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 Why NFTs?
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We talk a lot about NFTs and have explored their utility and how builders and users are adopting the technology today. This week, we wanted to get a bit more philosophical and understand why NFTs are important.
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If you’ve been following any of the mainstream media or reading Life in Color, you know that NFTs have gotten closer to mainstream in the last couple of years. Whether it’s hype or not, it’s a technology being talked about.
But when we talk to people, there is still some confusion about what NFTs are and more importantly, why they are important.
A big part of this is that NFTs are still early in their lifecycle. Coupled with just because NFT technology exists does NOT necessarily mean we have found the right use cases for it yet.
Today we’ll explain what an NFT is, but more importantly try to shed light on why they are one of the more important technologies and Web 3 lego blocks being worked on today.
What is an NFT? 🎹
There are so many definitions of NFTs out there, from “it’s just digital art” to “it’s just a meme” to “it’s a digital asset” to some more technical definitions. Depending on who you ask, you might get a very different definition of NFTs.
After being in this space for a while and reading what’s out there, one of the better definitions is:
An NFT is… a bunch of data stored on a global decentralized ledger (i.e., blockchain), which records some basic information about who owns a specific digital asset and possibly a number of details about that specific digital asset in question. (For a detailed ~2 hour deep-dive, see here for a highly suggested follow-up read).
So you might be thinking, how can all this hype be about data on some ledger?
It is about data on some ledger… but that statement is more loaded than meets the eye. 👀
Let’s dive further into a few key concepts that underpin NFTs and will help us answer Why NFTs?
Fungible versus Non-Fungible 🎹🎻
The most basic starting point is the idea of fungibility. When something is fungible, it means it is interchangeable. For example, money is fungible… 1 USD is equal to 1 USD. The dollar in your pocket is no different than the dollar in my pocket. You can argue that they are indeed two different items which is technically true, but they both have the same value and utility, and the reality is most of us do not care which specific dollar we have… because 1 USD is equal to 1 USD. Other items in our daily lives that are fungible are things like commodities (oil, wheat, corn, etc.) to things like boxes of cereal on the shelves at a store. It doesn’t matter which specific item you take, they all serve the same purpose.
Non-fungibility, on the other hand, is when you do care about Item 1 versus Item 2. Non-fungibility comes into play when the qualities of one item versus another matter. Trading cards are a good example… getting a rare card in a collection is different than getting a not-so-rare card in a collection. In this situation, while they are both pieces of paper, one does care about the specific card they get. Non-fungibility can largely be defined as unique and can’t be replaced with something else.
The concepts are the same in crypto tokens.
Fungible tokens behave very much like fungible things in the real world… 1 ETH is equal to 1 ETH, and you don’t really care which specific ETH token you have.
On the other hand, non-fungible tokens are separate from each other. In a specific collection of NFTs, you actually care whether you have NFT #1 or NFT #88 because their properties are different, even if they are in the same collection.
The concept of non-fungibility and uniqueness is evident throughout our lives. Many of the things we buy and own are non-fungible, especially the things you customize. Some of the most important things in our lives are also non-fungible (jewelry, collectibles, etc). You can even argue people are non-fungible, and they are often the most unique thing in our lives.
Non-Fungibility in a Digital World 🎹🎻🥁
Next let’s move on to non-fungibility in the digital world, since this is where we see the concept of NFTs break down for some people. Ironically even though most things in our real lives are non-fungible, recreating non-fungibility online is actually quite hard (until now).
One key feature of the digital world is that things can be recreated ad infinitum (copy and paste). Fungible tokens are a simpler concept to understand because you are taking the concept of something like Bitcoin or Ethereum and deciding how many copies of it to make. Whether you know how BTC or ETH works or not, you can at least understand the concept of digital money because it doesn’t require the property of uniqueness like that of non-fungible things.
On the other hand, non-fungible things in a digital world seem a bit paradoxical… how can something be so unique online when it can be so easily copied?
This is at the heart of what NFT technology enables.
You can actually have true and provable uniqueness and non-fungibility in the digital world with NFTs.
