What are NFTs and what do they have to do with crypto?

Some may have heard of the new “NFT” trend on the Internet. TECHNOLOGY BUTTON explains what it is about and what it all has to do with crypto.

The term “NFT” explains

NFT stands for “Non-Fungible Token” and describes a non-exchangeable value. This means that an NFT is in contrast to an exchangeable value, such as a currency. Fungibility, or interchangeability, is a term used in business and finance. This is the possibility of exchanging an item for a similar item of comparable value. For example, four 5-euro notes can be exchanged for one 20-euro note without changing the value. Non-“fungible” values, NFTs, are the exact opposite. Each NFT is unique and cannot be replaced by any other item.

Famous paintings are a good example of such items. You can’t just replace a Van Gogh with a poster from the museum shop. The poster does not have the same value as the real painting.

Why should I buy an NFT when the picture is freely available on the internet?

Almost everyone can view, copy and save a picture online. However, an NFT gives buyers something that cannot be copied. Namely the possession of a work. You can think of NFTs like collectibles. Like paintings, stamps, comics – just in digital form. At first glance, however, it looks like you’re buying something that is already available for free on the Internet. About pictures and videos. A LeBron James slam dunk recently sold for $ 208,000 as a trading card. However, the video is freely available on the Internet.

The problem: a real life collector’s item is tangible. A painting like the Mona Lisa may look different from poster copies. Digital NFTs, on the other hand, are visually indistinguishable from their copies. Only an underlying encryption guarantees that it is the original. An NFT is only valuable because others assign it an imaginary value.

In the context of the LeBron-Dunks this means: the trading card with the video is the official NBA clip. Having the official clip is the prestige that gives the card its value. Only those who have this card really own the clip. Everything else are imitations.

How do you ensure that an original is not simply copied?

NFTs are part of the Ethereum blockchain. This is the basic framework for the crypto currency “Ether”, the second most valuable in the world after Bitcoin. There are now other blockchains that have introduced NFTs, but the Ethereum network is still the largest NFT platform.

So NFTs are a type of cryptocurrency. In contrast to Bitcoin, Ether and others, however, they are unique. They have a kind of digital signature – similar to the signature of a great painter. This means that the original can always be recognized as the original, even if there are tons of similar copies of it.

The blockchain is comparable to the bookkeeping of an account, but it takes place online and purely digitally. It’s a surefire way of tracking digital asset sales. Unlike in a ledger, however, NFTs are stored as a series of numbers and letters. This virtual certificate contains information about the owner of an NFT, as well as the date of sale and to whom it was sold. With the purchase, your own transaction of the money you spend on an NFT is added to the list of previous transactions. Saving this data in the blockchain guarantees the authenticity and uniqueness of the NFT.


Read more about blockchain: cryptocurrency Bitcoin and the blockchain simply explained

Who Needs NFTs Anyway?

This solves a problem that especially creatives often have on the Internet. In this way you can ensure that your works are not simply copied on the Internet. Creating a unique original increases its value. There can only ever exist one original of each NFT that is authentic.

So the goal is to create an artificial scarcity. A good example is a streaming service like Spotify. Musicians only receive small amounts for their songs on Spotify. However, if a song as an NFT is only available as an original on the Internet once, the value increases immensely. There may be copies of the song, but only one person can actually own the original. In addition, the author of an NFT can stipulate that a certain amount is to be lost to him or her every time the token is resold.

Thanks to NFTs, creatives can also offer things for which there was no sales platform before. For example, GIFs or stickers to send via Messenger. In principle, NFTs can be anything that can be stored digitally. At the moment, however, the focus is on digital art.

NFTs driven by speculation

Even for savvy collectors, NFTs are a way to make money. As in the art market, you can buy an NFT and speculate that its value will go up. For example, someone bought a “Gucci Ghost” for 3600 US dollars on the “Nifty Gateway” site and is now asking for 16,300 US dollars for it. The original price to create the image was $ 200.

What types of NFTs are there?

NFTs are used, digital art and sports collectibles, but also video games. One of the first applications that made use of the NFT principle is the digital collecting game “CryptoKitties” from 2017. The end of the game could buy, exchange and breed collecting cats. Every new cat was an NFT, so the authenticity and uniqueness was guaranteed.

The original copy of the “Nyan Cat”, a popular meme from 2011, partly cat, partly pop-tart (an American sweet pastry) was only sold in an online auction in February for 300 ethers (approx. 600,000 US dollars). The US band Kings of Leon released digital-only albums and earned 2 million US dollars. Twitter founder Jack Dosey’s first tweet sold for $ 2.5 million in March. Even the New York Times is offering articles as NFT for a mere $ 560,000.

just setting up my twttr

— jack (@jack) March 21, 2006 “>

Twitter founder Jack Dorsey’s first tweet is worth $ 2.5 million

The auction house Christie’s also auctioned its first purely digital work of art in the form of an NFT for 69 million US dollars in March – a picture collage called “The First 5000 Days” that had been in the works for 13 years.

The US NBA, for example, shows how NFTs work as trading cards with Top Shot. Users can use it to collect short videos with basketball highlights. As of October 2020, NBA Top Shot has raised more than $ 333 million.

Of course, the fact that an NFT is unique does not mean that each object is unique. As in real life, trading cards can exist multiple times. Thanks to the blockchain, however, it is tracked when each individual card has changed hands.

Problems with the NFT market

Who guarantees that a work will remain unique?

By the way, buying an NFT from an artist does not mean that they lose their copyright on it. This is one of the potential problems with NFTs. Because what if someone decides to simply sell the same work of art that they have already bought a second time? The young NFT market has not yet offered a solution for this. This is why it is important to make sure that the person selling is trustworthy. The first point of contact should therefore be well-known sales platforms such as Nifty Gateway, OpenSea and Rarible.

Enormously high energy requirements

Like other cryptocurrencies, NFTs require ever larger amounts of energy because blockchains are extremely hungry for computing power. For this reason, some creative people have already announced that they will no longer want to create NFTs in the future so as not to drive up the energy requirement even further.

NFTs are not protected against deletion

Instead of buying a painting that you can then hang in your living room, when you buy an NFT you only acquire a kind of title deed – not the NFT itself. The deed in the blockchain contains all information about the authorship, transactions and ownership of an NFT and cannot be deleted as such. The NFT, however, must be stored somewhere on a server.

When you buy an NFT, you practically only get the access code to the NFT. If the website is deleted or the server on which the NFT is stored is moved, this code leads to nowhere. In this case, owning an NFT is nothing more than a dead link on the internet.

The question of value

It is also questionable whether owning a unique NFT alone makes it valuable. It is true that a buyer pauses for the original, real NFT. However, since it is digital art, that person cannot prevent others from copying the image and sharing it online.

So are NFTs an evolving digital bubble? Proponents think NFTs are the next digital revolution. But there are still many unanswered questions. If I buy an NFT, who can guarantee it is worth the money? The value of an object is only given as long as there are people who will spend money on it. Like other cryptocurrencies, NFTs have no real world equivalent. For example, if everyone decided overnight to monetize all of their NFTs, who would buy them?

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