For years cryptocurrency seemed like the kind of feeling tech trend most could safely ignore like hoverboards or Google Glass. But it has become too big to overlook. David Oku/The New York Times
This is part of “The latecomer’s guide to crypto,” a mega-FAQ about cryptocurrency and its offshoots. Kevin Roose, a Times technology columnist, is answering some of the most frequently asked questions he gets about NFTs, DAOs, DeFi, web3 and other crypto concepts.
I KNOW NFT STANDS FOR NONFUNGIBLE TOKEN. BUT WHAT DOES IT ACTUALLY MEAN?
Let’s start with the words themselves. In economics, “fungible” is a term used for things that can be exchanged for other things of exactly the same kind. The US dollar is fungible, because you and a friend can trade $1 bills, and each of you will still have the exact same spending power. Most cryptocurrencies are fungible, too — a bitcoin is a bitcoin, and it doesn’t really matter which bitcoin you have.
But most objects in the physical world, such as cars and houses, are nonfungible — meaning they have unique qualities, and you can’t just exchange them for others of the same type. (You might be willing to swap your 2020 Honda Civic for another 2020 Honda Civic, but the cars wouldn’t be exactly the same, and you’d want to know what condition the other car was in before you’d agree to the trade.)
Tokens, in crypto speak, are units of value stored on a blockchain. Cryptocurrencies like bitcoin, ether and dogecoin are tokens, but not all tokens are meant to be used as money. Tokens can be attached to tangible goods — Nike, for example, is experimenting with crypto tokens that are linked to the ownership of physical shoes — but they can also represent intangible goods, like access to a private chatroom or storage space on a cloud server.
SO NONFUNGIBLE TOKENS ARE SORT OF LIKE CRYPTOCURRENCIES, EXCEPT THEY HAVE UNIQUE QUALITIES AND THEY AREN’T NECESSARILY USED AS MONEY. WHY IS THAT IMPORTANT?
Well, until pretty recently, nonfungible goods didn’t really exist on the internet.
The internet essentially works like a giant copy machine — any digital file can be duplicated an infinite number of times, and every copy is exactly the same as the original.
The infinite copy-making quality of the internet was great for making digital objects abundant. But it was horrible for making them scarce. If you were an artist who wanted to make only 100 “first editions” of your digital artwork, or a professional athlete who wanted to sell digital trading cards to your fans (and have those cards retain value the same way that physical trading cards would), your options weren’t great.
Several years ago, people realised that blockchains (the shared, decentralised databases that power bitcoin and other cryptocurrencies) could be used to create unique, uncopyable digital files. And because these files were simply entries on a public database, anyone could verify who owned them, or track them as they changed hands.
That realisation prompted the creation of the first NFTs.
BUT AREN’T MOST NFTS JUST JPEG FILES THAT YOU CAN COPY BY RIGHT-CLICKING THEM AND SAVING THEM TO YOUR COMPUTER? HOW DOES THAT SOLVE THE FILE-COPYING PROBLEM?
If it helps, you can think of NFTs as like the certificate of authenticity you might get if you bought an expensive sculpture. The sculpture could be copied or forged — or someone could break into your house and steal it — but because you have the certificate of authenticity, you can prove that you are the owner of the original.
I’M STARTING TO GET IT. SO NFTS ARE BASICALLY A WAY TO CLAIM OWNERSHIP OF A DIGITAL FILE?
Yes. Which might not sound like a big deal. (And maybe it will turn out not to be!) But people who are into NFTs think that this idea of being able to claim ownership of digital files is a radically important concept.
They argue that scarcity is what gives a lot of objects in the offline world their value. And bringing this quality to the internet through NFTs, they believe, will unlock a whole new market for scarce digital goods.
I CAN SEE WHY NFTS ARE AN INTERESTING TECHNOLOGY. BUT WHY WOULD SOMEONE PAY MILLIONS OF DOLLARS FOR ONE? YOU CAN AT LEAST DRIVE A FANCY CAR OR APPRECIATE A PICASSO PAINTING HANGING ON THE WALL — YOU CAN’T DRIVE A JPEG.
It’s true that most NFTs aren’t valuable because they’re useful. And at the high end of the market — like the Bored Ape Yacht Club, or the NFT […]
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