Take, for example, a specific NFT collection that has a total supply of 10,000 NFTs. Each NFT is a serial number that represents a specific combination of data, properties, parameters and variables in the collection. What this means is that when you buy NFT #1 in the collection, it has different properties than NFT #88. This relates back to the above definition, particularly that an NFT is a bunch of data stored on a global decentralized ledger.
But wait… how does NFT #1 translate into this kind of visual art or cartoon character?
Well, a specific combination of data, properties, parameters and variables can include visualization (JPEG, etc).
Theoretically, NFTs can include any kind of digital data and representation of data.
Okay, but how is this “unique”?
Well, NFT #1 in our hypothetical NFT collection above was created at a particular time, with particular traits and combinations and will be the only NFT ever that has those exact properties.
Even if you right click and hit save, your copy might look like the original… but it won’t be the original because you can verify on the blockchain that the original is indeed the original.
So your copy of the original has one property that is different than the original. In the copy, you created it, in the original, the original creator created it. Now this point may not matter in your use case, if you simply just want a copy of, say, the Mona Lisa… then right click and save away!
Up to this point, you can at least accept from a technology standpoint there is a way to recreate non-fungibility / uniqueness in the digital world.
Well for one, non-fungibility in the digital world is important because we are spending more and more time in the digital world, and we are putting more of ourselves online. See our article on Avatars.
Fine… We get non-fungibility in the digital world… but I can still make a copy of this NFT that everyone is hyping over.
Why does anything have value? 🎹🎻🥁🎺
Now we get to what might be the hardest and most philosophical question we have to address… why does anything have value?
The common critique in why a particular NFT doesn’t have value is because someone can just make a copy of the image.
And yes, that is totally true, but we still value the original and not the copy because:
There is some utility to holding the original, such as access to a community or other benefits. The holder of the copy of the image of the NFT doesn’t get access to the community. We know which one is the copy and which one is the original because ownership of a specific NFT can be verified on the blockchain.
Demand for the NFTs that is actually in the collection (not copies of the NFTs) outpaces the supply of the available NFTs. Simply put, more people want the real thing, believe in the real thing, want to be part of the real thing, and therefore the real NFT has value.
Let’s unpack the second point a bit more. Many schools of thought and academics can try to unpack why something has value, but fundamentally anything that has value derives from the idea that something has value because we, as a society or a group of individuals, agree and say it has value.
Concepts such as money, art, assets, etc. can be boiled down to this one statement.
Let’s look at an IRL example: the original, prized Mona Lisa is worth almost ~$1Bn.
The original is sitting in the Louvre Museum. Of course you can go take a picture of the Mona Lisa or buy a reprint. If you see the copy having the same value as the original, then you probably are also okay just saving an image of an NFT as well.
But many of us would say, the original Mona Lisa is what is worth ~$1Bn and NOT the copy.
Maybe as individuals or humans we prize the uniqueness of the original. But together as humans, we are constantly looking to each other to validate and form our opinions that drive our behaviors and thinking. This is at the core of Mimetic Theory (more on this in a later post).
The Mona Lisa was painted in 1503, but it wasn’t until a heist by a Louvre employee in 1911 that the painting became one of the most well-known paintings in the world.
The same painting for 400 years was ignored until more people paid attention to it, which then led more people to want it and then go see it in the Louvre. This belief is what underpins the value of the painting.
So What? 🎹🎻🥁🎺🎷
With NFTs, you have a representation of value and assets in a digital world.
Anything that has value can be represented or stored digitally through an NFT (albeit what can be represented today is a function of how early the technology is).
NFTs represent your ownership rights online (the place where we spend more and more time). This means there is a world developing where:
Your online identity is represented through NFTs
Your membership in a community is represented through NFTs
Your ownership of digital artwork / assets / properties is represented through NFTs
Your credentials may one day be represented through NFTs
[insert other use cases we have yet to come up with]
Anything above that started outside of Web 3 will likely migrate to Web 3 (e.g. diplomas on blockchain)… but there will also be a lot of new things represented natively with NFTs from day 1.
This is why NFTs are important.
Okay… last example to hopefully drive this home.
Why might some people pay a few hundred thousand dollars for a JPEG NFT? … when you can just right click and save to make a copy of the NFT (image)?
Well… why do some people pay a few hundred thousand dollars for a diploma from an Ivy League school? … when the content exists online for free?
We are early 🎤
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