From cartoon penguins to pixelated punks, anybody who has been following the news over the past month will surely have heard about NFTs. But what are these bizarre cartoon pictures and why are some of them selling for millions of dollars?
An NFT is a non-fungible token, which is a confusing way of saying a digital token that is singularly unique and valuable in its own way. Other digital tokens like Bitcoin are considered 'fungible' because every single one is identical and of equal value - all your Bitcoins are just the same as everyone else’s. Where Bitcoins are like gold coins of the old days, an NFT is like the Mona Lisa - there is only one unique, original creation.
Like art, only digital
Although NFTs have often been compared to traditional art, the comparison is not entirely accurate. More often than not, the art itself is not really stored within the digital token but rather linked to the token with verifiable ownership. The creator of the NFT states that whoever owns the NFT token, owns the associated digital artwork. The official legal jargon in relation to copyright and licensing law still needs to be finalized but the technology shows promise.
You can only store small amounts of data within an NFT on a blockchain, so often they display as low-resolution images. However, the image in and of itself is usually not relevant to the NFTs value, which is derived from a mix of cultural significance, rarity, and popularity. In April 2021, North Carolina resident Zoe Roth sold the rights to her "Disaster Girl" meme for $473,000. The fortuitous photograph, taken by her father in 2005, was co-opted by early Internet users who turned it into a meme that represents a particularly mischievous achievement. The sale is one of many recent examples of how proponents of Internet subcultures already see the high-value potential for NFTs.
Despite these early instances of NFT use exhibit similarities to 20th-century rare trading cards or collectibles, the technology actually has far greater long-term potential.
NFT tokens are stored on a blockchain in the same way as other cryptocurrencies, and owners store the public and private keys in their own personal wallets. The most common blockchain used to create, store, and trade NFTs is Ethereum, although other NFT-enabled blockchains like Solana (SOL) are gaining popularity.
Rather than cutesy pictures of animals and punks, an actual NFT looks more like a small computer program, containing a few lines of complex code. This code can be embedded with both encrypted data and clearly visible plain text, so you can store instructions, web links, or other information within it.
Although the core programming behind an NFT is complex, today there are simple applications that anybody can use to quickly create their own NFTs. One of the most popular NFT building applications is Solidity, an Ethereum programming language that creates NFTs using a protocol called ERC721.
In order to use Solidity, a user must first link their Ethereum wallet to the platform because each NFT creation requires a small payment in ETH. The entire NFT sector is supported by its own cryptocurrency-fuelled economy, the vast majority of which is funded by Ethereum.
So what do NFTs solve?
Despite the sudden boom and seemingly mainstream popularity of NFTs, they are still somewhat ahead of their time. Society already has in place functional systems to prove ownership, copyright, and licensing, leaving many to question whether NFTs are needed.
However, like with cryptocurrencies, the power is in the decentralized, autonomous, and immutable nature of blockchain technology. The ability to hold, display or transfer verifiable proof of authenticity without the need for any third-party intermediary is a powerful development that is yet to be fully recognised.
Widespread corruption and lack of trust in authority have led to a shift in societal behaviour, where freedom and independence are quickly becoming the most highly valued commodities. Blockchain technology is poised to usher in a new era of digital sovereignty, where NFTs could serve to support a new type of independent legal system.