What are NFTs? And why are they important?

You may have heard of NFTs before. You may even know that NFT stands for non-fungible token. But you might not know exactly what that means and why this new technology is important for artists, creators, and businesses.

Chances are you first heard about NFTs from a news story about an eye-popping purchase price, like when the artist Beeple auctioned off his digital art piece Everydays: The First 5,000 Days for $69 million:

Or when Jimmy Fallon bought a Bored Ape for $220,000:

Before we get into why NFTs are important, beyond these astronomical price tags, let’s first start by learning the basics.

What does non-fungible mean?

A fungible item is one that can be replaced by an identical item. Think of a dollar bill. My $1 bill has the same purchasing power as your $1 bill and any other $1 bill in circulation. In other words, they’re mutually interchangeable.

A non-fungible item, on the other hand, is unique and can’t be copied or substituted. The Statue of Liberty, the Mona Lisa, and a ticket for a seat at the Super Bowl are all non-fungible items. That is to say, they’re one-of-a-kind.

In the crypto world, if I hold one Ethereum token (ETH), it’s fungible because it’s worth the same as any other ETH token someone else is holding. On the other hand, I currently own a Crypto Coven, a profile picture NFT project featuring drawings of witches with individual lore written for each one. Mine, named soursop the cloudless (pictured below), is a non-fungible token (NFT) because out of all the 9,757 total Crypto Coven NFTs in existence, there’s only one that looks exactly like mine. 

Living on the blockchain (sort of)

A blockchain can most easily be described as a decentralized and distributed server. When you interact with a blockchain like Bitcoin, you’re not just sending a transaction to a server farm somewhere as you would in a more centralized ecosystem like Amazon, for example. Instead, thousands of computers (referred to as miners) will verify portions of your transaction simultaneously. This makes the blockchain incredibly secure and essentially unhackable.

A token is simply a crypto asset that lives on the blockchain. There are many different tokens and many different blockchains. The most popular blockchain for NFT projects is Ethereum because it was specifically created to enable developers to build projects on top of it. NFTs contain code called a smart contract—a computer program stored on the blockchain that runs when certain conditions are met (more on this later).

At this point, you might be picturing my Crypto Coven NFT just kind of hanging out on the blockchain until I decide to sell it. That would only be partially true. 

Blockchains are fairly limited when it comes to storage space. This is by design because everything that ever occurs on the blockchain will remain there in perpetuity. There’s a record that represents my ownership of my NFT on the Ethereum blockchain, but the image itself is not on the blockchain. So where is it? Images and other digital assets are typically stored elsewhere. IPFS, the Interplanetary File System is one of the most popular storage solutions because it’s also a decentralized protocol.

There are some on-chain NFTs, meaning they’re fully stored on the blockchain. The most famous of which is Cryptopunks, a collection of 10,000 pixelated characters currently selling for a minimum of 62 ETH ($201,894.95). Cryptopunks are also one of the first-ever NFT projects and therefore one of the most sought after. Case in point, CryptoPunk #3100 was the highest ever sold at 4,200 ETH ($7.58M).

The key takeaway here is that an NFT is a contract on the blockchain that signifies who owns a digital asset.

Why NFTs will be important for creators and businesses

Let’s go back to the concept of smart contracts. As I wrote above, a smart contract is a computer program stored on the blockchain that runs when certain conditions are met. So what kind of conditions are we talking about here and how can they be used by creators and businesses?

With collectible art projects, royalties can be programmed into the smart contract. Typically royalties are set at around 10%. This means that every time the NFT is sold, a percentage of that sale is programmatically sent to the original creator’s wallet. This guarantees that the original creators are always linked to their projects, a concept called provenance, and they’ll be able to share in the upside as their work becomes more well known.

Digital provenance is groundbreaking for art collectors who previously have had to rely on authenticity experts to determine if a piece of artwork is the real deal or not. And it’s estimated that up to 20% of paintings owned by museums could be inauthentic. But if there is a record of provenance on the blockchain, it’s immutable and verifiable forever. So if an unauthorized copy is created, it’s trivial to figure out that it’s a fake.

In some cases, creators have granted full commercial licensing rights to whomever owns their NFTs. There are now two different craft brew companies using Bored Ape NFTs artwork—North Pier Brewing Company’s Bored Ape IPA and Alternate Ending Beer Co.’s limited-edition “Drink Your Peas” beer can featuring Bored Ape #3500.

Other uses for NFTs

While the most popular—and expensive—NFT projects thus far are for visual art, there are many other use cases.

We’re already seeing music NFTs gain in popularity. Jonathan Mann, who has been recording a new song each day for over 4,700 days in a row, is selling his video as NFTs. The popular band Kings of Leon sold lifetime access to VIP seats at their concerts. And musicians are doing this all while maintaining the rights to their own music.

NFTs can also be used to grant special access to online communities. Kevin Rose, the well-known investor and podcaster, recently sold 1,000 NFTs that gave owners access to his PROOF Collective community, a token-gated Discord group for serious NFT investors. Similarly, Invisible College, a learning organization I’m working on for crypto and web3-curious builders and creators, is launching a collection of 10,000 NFTs called Decentraliens that will grant lifetime access to courses, events, programming, and the learning community.

Flyfish Club, founded by serial entrepreneur Gary Vaynerchuk, is a private dining club at a new sushi restaurant being built in New York City. NFT owners will get access to the restaurant and various culinary, cultural, and social experiences. Not only that, they will be able to sell their access to other people who want to make a reservation.

An event could create NFT-based digital tickets with beautiful commissioned artwork on each one. Instead of pinning them to a corkboard to display them in their house, fans could show them off as part of their online identities and prove that they were there. And depending on the event, they could even be sold to collectors, thus sending royalties that are split with both the event coordinator and the artist. Imagine if Arnold Skolnick, the designer who created the iconic art for the original Woodstock concert was still getting royalties for that work to this day.

The more you descend into the NFT rabbit hole, the more you realize how impactful they can be, especially as our lives become more and more tied to our online identities.

The future of NFTs

Like any new technology, it’s impossible to predict all the ways developers, creators, and businesses will utilize NFTs and their innovative underlying smart contracts.

We will almost certainly see NFTs used for tracking ownership of things like real estate, college degrees, professional licenses, event tickets, and countless other contracts that currently live on pieces of paper. All of those will take time to come to fruition. And in some cases, most people might not even know NFT technology is being used for them.

Ultimately, the limit to what is possible with NFTs is up to our imagination.