NFTs Explained : How They Work & Why They're Important
Summarise with AI
What does NFT mean?
NFT stands for non-fungible token.
An NFT is a unit of data stored on a blockchain (a non-editable digital ledger that is hosted on a global network of computers so no one person can take control of it).
The mechanics of a NFT are exactly the same as a cryptocurrency, except NFTs are items on a blockchain that are distinguishable from each other (non-fungible) whereas all Bitcoin for example are indistinguishable (fungible).
What are NFTs used for?
NFTs have blown up as “the future of art” with artists assigning a unique signature to their art, and selling it is an NFT through an auction.
Digital artist Beeple kicked off the goldrush by selling a collection of his artwork for $69.3 million in March, putting himself in the top 3 living artists in terms of value in one day.
People are also experimenting with turning some really weird stuff into NFTs. The CEO of Twitter, Jack Dorsey, had his first ever tweet turned into an NFT and sold for charity. That means that the owner of the NFT technically owns that tweet.
Also, collectibles are quickly utilising NFT technology, so expect things like FIFA Panini stickers and pokemon cards to become increasingly digital in nature.
When were NFTs created?
Despite their recent explosion, NFTs have actually been around since 2015, when a series of 3D “tiles” became tradeable on the Ethereum network. Ironically, most of these tiles went unsold until the current NFT gold rush, when all of them were bought, 6 years after their creation.
The first really notable and recognisable NFT project was the “CryptoPunks” collection by Larvalabs, released in 2017. CryptoPunks is a set of 10,000 unique computer generated cartoons, with rarity (and often price alongside it) determined by how unique the individual CryptoPunk's features are. If you fancy buying one there are multiple for sale at the moment .
How do NFTs work?
Blockchain technology is basically a big decentralised, shared ledger that documents the ownership of all of the contained tokens and the transactions that have taken place between users.
Blockchains consist of 'blocks' which are like pages of a ledger, permanently detailing all of the transactions that have taken place over a given amount of time. As blockchains are decentralised (not one person owns them), anyone can create the next 'block' on the blockchain. Users attempting to create the next block on a blockchain are called 'miners'. Each block must reference the blocks before them to make sure that it makes sense and is correct.
However, to prevent someone entering a faulty or fradulent block, blockchains also require miners to solve a very complex cryptographic puzzle that takes an immense amount of computing power to do, making it unprofitable for most hackers (it would take several thousand years to do on the computer I am writing this on). For every cryptographic puzzle that a miner solves, they create the newest block on the blockchain, and are usually rewarded with a cryptocurrency for their efforts.
Why are NFTs important?
Someone made $69 million in one day from NFTs. If that doesn't get your attention I don't know what will.
NFTs are going to become more and more popular, and enable the digitalisation of art.
As people experiment with NFT and blockchain technology, more and more progress will be made, leading to new projects and new goldrushes.
It’s absolutely murdering the planet right now. Due to the amount of computing power it takes to correctly guess the “hash” mentioned earlier, an immense amount of energy is needed to power the machines attempting to make the next blockchain block. Work is currently underway to move away from such a power intensive method of creating a new block on the blockchain.