A 10-second art video of a man who looks like Donald Trump collapsed on the ground, with insults written all over him, sold for US$6.6 million. A snippet from an L.A. Lakers game of LeBron James dunking sold for US$200,000. Another art video of cherubs flying in a desert landscape sold by Grimes for US$390,000.
All are part of a new digital asset class called NFTs, which are all the rage right now. Anyone can see the videos, download them and redistribute if they wanted, but still people are dropping enormous amounts of money to buy the digital assets.
Let’s take a dive into what’s behind all the craze.
First off, what is an NFT?
NFT stands for non-fungible token.
To understand what it is, let’s first dissect the meaning of fungible. In economics, the term is used to describe assets that are alike, they’re worth the same value and, therefore, can be interchanged. An example is plain, ol’ money. If one person has a loonie and another has a loonie, and they exchanged coins, neither person is richer or poorer. They still each have a loonie that’s worth the same.
A non-fungible asset is one that is not so easily interchangeable. An example, Laleh Samarbakhsh said, is homes. “There are really no two houses that are identical,” said the Ryerson University finance professor, and as a result, no person would ever exchange their house with another because the value attached to each home is different.
Those are real-world examples.
NFTs are digital assets like the aforementioned videos. The qualities and substance of each video are unique and, so, they are not worth the same. The simplest way to understand it is to think of each NFT as a digital collectible, said Henry Kim, co-director of York University’s Blockchain.lab.
How do NFTs work?
NFTs are bought and sold on the blockchain and that’s what makes it different than, say, just buying a digital artwork off Etsy.
To understand why, let’s quickly unpack what blockchain is. In essence, a blockchain is a network of millions of computers that all validate transactions which have been encrypted. Think of it like a ledger, which cannot be manipulated or changed, it can only be appended, Samarbakhsh said. Because millions of computers are validating the transaction, there is no need for a middle man to facilitate security and handle the money, like a bank or PayPal. It effectively is a decentralized network that facilitates direct, peer-to-peer exchanges.
NFTs are primarily sold on the Ethereum blockchain. There are many blockchains, including Bitcoin, but not all are built equally. Ethereum is robust and easier for programmers to build on, said Dan Kelly, creator of NFT analytics platform nonfungible.com. As well, Ethereum has smart contracts and Bitcoin does not.
Smart contracts, like traditional contracts, lay out the parameters of a deal, but on blockchain it’s coded into the network. It’s another element of security. In the case of NFTs, smart contracts prove ownership of the token.
But it’s on the internet. How can a person own it?
With NFTs, like the LeBron James dunking clip, they can easily be copied and redistributed. Someone can look for that dunk clip on YouTube and download it, but they do not own it. The person who purchased the NFT owns it and has the smart contract to prove it.
It’s like real art. “You can get a copy of the Mona Lisa,” but it doesn’t mean you own the Mona Lisa, said Andreas Park, a finance professor at the University of Toronto. To him, NFTs are an “obvious transition as we move into the digital world.”
Even established auction house Christie’s is moving into the digital world . It launched its first purely digital NFT auction of a work by an artist called Beeple, who made the Donald Trump video. Bidding, which ends on March 11, started at US$100 and now sits at US$3.5 million. And yes, the artwork can be bought with ETH, Ethereum’s cryptocurrency.
How do you buy NFTs?
There are marketplaces that sell the tokens, such as OpenSea.io, and one of the more popularly known, NBA Topshot, which sells digital collectibles relating to the league, like the LeBron clip.
Are NFTs just video clips?
No. The news about NFTs being sold for millions of dollars centre around artworks right now, but NFTs can be anything on the internet, like music albums, skins or characters for video games, even usernames, said Kelly. Someone can buy a username as an NFT from the Ethereum Naming Service , which operates on the Ethereum blockchain, and any platform that operates on the blockchain and uses ENS will allow people to signup with that username. There are many kinds of platforms and apps on the blockchain, such as marketplaces, games and social media.
NFTs are having a moment and that’s why we’re seeing people spending lots of money to pick up the digital assets but it’s very fitting for the digital age, said Kim.
Even on a smaller scale, with NBA Topshots, it’s like new-age sports cards.
“This presents a much more experiential opportunity than baseball cards on paper,” Kim said. “It’s an opportunity for the new generation to experience what I experienced.”
Copyright Postmedia Network Inc., 2021
