Picture this – a digital piece of art has been sold at the world’s largest auction house for a mind-bending $50 million, but the winning bidder is not be handed a painting, vintage artefact or even a print.
Instead, they end up receiving a unique digital token that would represented the perceived value of the art work.
Welcome to the world of non-fungible tokens (NFTs).
NFTs were created as a disruptive answer to questions concerning the issues surrounding the world of art collectors. The best way to see it would be to align NFTs to collectables, just the way Bitcoin was created to challenge status quo in the fiat currency market.
The Basics: Fungibility
In order to fully understand how NFTs work and why some of them may cost millions of dollars, we need to first illustrate the idea of fungibility.
By definition, fungibility denotes the situation where individual units of an item become interchangeable, and that each element of a unit is indistinguishable from the other. The classic example that we can pick is the manner in which fiat currency works.
For instance, a $1 bill bears the same value when compared to $1 kept at the bank or as the $1 that someone else may own. This means that an individual can exchange their $1 will another person’s without altering the basic elements of its application, therefore expressing the fungibility of currency.
In the physical world, examples can be picked from everyday items: the autographed baseball cap you got from your favorite celeb’s event, or even the ticket you purchased to attend a football tournament. None of the above is interchangeable in the same manner as currency.
Point to note, however, is that fungibility does not always occur within binary limits. We may consider the example of sports ticketing. A number of people may regard sports game tickets as fungible if they occur within the same section of the field, that is, they can exchange court-side tickets without a problem.
In cases where tickets are drawn from different sections of the field, such as when people attempt to swap football game tickets between the 50 yard line and the area behind the goal post, the items lose their fungibility.
As we are about to see, the above-stated ideas hold true to the concept of fungibility in digital assets and non-fungible assets.
How NFTs Work
In 2021, just after the DeFi summer that was accompanied by a sharp increase in activity within the fungible token ecosystem, NFTs are on the oath to make a comeback with the occurrence of fresh assets being sold for top dollar.
Nonetheless, the financial industry has not achieved the much-needed maturity as far as the NFT space is concerned – a number of adjustments need to be made just as the years of ICO mania demanded.
Traditional forms of fine art such as paintings hold value by virtue of being unique. Digital files, on the other hand, can be simply and continuously duplicated. In the case of NFTs, artwork can be converted to tokens for the purpose of making digital certificates of ownership that may be traded appropriately.
Just as cryptocurrency, records of persons owning a piece of art can be kept on a shared ledger system referred to as the blockchain. The records are protected such that threat actors may not forge the information – the ledger is sustained by hundreds and thousands of computer systems spread across various locations in the world.
Further, NFTs can also have smart contracts designed to empower the artist, for instance, with royalties made off sales that may be made of the token in the future.
