Understand NFTs in 5 Minutes or Less

The current NFT craze is taking 2021 by storm. However, like all new trends, you may not yet know what is actually going on and why it matters. Let's explore the basics of NFTs so you can get in on the action, or at least know what this thing is suddenly blowing up on social media and even in mainstream media all of a sudden is actually about.

What Does NFT Even Mean?

NFT is an abbreviation, and it stands for "non-fungible token." The key to understanding what exactly this means is to explore the term fungible in the name. Fungibility is a property that something can have. This property defines whether something is unique in a way that if it were to be exchanged with another of the same item, you would be unlikely to care or perhaps even notice.

A practical example of something being fungible is cash. If you were to lose a $20 note on the street but found another one on the way home, you likely wouldn't consider this to be a loss. This logic is because both items' value can typically be regarded as equal, and one $20 note is basically the same as another. However, if you were to lose a one-of-a-kind family heirloom that could not be replaced, it wouldn't matter what else you found on the way home as that item had a specific value to you and couldn't easily be swapped out with a similar item. While you can probably imagine edge cases in both of these situations, the term fungible or the alternative non-fungible is typically used in the relative sense rather than as a perfect descriptor.

Combining Non-Fungibility and Crypto

Now, this is where things have really gotten interesting. Cryptocurrency has allowed for modern approaches to be taken when it comes to everything from finance to ownership. The latter is one reason why NFTs are becoming so popular.

Having something you don't just own but can freely control can be powerful. This side of things is something that crypto has been a great tool for when it comes to personal finances and empowering people to gain more sovereignty over what value they hold and how they exchange it. NFTs have essentially taken some of the qualities of traditional cryptocurrencies and combined them with uniqueness.

Owning an NFT means you own something unique; that NFT could be a piece of art, an item in a video game with specific traits, maybe even the rights to something like a video or document. The realm of NFTs and what exactly constitutes an NFT is only something that seems to be evolving. While some of the most popular forms of NFTs come from the art realm, other areas are growing, such as officially licensed digital collectibles like NBA Top Shot or the upcoming launch by Funko of their own tokens likely centered around their popular collectibles.

Can't You Just Copy an NFT?

Like an original painting from an artist, prints or other forms of copies can be made, even fakes or replicas. However, like a copy of an original painting, no matter how good or accurate, it will almost always hold less value than the original, provided you can verify which is which. Now conveniently, verification is something cryptocurrency does very well. If you own an NFT, you will own a unique token, and just like bitcoin, making copies of your wallet won't generate you any more coins in reality.

While this feels different from when dealing with a physical item like a sculpture, the basics remain the same at the core of the concept. If you made a replica of the sculpture, it would be worth less, probably significantly so, and you could potentially even make it harder to prove which was the genuine item, in turn hurting the value of your original. Thankfully, an NFT can usually be easily verified with just a block explorer and some information to reference from the original.

Where Does an NFT "Exist"?

Now while cryptocurrencies do verification of ownership well, something that most do relatively poorly is storage. Storing large files on blockchains can be difficult, expensive, or even impossible, depending on the crypto in question. You may already have guessed how this could affect NFTs in the form of art or other digital media, and this is a concern that many have but something that is evolving.

Many platforms that are trading NFTs currently store the data for any media or other files attached to the ownership of the token. For example, if you have an NFT that is a short animation, that animation needs to be stored somewhere, and often it's not practical right now to store that "on-chain." Currently, what is typical is that the token will have a variable that points to the location of the media for which the token represents ownership. While this is a question that many are asking in 2021, this is a problem that a growing number of projects will likely address in the coming years with a range of approaches.

Suppose you do have control of an NFT in a personal wallet. In that case, even if a platform storing some element associated with it were to go offline, you'd still maintain ownership of the token itself on the blockchain. When considering trading NFTs, having access to private keys and moving your token without restriction is worth considering, just as it is when dealing with any form of crypto.

When Will NFTs Go Away?

NFTs are something that not just the crypto community has shown a strong interest in but has also extended well beyond into a range of diverse areas. While demand for NFTs may fluctuate and the specific forms they come in may change wildly over time, the NFT is likely a concept that won't just slip away. It might just help shape the future of art, ownership, collecting, and many things in between we'd never considered before.

Are you getting in on the NFT boom or excited about an upcoming NFT launch? Let us know why (or why not) by tweeting @LocalCoinSwap_