NFTs Explained: What Are NFT’s?
By Sophie Gebray, Halal Incorp
We explore and look to understand the digital world’s latest trend: NFTs.
First of all, what are NFTs?
NFT stands for Non-Fungible Token; this doesn’t seem to have developed our understanding much. Let’s begin to address the NFT by breaking it down.
What is meant by the term Non-Fungible?
Fungibility is a term used in the economics world to describe the uniqueness of an item, product or service existing within the market. If something is described as non-fungible, then this is to say that it is non-replaceable & that this item is the only one of its existence. Imagine, for example, that you are ordering a jacket from The North Face.
You will have a preference for the size, colour & fit of the jacket you decide to order & these details will be sent to the supplier (in this case The North Face). Our supplier, The North Face, will have thousands of jackets in your preference. When you make a purchase for your jacket you do not care for which particular jacket you receive out of the thousands in stock, given that it is not damaged or faulty. This is to say that The North Face jacket has fungible value within the market as it can be swapped for an identical jacket out of the stock.
NFTs Explained: What Are NFT’s?
An example of a non-fungible item is the sentimental wedding dress – it is highly unlikely that a bride would place the value of her own wedding dress equal to that of the innumerable wedding dresses in existence within the market.
The Mona Lisa is undisputedly a non-fungible item whereas a bag of pasta would be fungible. This explains the non-fungible aspect of the NFT.
Okay, what about the term ‘token’?
Now let us discuss the meaning behind the term ‘token’ as used in ‘NFT’. This will require a quick brief on the technology used by NFTs, namely blockchain technology. Blockchain technology uses a distributed database which is shared amongst a network of computers. It is blockchain technology which allows for DeFi – Decentralised Finance.
To understand this, let us explore our current financial system. Once you have selected the jacket you would like from The North Face, it will follow that you would need to purchase it. Let us say that the jacket costs £250. When making the purchase, you are informing your bank (e.g. HSBC) that you would like to send £250 to The North Face. The North Face is, however, only the merchant – relative to how you bank with HSBC, The North Face will use Worldpay Group as its payment gateway. This is to say that Worldpay Group will be notified of the £250 transaction from HSBC. Here we can see that our most prevalent financial system is entirely dependent on banks outside of the business between yourself & The North Face.
NFTs Explained: What Are NFT’s?
Banks have been involved in the transactions between merchants & customers for centuries. In the 21st century, banks keep a meticulous record of the incoming & outgoing transactions belonging to each account within that bank’s hold. Our statements for the bank are an example of these meticulous records. As our money becomes more digitalised, we can see that what we know as our money really relates to numbers on a screen. This can also lead to a manipulation of these numbers. The Wall Street crash of 2008 is a prime example of how the banks can leverage and abuse the dependency we have on these banking institutions as gatekeepers of our own money.
Is there a way to transfer money between 2 individuals without the bank? This brings us to DeFi & the concept of the blockchain. Decentralised Finance looks at cutting banks out of the picture through blockchain technology. Recall the meticulous records kept of all our transactions. Currently these are kept with the bank.
NFTs Explained: What Are NFT’s?
Blockchain technology allows for these records to be published on the internet, now making these accounts public records. These records are upheld by many computers which are working in a network & are usually distributed all around the world. Let us now evaluate our transaction to The North Face using blockchain technology. You would like to make a transaction of £250. Instead of the bank seeing the request for the transaction, it goes on to a public record.
This public record – a network of computers all around the world – are keeping track of this public record. If you don’t have the £250 in your account, all of these computers keeping track of every transaction will see a discrepancy & your request will be rejected. If you do have the money, then the transaction will be allowed & is written on the public record. The group of computers verifies the legitimacy of every transaction by keeping an eye on every transaction to make sure that it all adds ups.
It is in this way that blockchain is a way to verify currency transactions & effectively acts as a decentralised financial system. Everybody knows how much everybody has because it is all public. These records are never erased, just like our bank statements.
To bring us back to understanding the meaning behind the notion of a token – simply, a token is the name given to just one of these transactions found on the digital record.
What is being exchanged… what does an NFT look like?
As we discussed, a non-fungible item is a unique, irreplaceable item. We can thus expect that our NFT is an original piece of work. As they are being traded today, these pieces of work tend to be digital. NFTs are quite often used to purchase and sell digital artwork & can take the form of GIFs, tweets, virtual trading cards, images of physical objects, video game skins, virtual real estate as well as other forms.
NFTs & human nature
In getting to know NFTs, we can find insight into human psychology. It can be suggested that the things we take as holding value is shifting due to technology. This technology may revolutionise our society yet at the same time accelerate the climate crisis as we shall discuss later.
