How much do you think this cartoon ape picture is worth? According to Steph Curry, $180,000.

If you have internet access and a pulse, chances are you’ve heard about non-fungible tokens (NFTs) over the past year or so. They’ve gone from niche to mainstream seemingly overnight, and there always seems to be a new headline marking some “milestone” for the NFT community. 

It’s honestly hard to keep track of all of the new developments, even for an insider such as myself. Beeple, a well-known artist, sold a collection of his work as an NFT for $69 million via Christie’s in March 2021. Nas is selling fractionalized ownership of the rights to his songs “Ultra Black” and “Rare” on NFT marketplace Royal, and the Cryptopunk and Bored Ape Yacht Club NFT avatar collections continue to attract numerous celebrity owners such as Stephen Curry, Jimmy Fallon, and Serena Williams. High-end NFTs are becoming status symbols, and more people are participating in the NFT market than ever before. So the question is, just what exactly is a non-fungible token? 

Token, in a cryptocurrency sense, is merely proof of ownership of an asset written into the blockchain. Let’s take something simple, like Ethereum, as an example (think of Ethereum as coins, although this is quite an oversimplification). If I own, let’s say, 2 ETH, there is proof of my purchase and ownership written into the blockchain: a decentralized, public ledger that stores and validates cryptocurrency transactions. 

Non-fungible just means the asset is unique and is not equivalent to any other. Referring back to my Ethereum example, I don’t really care which exact Ethereum coins are in my wallet; they’re all the same, or in other words, fungible. Non-fungible tokens come into play when you have assets like art, music, etc. that are entirely unique. If I own a unique piece of art on the Ethereum blockchain, I can’t exchange it for another one out of the blue. They are entirely different, and therefore non-fungible. 

Rounding out the technical aspects of NFTs, there’s the storage of the assets. In most cases, these unique tokens refer to something that people actually interact with in the real world, such as art, photos, songs, etc. So the question is, where are these assets kept? In most cases, off-blockchain. Blockchains have non-negotiable file size restraints, so they really aren’t good places to store things like art. Most NFTs are actually stored by a marketplace platform or the InterPlanetary File System (IPFS), a peer-to-peer decentralized storage network. The key to understanding most NFTs is that they are blockchain proof-of-ownership of an asset that is actually stored somewhere else. 

Before moving on, I’d like to make a quick note about the environmental impact of NFTs, and address some of the stigma surrounding their energy use. Many people have valid concerns about the sustainability of cryptocurrency, but let me put your mind at ease; with regards to NFTs specifically, it’s getting greener by the day. Blockchain miners are incentivized to use the cheapest energy possible, and in most cases that’s renewables. Not to mention, most blockchains that are popular for NFTs are getting rid of miners altogether, along with their copious energy use. In 2022, Ethereum plans to transition from Proof of Work consensus to Proof of Stake consensus, and other blockchains like Solana already use Proof of Stake. The differences are a little complex, but the long and short of it is that Proof of Stake eliminates the need for millions of computers (miners) to be running full tilt guessing numbers, and instead uses financial incentives to secure the blockchain, significantly reducing energy use. 

With regards to art, the implications of NFT technology are immense; anyone with some creativity and a little bit of cryptocurrency to cover fees can “mint” and sell NFTs online. In an industry that is known for being exclusionary, especially towards young artists with fresh styles, NFTs promise to eliminate gatekeeping and even the starting line for all creatives. Despite some of the highest-profile NFT sales taking place through auction houses, the endgame of NFTs is ultimately the elimination of the need for them. Any artist can list their art, whether visual, musical, or otherwise, and anyone else can pay whatever they think it’s worth with no third-party involvement. The fact that NFTs allow anyone to tell their story has fostered the growth of many communities online, with everyone naturally gravitating to what they are interested in and what they think is valuable. 

Aside from art, there are many other potential uses for NFT technology since NFTs can truly be used to record the ownership of anything. Land, buildings, cars, and even jewellery have all been proposed as beneficiaries of NFT technology. These are all high-value hard assets, that of course involve a ton of paperwork and bureaucracy involved in buying and selling plenty of middlemen siphoning off transaction fees for themselves. With a blockchain in place, NFTs could be used as deeds and proof of ownership of these assets with very little friction. Compared to the government databases of today, transferring ownership of assets such as a house or registering an asset such as a vehicle promises to be much easier, faster, and more secure. 

NFTs also promise to have huge implications for social mobility via new credit markets geared towards individuals. For example, with land ownership written into a blockchain via a land deed NFT, it becomes much easier to post the land as collateral and borrow against it. Credit scores become much more transparent and easy to calculate since proof of ownership of most major assets an individual holds would be all collected in their blockchain wallet(s). Making it easier for people to borrow against assets, even small ones, allows them to climb the societal ladder much faster; this could lead to a huge standard of living increase for the working poor, for example. 

That’s in the future though. Right now, NFTs are still in their early phase; there’s certainly a lot of speculation and gambling taking place right now, even on the part of yours truly. I’ve been dabbling in some art, as well as some utility domain name NFTs, and even I think that prices are pretty inflated at the moment. The sheer number of NFT art collections is rather overwhelming, and if I had to guess, I’d say that most of these collections aren’t going to last in the long term. NFT collections that are actually unique and tell a story are going to be the ones that prevail alongside the practical hard asset applications, and I’m really interested to see what emerges from the inevitable re-rating of the NFT market. Irrespective of the current market conditions, it’s hard to deny the utility at the core of the technology, and that’s really promising for the future.