NFT stands for “non-fungible token.” Now, if that phrase confuses you, trust me: You’re not alone. The world of technology is sometimes obsessed with unnecessarily complicated acronyms and terms. So, for the moment, let’s just use the term “unique digital artwork” instead.

In simple terms, an NFT is a unique piece of digital art.

More importantly, an NFT is a verifiable and unique piece of digital art because it comes with its own certificate of authenticity. That is made possible by another magical technology: a blockchain. Blockchains are powerful technologies because they’re able to keep permanent digital ledgers. Blockchain entries cannot be forged or otherwise manipulated.

A digital ledger is a distributed record, kept on many thousands of computers, that details every interaction on a blockchain. In practice, it’s identical to the ledger that we all keep in our checkbooks: Every bill we pay and every check we deposit has its own entry. In the case of our checking accounts, there are only two authoritative records: ours and the banks. In the case of a blockchain digital ledger, there are many thousands of authoritative records because blockchains are supported, by design, by the entire community of users.

That is what makes them impossible to change. 

Having access to a permanent digital ledger is important because it allows anyone to know — with 100 percent certainty — whether the unique piece of digital art in question is original or a knockoff. Having entries on a blockchain allows artists and all subsequent owners of their art to prove that what they own is authentic.

That’s sometimes incredibly difficult in the traditional art world. For example, Andy Warhol prints are notoriously difficult or impossible to prove authentic. In the world of digital art, NFTs remove the guesswork, which is important because works of art that are proven to be authentic can sometimes carry tremendous value. 

Beeple’s “Everyday” is one such example. In October of 2021, this NFT, which is a fascinating photo collage created by artist Mike Winklemann, sold for $69.3 million at Christie’s. The auction of Winkelmann’s art — the first of its kind — proved to the world that investors were willing to pay top dollar to own an authentic piece of digital history. 

How Do NFTs Work?

  • NFT stands for “non-fungible token.” In practice, they're unique digital artworks.
  • Blockchain technology authenticates each NFT as unique.
  • NFTs are not comparable to one another.
  • NFTs cannot be divided.
  • Most NFTs are created and hosted on the Ethereum network.
  • Decentralized blockchains create centralized tokens and marketplaces.

More From David KoffHow to Mine for Ethereum: A Step-by-Step Tutorial

 

What Was the First NFT?

In 2014, multimedia artist Kevin McCoy created a piece of digital art that he called “Quantum.” The piece was a psychedelic, octagon-shaped animation. Because the artwork was digital, McCoy realized that he needed a way to sign or authenticate it. But how? The answer came when he partnered with an entrepreneur named Anil Dash. The two men created a digital authentication method using a new technology called blockchains and cryptocurrency.

Prior to 2014, blockchains and their unchangeable ledgers were used solely to help authenticate cryptocurrency transactions. McCoy and Dash pioneered the use of blockchains to also authenticate art. They created their own marketplace called Monegraph, allowing artists to digitally “sign” and sell their work using a cryptocurrency based on Bitcoin called Namecoin. McCoy became the first artist to use the digital authentication for “Quantum” and, in doing so, created the first-ever NFT.

“Quantum” sold for $1.5 million in 2021, cementing its place as a valuable piece both of both technology history and as a ground-breaking method of delivering art.

Fun fact: Although McCoy’s “Quantum” was the first ever NFT artwork, it wasn’t the first-ever “NFT project.” That distinction goes to Etheria, which was created in 2015, shortly after the launch of the Ethereum blockchain. In this “game,” people purchase hexagonal plots of “digital land” and then… build whatever they like on them. Including, say, Vanilla Ice.

No, that’s not a joke.

A screenshot of an NFT game showing Vanilla Ice
Image: Screenshot

 

How Do NFTs Work?

To better understand how NFTs work, we need to better understand their characteristics. So, here’s a short primer.

 

NFTs Are Not Comparable

Just as there are many different kinds of physical artwork — paintings, photographs, sculptures, et cetera — there are many different kinds of NFTs. The value of one can’t really be compared to that of another. For example, the NFT of Jack Dorsey’s first tweet, which has historical significance, can’t be compared to the NFT of Chris Torres’ Nyan Cat, a silly animation that captured the attention of the internet in 2011. Both are NFTs, yes, but each has its unique and intrinsic value with its own unique properties.

 

NFTs Cannot be Divided

If you own an asset like land, you can divide and subdivide that land into smaller parcels that you can sell. But that approach doesn’t work in the world of NFTs. Once an NFT is created, it is considered a “digital whole” and can’t be divided an NFT into smaller tokens. Therefore, you can’t purchase half of an NFT; either that token is purchased in whole or not at all. 

 

Most NFTs are on the ethereum blockchain

An NFT is authenticated by the digital ledger, which is kept by a blockchain. Blockchains not only ensure that all transactions get recorded into the ledger correctly, but they also prevent changes to ledger entries.

Despite Bitcoin being the world’s first and most profitable blockchain and cryptocurrency, most NFTs are actually created and hosted on the Ethereum network. The reason? Because Ethereum was the first crypto project created to give NFTs what are known as token standards to help make them compatible with other tokens.

Graduate Class Notes: Ethereum Requests for Comments or “ERC” are the documents that allow the Ethereum organization to create standards on their platform. In this case, ERC-721 and ERC-1155, are the two blueprints that help developers easily create the tokens needed for NFTs. 721 created the NFT standard on Ethereum while 1155 created a standard for managing multiple types of tokens

More on NFTsNFT Art Theft: What Buyers and Artists Need to Know

 

Decentralized Blockchains Create Centralized Tokens and Marketplaces

Although a blockchain is a decentralized system of peer-to-peer networks and transactions, the tokens on those blockchains,  including cryptocurrencies and NFTs, are not, themselves, decentralized. Digital assets from a blockchain must be stored in a digital wallet. If you’ve ever used PayPal, Venmo, or Apple/Google/Samsung Pay, then you’re already familiar with what digital wallets are and how they work with standard U.S. dollars.

It’s the same concept for keeping and using your cryptocurrencies.

A central holding place is also used when consumers wish to purchase cryptocurrencies or NFTs. Centralized NFT marketplaces, for example, list auctions of various artists whose digital artwork is available for purchase. Popular NFT marketplaces like OpenSea or SuperRare allow sellers to either participate in an auction or negotiate directly with the artist.

Just remember, in most cases, purchases require using a cryptocurrency, preferably ETH, the currency backed by the Ethereum blockchain.

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