NFTs Explained: What Are NFT’s?
Once we have our basic human needs met (food, shelter, warmth etc.), it seems that the next frontier is to create value in things that have no inherent value. The same could be argued to how we value our contemporary art & how the art industry functions.
It is unclear to whether NFTs are just psychological hype or could potentially withstand the tests of time. Some may even argue that NFTs encapsulates the technological & non-physical version of how we place value onto fine art. It may be that NFTs are somewhat analogous to the art industry however NFT technology is only just starting to reach the collective consciousness & this technology only has the potential to become better.
Who decides the value of the NFT?
To discuss the value of NFTs, we must first make a distinction between objective & subjection value. An example of objective value would be how we value air & water. There may be many different beliefs, perceptions & preferences on our air or water – this does not add or take away from the overall importance or value attributed to air & water. To discuss subjective value, suppose that a free travel ticket to Jamaica is presented to a group of individuals in the UK.
The travel ticket holds value dependent on preferences according to each of the individuals (e.g., commitments to work, how they personally feel about Jamaica etc) – this makes the travel ticket of subjective value. With relation to NFTs, we are dealing with an item within the market which isn’t only highly subjective but incredibly volatile. Take, for instance, the purchase of Twitter CEO Jack Dorsey’s first tweet by Sina Estavi. Estavi, who is the CEO of Bridge Oracle, stated “I think years later people will realize the true value of this tweet, like the Mona Lisa painting”.
NFTs Explained: What Are NFT’s?
Estavi paid $2.9M for Dorsey’s tweet. Clearly this NFT has subjective value – it wouldn’t necessarily be easy to find many others who would pay almost $3,000,000 for a tweet, let alone enough of these characters to influence & create a market. What we observe here is that many collectors of NFTs are not finding value in the current market value but instead that NFTs are an investment for what is to come.
An aspect to consider is our dynamic world which seems to be rapidly changing (try for yourself & compare pre-911 2000 with Gangnam-style 2013 to pandemic-stricken 2020). It seems the only constant is that our technology is becoming increasingly more complex, expansive & innovative. We are all conscious to the fact that our personal worlds are becoming increasingly more digitalised, is it so convoluted to accept NFTs as a possibly wise investment?
This brings us back to the subjective value of the NFT. We witnessed an internet boom less than 2 decades ago & there seems to be a lot of emphasis & hope which comes with the future of the internet (think: Metaverse) so NFTs may not necessarily be a fools game…
So, is money being made or not?
As discussed before, this comes down to the NFTs value within the market, i.e., the basics of economics – supply & demand. There are existing examples of real money being made of the virtual reality world, made possible via NFTs. Decentraland is a game which uses NFTs to allow the purchase of parcels of digital land which can be later resold or used as advertising space within the game … and this is not the only videogame which leverages NFTs. What this describes is entirely new age but also drastically revolutionary; real money can be used to buy virtual land which can itself turnover real money.
With this new technology we have seen exceptional cases such as a 12 year old boy making over £290k selling whale artwork as NFT’s.
NFTs – POSITIVES:
Let us outline some of the positives associated with NFTs:
- NFTs are fraud-proof. This is due to blockchain technology & how each of these transactions is tightly encrypted & publicly accessible. These online records, namely smart contracts, cannot be manipulated due to the transparency of their nature.
- NFTs allow for artists to sell their work beyond the need for a middleman. This allows for more of the revenue to reach the artist for their work. Since fine art is subjective, we will also see less constrained art as there lacks involvement & ideas from art dealers, curators etc. American digital artist Winkelmann describes NFTs as “the next chapter of art history… now there is a way to collect digital art”.
NFTs – NEGATIVES:
The technology which is the backbone to NFTs – the blockchain – can be understood conceptually as a public record. This public record must be accessible all day & all night forever for NFTs to work. Physically this would entail many computers doing calculations all day & all night forever. Most NFTs are stored on a blockchain called Ethereum. The Ethereum blockchain is currently using about 33 terawatt hours of electricity – this is the same amount of electricity as the entire country of Serbia.
NFTs Explained: What Are NFT’s?
Evidently, the longevity of NFTs contradicts our collective commitments to reduce the amount of electricity we consume. This isn’t just a problem with NFTs, but which belongs to all of blockchain technology. However, the novelty nature of the NFT suggests that whilst collectors wait for “the world to catch on to the value of the NFT” we should expect this same technology to further damage our home planet.
Quite possibly, we are attributing marketplace worth to items which began with no inherent value whilst also stripping our life-giving planet of natural resources, & in turn, the Earth’s own value.
Disclaimer: The views of the author do not necessarily reflect the views of Halal Incorp. Always seek the advice of a professional finance expert when planning to invest.