Non-Fungible Tokens Simplified: What Does NFT Really Mean?

Before you found this article, you’ve probably come across tweets and online posts that talk about NFTs. And you can be forgiven for wondering, “what are they talking about” or “why are people paying millions for NFTs?”

Because at first glance, the entire concept sounds implausible. Like, “what do you mean the ownership rights of this art piece was sold for $6M yet anyone can access/download it? I have the GIF on my phone right now; something doesn’t add up.”

But it kinda adds up, and as you read on, you’ll see how. One of the reasons you may struggle to understand NFTs is that most online discussions around the topic are jargon-heavy, thereby discouraging newbies from joining the conversation. However, there’s nothing particularly complex about NFTs that precludes you from understanding what it is and how it works.

As long as you pay attention and keep an open mind as you read on, this post will provide a detailed explanation with analogies to make the subject even more relatable. When you get to the end of this page, you should understand NFTs enough to explain it to other people or join those pretentious online discussions 😜.

Let’s dive in:

What exactly does the abbreviation “NFT” mean?

NFT stands for non-fungible token, and truly, the people who coined this term didn’t consider user experience while doing so. Because “non-fungible” and “token” are probably the two most boring words ever to be put together. That’s not a problem, though; let’s divide and conquer.

Non-fungible describes an item that cannot be replaced with another one. Yup, it’s that simple.

In the context of NFTs, it means a token with characteristics that make it unique. So much so that it cannot be traded for an identical token.

Consider this analogy: you order a custom Rolls-Royce with just one door and a host of “special” features. Now, say the shipping company misplaces your cargo. They can’t simply visit a nearby dealership and get you another car, no harm done.

Why? Because the lost vehicle is a one-of-its-kind, specially built automobile with features that only you and RR know about. That particular car is non-fungible.

Conversely, imagine that the shipping company was transporting $100,000 in cash and misplaced the cargo. They could simply visit a bank, make a withdrawal, and replace the money.

Why? Because money is fungible. $1 will always be $1, and every $20 note has the same characteristics and can be replaced with another $20 note. A non-fungible item, however, is unique and not interchangeable.

So, how does this relate to JPEGs, GIFs, and Bored Apes? We’ll get there.

Breaking down NFTs in simple language

The most popular side of NFT right now focuses on digital media, i.e., images, GIFs, and videos. So, let’s explore that angle using an illustration.

If an artist creates a beautiful oil painting with the intention of selling it, they could show it at a local gallery. Perhaps display the art at an exhibition where potential buyers pick out paintings they like.

People can come in and look, maybe even take a picture, but they can’t go home with the artwork until they pay for it. NFTs provide a digital alternative to this.

In this case, the artist creates the painting on their computer, and it exists as a media file. So how do they sell it? They may choose to send the file to a buyer and get paid. But there are a couple of problems with this approach.

An obvious one is: how would the buyer and seller meet?

Say they meet on an online platform; how does the seller show the artwork? Prospective buyers could simply take a screenshot and own a piece of the art without paying the artist.

With NFTs, the seller can register the painting on the blockchain and get a non-fungible token in return. Subsequently, the artwork is assigned identification codes and metadata that make it unique and distinguishable from other images. Doing this converts a media file that could be exchanged for another one to a one-of-a-kind token.

Since this encoding is done on the blockchain, anyone can go online and verify the ownership of the NFT.

What difference does this make?

Now, if the artist wants to sell the artwork, they can simply transfer ownership of the token to the buyer. While the image can be shared widely and posted on online marketplaces, the token is a valuable item that only people who pay for it can own.

I know what you’re thinking, “...but people can just download the JPEG online and own the image.” Yes, but they don’t get the token that confers ownership rights. The image on its own is fungible, but the token is not. That’s why all the value is in the token.

What difference does this make? Actually, a lot. Consider this: people can take pictures in art galleries and have the images printed and framed. That doesn’t mean they own the artwork. They could hang the printed/framed version in their home, but it wouldn’t mean much because the gallery keeps a record of who owns every painting they sell.

And it won’t be the person who printed it off a camera picture. As a result, they can’t claim its ownership or sell it at an auction. If the original artwork gains value, there’s no impact on the printed copy they have hung on their wall.

So, when people buy an NFT, they’re not paying for the image you see on Twitter. The token is the item of value; the media file is just an add-on. Because they have the token, they can use the image exclusively, sell it, benefit when it increases in value, and earn a percentage when it’s resold.

You may have a Bored Ape JPEG on your phone, but you don’t own the rights to it. If Justin Bieber wants to pay $1.3M for that media file, he won’t buy it from you. Because your media file, without the accompanying token, is without value.

Conclusion

Well, that’s it. A non-complex explanation of NFTs and how they work. If you’re a curious person like me, the next question you’ll be asking is: how come they’re so expensive. The answer to that is even more straightforward than everything you’ve read so far.

But I like to talk (or type 🤪), so I’ll write another article with some insight on why someone would choose to pay $5.4 million for an NFT of the World Wide Web source code.

Watch this space!