NFT stands for Non-Fungible Token.
The word ‘Fungible’ is similar to ‘replaceable’, but legally NFT refers to things that are non-fungible – things that cannot be replaced. A ‘thing’ or things.
How are NFTs Used?
An NFT is a unique digital asset that is stored on a blockchain. NFTs can represent anything that can be digitized, such as art, music, videos, or even tweets. A scan of an art piece.
Blockchain is a new word to society, but it is very similar to the age old concept of a linked list. The block is in a database and as transactions occur, new blocks are entered into the database and the list grows with the new block referring back to the previous one.
Creating an NFT
NFTs technically don’t exist and cannot be transferred until they are minted. A Silver Dollar, for example, can be a lump of silver until it is minted into a coin. The coin then has value and can be transferred as One Dollar.
Unlike the lump of silver that they were made from though, rare Silver dollars can sell for $100K+. So the item when it is minted has a basic value, but that value can increase wildly as supply and demand separate. 100 people want one but there is only one…a bit like toilet roll in the early 2,000s, during the CoViD-19 pandemic.
Digital Art
In the context of art, NFTs can be used to create digital artworks that are unique and scarce. This is because each NFT is a unique token that cannot be replaced or subdivided. This gives NFT artworks a certain level of authenticity and value. Authenticity is created at the time that the NFT is minted. Then the value and the transactions are recorded as the NFT is exchanged between investors (owners). The NFT is only ever owned by one entity and ownership is passed with a transaction, just like a real-world object.
At any one point in time, the NFT can be traced back to the minted point and every transaction along the way can be seen.
Authentication and Provenance
Authentication and provenance are probably the two key features of an NFT. Authentication, by itself, does not express value. Provenance, by itself, does not express authenticity. A fake ‘Mona Lisa’ might still have value if the artist is a famous fraudster, but you would know that you were buying and selling a fake.
When we combine Authenticity and Provenance then NFT becomes a very interesting prospect. If Madonna buys and sells an NFT, then that piece of art could benefit from the fact that Madonna once owned it. That would be similar to a car that Michael Jackson once owned. The car itself is the same car that existed before MJ owned it and is the same car after MJ owned it. The value of the car can (and will) change if you can prove that MJ owned it.
Proof
NFT is the proof of authenticity and provenance. NFT can be attached to real things, but is generally attached to something that can be stored digitally.