It is a nightmare to research NFT online.
Not only is it a complex and abstract topic. The number of errors and misunderstood issues by tech writers is tremendous. I spent hours looking for reliable information about what NFT really is and how exactly it works. After all this time, I can certainly tell you one thing — most people get it wrong. And that is a perfect environment for scams and hypes to appear.
So I have asked a guy who lives and breathes cryptography to help me get it. He told me to really understand what NFT is, I need to learn the basics of blockchain technology.
Let Me Introduce You to the World of Blockchain
Blockchain stands behind all cryptocurrencies like Bitcoin, Ethereum, Dogecoin, Pizzacoin, and whatever coin you have possibly heard of. It is a database of records grouped in blocks and linked together by cryptography rules.
Blockchains can be centralized and decentralized. The most popular NFTs rely on Ethereum, which is decentralized, so I will focus on that.
Decentralized blockchains mean that, unlike most databases (e.g., SQL databases), no central authority has the exclusive right to change the records. All users can write new information into the blockchain and modify it. Therefore the power is in the hands of the whole community, rather than a single person. It should make it safer.
All blocks in the chain consist of a header and a set of transactions. (I will not explore the header in this article because it does not affect NFTs.) Each transaction can contain some additional data. It enables them to interact with smart contracts — simply, self-executing programs. Usually, they ensure that the terms of the agreement between buyer and seller are being written into the blockchain.
But smart contracts can serve many purposes. In theory, they can be responsible for recording into a blockchain any data like photos, programs, music, documents, cryptocurrency tokens, etc. And that is how the idea of NFT was born (as well as all misunderstood about it).
So What the Heck Is NFT?
NFT stands for non-fungible token. It is a unique unit of data stored on the blockchain. Unlike cryptocurrency, NFT can’t be traded from one to another. Its value is defined by its unique properties.
You can compare NTFs to any collectible goods. Let’s go with traditional collector coins. At first glance, they look pretty much like regular coins. They have the same shape, similar colors, etc. But their real value is quite different from their face value. That is because they are issued to commemorate some historical event in limited numbers. It makes them more valuable. So even if you can’t use collector coins to pay your bills, you can still trade them.
The only difference is that in the case of NFT, there is always only one particular NFT. So it is like you would always have only one exciting coin from the collection.
Controversy Over NFTs
NFTs enthusiasts believe that they can use non-fungible tokens to represent ownership of assets because:
- the blockchain secures them so no one can modify or steal once recorded ownership,
- they are unique (you can’t have two NFTs the same),
- they can have only one owner at a time,
- anyone can easily verify who the owner of a particular NFT is.
All those things are true. What is questionable is whether or not these allow NFTs to prove ownership. Whatever the doubts, there are already many NFT marketplaces online (e.g., OpenSea, Rarible, or Binance). They take advantage of the hype on NFTs and don’t bother whether people understand what they are buying. So let’s explain the most popular NFTs’ misunderstood.
NFT does not confirm that the seller had the rights to sell an asset
If you bought something from a thief, you don’t own it. Whether or not you knew it before making a transaction. There are a lot of examples of stolen art that have been tokenized and sold without the author’s knowledge.
NFT does not ensure that the asset you bought is unique
And it never really attempts to do it. What is unique is NFT itself, not an asset it represents. There are no obstacles to tokenizing the same item as many times as you want. Have it on your mind if you consider spending $2.9 million for a tweet. You may not be the only one who “owns” it.
NFT does not store digital items in a blockchain
Technically it could, but it is extremely expensive. What is really recorded in a chain is… a link. URL points to the server where your digital item is stored. Those servers may be controlled by institutions or anyone who will gain access. It means that even if blockchain secures the link, the actual asset is not protected. It can be easily deleted or switched into something else. NFT tells you nothing about the digital item you “own.” Read the story of a guy who hacked the system with 💩 emoji.
NFT does not give buyers copyrights
It is possible, but usually, it is not the case. Just because you spent a lot of money on NFT art does not mean you can take advantage of copyrights. It is more like a purchase of a book. You can read it or lend it to your friend, but you can’t translate it to a different language and sell it as your own.
Can NFT Provide a Proof of Ownership?
I get the impression that discussion about NFTs’ ability to prove ownership is almost philosophical. Currently, it is neither better nor worse than any other sale and purchases agreement. Why?
Well, NFT can prove that you bought something and is good at it. It can store the history of transactions since the purchased asset has been tokenized. What was once recorded into a blockchain stays there forever. We can assume it is secure. But it is more like a well-protected invoice rather than a proof of ownership :)
NFT can not prove you own something without any doubts because nothing really can do this. Ownership is a matter of social agreement. And that requires trust. Therefore there will always be people who believe in NFT and people who do not. Regardless of what its true capabilities are. Vaccines work, and it has been proved. At the same time, many people do not accept it — tough life.
Conclusion
If you have got to this place, you are probably aware that NFTs are complex issues. This article is also a simplification. It would require writing a book to explain this topic adequately. No wonder most people are overly enthusiastic about it and invest their money in something they don’t understand.
Hype for NFTs, which we observe currently, is very much a result of a lack of knowledge. But just because people invest in it for the wrong reasons does not mean that NFTs have no future. It is quite the opposite. In a short time, NFTs may be used to reduce frauds in e-commerce, secure transactions, or improve online identity verification. I guess we all have to wait to see which direction NFTs will develop.