I have been hearing a lot of talk about NFTs, which stand for Non-Fungible Tokens. I became curious as to what exactly are NFTs and how are they being used now and what uses can they have in the future. Before we understand why people would want to use NFTs, we probably need to understand how NFTs work. The technology behind NFTs is blockchain, the same technology that powers Bitcoin and Ethereum. A blockchain is simply a ledger, which is used for record keeping. Bitcoin uses its blockchain to track and record transactions. A typical transaction would involve moving a certain amount of bitcoin from one wallet to another wallet. Since people or organizations own these wallets, they are virtually making transactions using bitcoins between each other.
Now that we understand what a blockchain is and how bitcoins use these blockchains to record transactions, lets move on to NFTs. Like I mentioned earlier, NFTs use blockchain technology, but what they use it for is a little different. So instead of using wallets, where each wallet has its own unique address, NFTs assign these unique addresses (aka tokens) to digital assets. So instead of having a wallet with a unique address storing coins, these digital assets are given unique addresses that will hold some value based on the amount of coins it receives and stores. So the amount of coins will determine the value of the digital asset, essentially the digital assets’ worth. Since no two tokens are the same because they each have their unique address, each digital asset is unique.
So why would somebody want to own or buy a digital asset? Let us look at an analogy of NFTs as a wedding ring. A wedding ring is a “token” of one’s love. It technically represents a claim of one’s love (or “ownership”) of another person. Does that mean that married people can’t cheat or are always exclusive to their marriages? The ring itself may be meaningless. People with rings on their fingers can cheat and technically two people can be married and not have wedding rings. The value or significance of the ring is recognized by the person that gave the ring and the person that received it, and bystanders will look at the ring and say to themselves, “that person is taken” or “who cares”. So NFTs are these tokens that represent ownership and worth/value of digital assets to those that have an interest in that digital asset.
Although an actual painting can be copied, to determine its authenticity an appraiser would be used to appraise the piece. In regards NFTs, a digital asset can be visually replicated as well, but its authenticity can be determined by simply looking up its unique address located on the blockchain. If it were not recorded onto the blockchain it would be a counterfeit and if it does exist on the blockchain but the unique address does not match the original, then it is just a copy. NFTs can provide a way to record ownership of digital assets as well as a way to place a value on these digital assets. I can imagine NFTs being used to record ownership of homes, patents, and other unique assets that can be differentiated from one another.