What is an NFT?
What is an NFT?
As you may already know, there are tens of thousands of NFTs of all kinds that are being bought and sold on online marketplaces like Mintable. Some music is being given tokens, lots of art is being minted as tokens and being bought and sold, and then of course there’s the NBA Top Shot who is has gotten a lot of attention lately for taking advantage of this in the form of NBA Top Shots. These highlight moments, these Top Shot moments from your favorite NBA players have been turned into non-fungible tokens. Jesse made headlines the other day when he paid $208,000 for a Lebron James Top Shot.
It’s the weirdest thing – as soon as humans have enough abundance to have their basic needs met, food, shelter, warmth, et cetera, the next frontier is to create value in things that have no inherent value. The value turns into psychological hype. Excitement around a certain thing. Unsurprisingly, non-fungible things are way more valuable than fungible things. And to explain this, I have to explain something I have avoided explaining for a very long time, the blockchain.
Luckily, there’s a way to understand this, and I’m going to make it as painless as possible. Let’s say I want to buy three slices of pizza from my friend Anna. She charges me six dollars for these three slices. I don’t use cash anymore, so I pull out my debit card, my bank card, and I swipe on her little terminal. As soon as I swipe this card a message is sent to my bank and it says hey, Johnny, who has an account at your bank wants to spend six dollars on pizza, and that money needs to go to Anna’s bank. This is like the bread and butter of what a bank does, all day, they document every transaction that comes in from all their customers, they send out money to the other banks, and at the end of the day they have a tally of all the money that went out of your account and into your account and they can give you a number. They can say based on all of these transactions, you have $50 in your bank account. And so when that request comes in as I swipe my card my bank is like okay, based on all of your transactions you have $50 in your account, I can send six dollars to Anna’s bank, approved. And they approve the transaction. Once that money comes into Anna’s bank, Anna’s bank is doing the same thing. They’re like oh cool, she had $80 and now she has $86, and they add it to her record. More and more your money is just a number on a screen. It’s the result of a bunch of transactions. You don’t barter with physical things, you don’t use cash as much. So the bank keeping meticulous records of every transaction becomes really important. We trust the bank to do this correctly. So thank you banks.
Banks and other middle men have been keeping stuff like this running smoothly for centuries (kind of). There have been a few bumps in the road. With the rise of the internet, people started to wonder. Is there a way that we could do this same thing, coordinate this same transaction of transfer of money between two people without the bank? The result is a very clever concept called the blockchain.
The blockchain fulfills the same thing the bank was doing, but instead of doing this privately on my bank account and talking to Anna’s bank, all of the transactions are actually recorded publicly on the internet. So let’s redo this example in a crypto world. Anna charges me six crypto coins for my three slices of pizza. I go to swipe my proverbial bank card to say yes, I want to pay you six coins. Instead of the bank seeing that request for a transaction and trying to validate it, it goes on to this public record where a bunch of people’s computers all around the world are keeping track of every single transaction of everyone always. If I don’t indeed have the six coins in my account to pay Anna, all of the people’s computers who are keeping track of every single transaction will notice that there’s a discrepancy. They’ll be like whoa whoa whoa dude, you don’t have six coins. We’re looking at every transaction ever and you don’t have six coins. Your transaction is rejected. If I do have six coins, all of the computers looking at the public record will see that request for a transaction and they’ll be like yep, approved. You have six coins and now Anna has six coins. And they’ll write that transaction into the public record. Now Anna having those six extra coins is now the business of everybody, everybody now knows that. The point here is that the group verifies the legitimacy of every transaction by keeping an eye on every transaction to make sure that it adds up. Okay I’m getting hot at this point, so I’m taking off my orange jacket.
Okay, so you’re wondering what does the blockchain and this public record have anything to do with cat gifs that sell for $600,000? Well I’m about to tell you. So in my pizza example we talked about blockchain as a way to verify currency transaction. I pay you this much, you pay me this much and everybody knows how much everybody has because it’s all public. But this is where it starts to bend my mind a little bit, what if we apply this to something that isn’t money or currency?
Let’s say one day you’re just looking at the ledger and the ledger’s like Johnny wants to give Anna six coins. Okay he’s got six coins, approved. And then a transaction comes up that’s like a Malaysian businessman wants to give three million dollars worth of coins to Jack Dorsey in exchange for a little token, or digital certificate that says that the tweet is now somehow owned by the Malaysian businessman. The only thing that the blockchain cares about is does the Malaysian businessman have three million dollars worth of coins? And so a bunch of computers all around the world look at the whole entire list of transactions and say like yeah, this guy has more than three million dollars worth of coins, approved. They approve the transaction, and now it is written in a public record that is unalterable that says that this Malaysian businessman owns this tweet. The token has been transferred to somebody new, non-fungible token, NFT. And if there’s anything that gets human psychology to value something, it’s if an entire group validates that it’s real and that there’s only one of them.
We’ve been doing that forever, I mean the whole art industry is based on the idea of a bunch of people deciding that this painting, this little bit of canvas and wood and paint is valuable, and thus it is valuable. The only different about now is we now have the technology to do this in a non-physical way using this very sophisticated internet technology that is maturing very quickly.