of art with randomly generated attributes. A person or group of person will design a thing, generally a character, and design different attributes for that thing. So they may design a penguin base character, create 5 different eyes, 5 different shoes, and 10 different items the penguin is holding. Then a specific number of penguins with these attributes are randomly generated in what is called a mint. As we talked about earlier, to mint something means to add an NFT to the blockchain. So a collection mint is when a project allows users to pay a certain amount of crypto to randomly generate a character and mint it into their own wallet. Normally mints will start at a certain time, and there will be an allocated number for how many can be minted (to give it value.) You can usually mint a collection item by simply clicking a button on the project website, pay the specified amount of crypto, and get it into your wallet. After this mint, the collection will say they are 'sold out', public information is released about how rare each attribute is on something like howrare.is, and the people who minted them can put them on the marketplace. Mints are often used to raise capital for a bigger project.
People interested in the NFT go absolutely berserk during the mint. It is such a bizarre and strictly human phenomenon, and I highly recommend that you get involved. You don't even have to mint anything; just find an upcoming mint on Twitter, join their Discord, and watch the chaos unfold.
What makes people want to mint an NFT? Simple - thinking it will go up in value (...or gambling). There are certain reasons NFTs within a collection may go up in value, and the project will generally have a roadmap indicating what they plan to do with these NFTs. Sometimes they generate passive income for people holding (in crypto terms: HODLing) by giving them a portion of the profits each time one is sold, holding giveaways for minters, giving profits to charity, or creating a game based on the NFTs. Or sometimes they'll go up in value because they look cool or represent a cool concept. Crypto Punks is an example of the latter - they've been around for longer than many other NFTs.
There are lots of projects like this recently popping up on the Solana blockchain. For example, Solcops has hugely grown in popularity recently due to the fact it has a Solcops vs Aliens game on its roadmap. Fly Frogs held their mint a couple of days ago (October 4th) and sold out within minutes, as they held giveaways at each milestone. They also gave 5% of their profits to the Save the Frogs charity. Solagon is holding a giveaway soon, and even promises to give 20% of their continuous profits to HODLers and 10% to minters.
Another cool (and more famous) project is Decentraland, a virtual adventure game that that sells parcels of land as NFTs - it's been around since 2017 but its NFTs have recently soared in value. Sorare is another less-known one, which is a fantasy football game that allows you to buy and sell NFT trading cards.
The future of NFTs
As I see it, the main problem with NFTs is the confusion surrounding what you actually own, making it technically and legally possible for it to be altered and even deleted by someone who does not 'own' (in inverted commas) the NFT. There are multiple ways to solve this problem - you can put the actual art on the blockchain, which currently would be crazy expensive, or NFTs will push legislators to change the legal definition of ownership. If this is solved, I believe NFTs will have an absolutely amazing future in every aspect of our lives.
Blockchain is secure. That's the point. That's why currently its most prominent use case is crypto and finance (aka DeFi) - the expense of the blockchain is worth the amazing security it gives. So if these problems are solved, it can open up more industries to join the NFT space, especially ones in which security is important - housing, insurance, copyright, etc. I personally believe in this future, but lots needs to change before we can get there. I just hope that this 'fad' isn't only a fad.