NFTs: The Simplest Explanation You’ll Ever Read

Still confused why someone would pay $69 million for a JPG file anyone can download for free? You’re not alone. Despite all the articles explaining the technology behind NFTs (“non-fungible token,” “blockchain,” the usual buzzwords), no one has explained why anyone would spend a penny — let alone eight figures — to “own” an image you can Google in two seconds.

Well, the mystery ends here.

Understanding NFTs (or “crypto art”) is simple. You know how collectors go crazy over the first edition print of a baseball card, or the first print of a comic book? NFTs make it possible to attach a “print number” to a digital file, allowing anyone to turn their work into a collectible. In other words, NFTs are just digital trading cards.

A Beeple NFT is just a trading card of his art. The Nyan Cat NFT is a trading card of the original animation.

In fact, owning an NFT is exactly like owning this 1988 Michael Jordan Fleer basketball card. Buying it doesn’t give you exclusive rights to this image of Jordan dribbling. It doesn’t allow you to decide how it’s used (i.e. whether it’s featured in a movie or printed in a book). But it does give you full ownership of this specific card, which means you can sell it for however much you want.

Why Are People Buying NFTs?

Some time in 2017, a group of people decided that owning digital trading cards was cool. Eventually, they convinced their friends that it was cool, who then convinced their friends, so on and so forth.

Thus, a market was born.

Like with any other collectible, the market is entirely artificial. It only exists because there are enough people who genuinely think digital trading cards are cool.

If you’re having trouble wrapping your head around this, think about Pokémon cards. Fundamentally speaking, cardboard cards are almost as meaningless as digital files. Sure, you can eat them if there’s a famine or burn them for warmth if the electricity goes out, but apart from extreme circumstances, they have almost zero real-world value. And yet, the fourth ever printed Charizard recently sold for $360,000.

When the first collectible cards came out in the late 1800's, people were probably just as confused as we are now about NFTs. “Why would anyone pay for cardboard? Why not just cut it out from a cereal box?” they probably wondered.

The answer was the same then as it is for digital cards now: because others think it’s cool. And when there are enough “others,” a market exists.

The Next Generation of Collectibles

For the most part, NFTs are following familiar patterns.

For example, the lower the print number, the more they’re worth. In the NBA Top Shot universe, which has done over $455 million in sales to date, collectors own video clips of NBA highlights. There can be thousands of print numbers for a single highlight, but the lower the print number, the greater the value. Case in point: the 156th print of this Lebron James highlight is currently going for $44,499, whereas the sixth print is listed at $250,000 — more than five times the value.

And in cases like Beeple’s $69 million collage, there’s only one print, which makes the competition all the more fierce.

That said, NFTs add two big upgrades to the collectibles world. First, the fact that they’re digital means traders never have to worry about shipping costs, item defects or any of the logistical issues that come with physical objects. That makes them exponentially easier for casual hobbyists to collect.

Second, the artist can choose to collect a royalty (typically 5–10%) on all secondary sales. Real world example: last year I made this animation of a dog eating peanut butter. If I turned it into an NFT, I could charge a 5% royalty every time a third party sells it. Let’s say I sell the NFT for $100,000. The person who buys it flips it for $200,000 to a new buyer, who then flips it again for $1 million. As the original artist, I get to collect 5% of the $200,000, and also 5% of the $1 million.

This is a massive game changer for small artists as it allows them to create recurring revenue streams.

The Road Ahead

Is the current NFT market a bubble? Absolutely. I find it hard to believe that single tweets will continue to sell for $2.5 million. Pop culture guru 

Gary Vaynerchuk believes that 97% of all NFTs currently on the market will soon be worth $0.

There are also major environmental concerns. Running NFT blockchains (and blockchains in general) takes massive amounts of energy. The race for an eco-friendly solution is currently under way, and the challenge will be to either find a better way or be forced to justify the heavy environmental cost.

If they can work through these issues, however, the future is bright. Vaynerchuk believes that the market will eventually stabilize post-bubble, and that it’ll be a force for decades to come. Given how empowering NFTs are for both creators and traders, it’s hard to argue otherwise.

Also published here.