What exactly is an NFT?
NFT stands for Non-fungible Token, but what does that mean? Let’s break it down. A fungible asset is something that’s interchangeable with another unit of that same asset. A common example is traditional money, like Euros or Dollars. If I exchange my $1 bill for your $1 bill, nothing really changes. While they are two different pieces of fancy paper, both bills represent the same value. Plus, something like 1€ is the same as two times 0,5€. The same applies to cryptocurrencies, as 1 Bitcoin (BTC) is the same as another 1 BTC. That’s fungibility.
Now, non-fungibility. A non-fungible asset refers to something of a distinct value. There are no two exactly the same. A good example of a non-fungible asset is a house or a car, or even a person. Not one of these items can be exchanged for another one ‘exactly’ like it.
So, unlike crypto coins or fiat money, which are identical and worth the same, non-fungible tokens are unique, and the word token is where it gets interesting. Using blockchain technology, tokens can be attached to pretty much anything, including photos, videos, audio recordings, or any kind of digital file.
Why does it matter?
This token-file pairing provides proof of ownership since that information is stored and protected in the blockchain, allowing these tokens to be owned, bought, sold, and traded. This possibility is going to completely revolutionize entire industries by changing the way we share and consume pretty much everything.
Digital content, a keystone of all major online platforms and the way most of us spend our time online has long been undervalued, in large part because it’s so freely available. The idea of sending and receiving files has become normalized and being able to copy digital files any number of times is an integral part of everyone’s daily lives. Those digital files have creators have, for years, been less than optimally rewarded, and now artists of all kinds have been embracing blockchain technology since it allows them to monetize that very content.
Tokenization of digital content adds the crucial ingredient of scarcity. Art, even more than most categories, lives and dies on the idea that ‘originals’ hold more value than copies. It is still possible, after someone mints an NFT, to copy the digital asset any number of times, but not the authenticity token. Therefore, that same asset gets to be both scarce and abundant.
Artists of all kinds – authors, painters, musicians, filmmakers – are starting to explore how can NFTs transform the way they can engage with bigger audiences online, sell their work, bypass the establishment and build new communities around shared values.
Possible use cases
Some of the first use-cases for NFTs began with online gaming. In 2017 a game called CryptoKitties, which enables players to buy and “breed” limited-edition virtual cats, came to prominence. From there, game developers adopted NFTs in a big way to allow gamers to win in-game items, and separating the ownership of those items from the company that owns the game; the ownership of that asset has shifted to the actual buyer, and there are now multiple games where this is common practice.
Besides gaming, NFTs are frequently used to sell a wide range of virtual collectibles, including NBA virtual trading cards and even virtual real estate in Decentraland, a virtual world, where Atari, one of the biggest names in the gaming industry, announced the creation of a digital casino.
However, the possibilities for NFTs are endless. Major fashion brands are starting to use NFTs paired with physical objects to help fight against counterfeiting, and groups and individuals of every kind are realizing the power of blockchain-based tokenization.
Architects, for example, are starting to build digital structures which might later be built on either the physical world or the metaverse. A ‘digital home’, called Mars House, designed by Toronto artist Krista Kim, was described as the first digital house in the world. It was created with the help of an architect and video game developers and will allow the owner to explore it on the
Mars landscape using virtual reality.
Authors too are starting to sell their books in the form of NFTs. It not only allows them to create alternative objects, like collector editions, but they can also make the book more or less scarce; they can even create only one copy of a book or text. Plus, it allows for all sorts of playful options about the number of copies, added bonuses, and different price points. It also facilitates the creation of interactive fan experiences.
Link NFTs and Physical Assets
Artists have been exploring the possibilities of this linkage, and some have offered a physical object to the buyer of an NFT or vice-versa, an NFT to the buyer of a physical object, others have created pieces where the physical world and the digital world interlace, using Augmented Reality.
One really important issue of this real-world-object/digital-contract pairing, however, is the possibility of attaching a digital contract to a physical piece. Many artists, unwilling to change their practice to accommodate these new digital tools, could feel left out, but many are now starting to realize the advantages of allocating royalties to digital contracts.
Traditionally, once an artist sells their work, they are forever left out of future transactions. With the possibility of automating the way royalties are split between parties, artists can retake some amount of control over their work and reap the rewards of said work over the years.
This is possible because when someone mints (creates) an NFT on any platform or marketplace that currently allows for it, the royalty division is inscribed into the smart contract. Usually, the marketplace takes a small commission (Rarible takes a 2,5% commission, OpenSea 2,5%, SuperRare 15%, TerraVirtua Marketplace 6%, Mintbase 2%; these numbers may vary, and some of the differences between them may be expected because of different levels of curatorship) but, after that, the NFT creator can choose how to split royalties between themselves and the buyer (and all future buyers). Plus, they can split the royalties with other
people, e.g. four creators can receive 5% each (20%), so that means that every time that NFT is sold after the first time, they all get 5% commission and the owner the rest (always excluding any fees the marketplace might have).
Furthermore, this creates the opportunity for all kinds of creators, to take a small share of the second-hand market. Imagine a writer who sells a book. Later that book’s buyer can resell the book and the writer doesn’t gain a dime. But, with NFTs, the author can earn a royalty of that price.
The idea that a smart contract with split royalties can bring justice to the way people connect and work together is extremely appealing, and artists should, at the minimum, learn what blockchain technology can bring to their practice.