Help me Understand Non-Fungible Tokens

Factual Questions
1

Every now and then, I try to educate myself on the latest tech hype. Non-fungible tokens have been around for a while, but (at least in my perception), they’ve been really exploding lately, with digital artists earning record sums, and Nike filing a patent for a ‘blockchain-based NFT-sneaker’ called ‘CryptoKicks’ ¯\_(ツ)_/¯.

So I’ve been skimming a couple of articles trying to figure out what’s what here, but I’m not sure if I’m really getting it. Best as I can tell, an NFT is sort of like a bitcoin, but unique, i. e. they’re not mutually interchangeable (hence the name). And… that seems to be it: you can create an NFT for a particular artwork, and purchasing this then makes you the sole proprietor of that particular piece of data (although I understand one can also share ownership of one and the same NFT). If it’s, say, an image, other people can still have that very same image, but you’re registered as the owner of a particular NFT created from that image.

I get that this creates a sort of scarcity, similar to, I don’t know, signed autographs, maybe? Or original prints of something also available in copy? I’ve always found this difficult enough to understand—why would I want the original painting when I can hang a virtually identical copy on my wall at a fraction of the price—but (if my understanding is correct) this seems all the more bizarre regarding NFTs: there’s no sense in which, for instance, ‘the master’s hand’ has touched the NFT anymore than just an ordinary .jpg-copy—it’s just that one of them is a data structure that has been entered into a blockchain, the other isn’t. Why does that create value?

2

Your understanding matches mine (and consequently sounds about right). The signed autograph comparison is apt - with addition of block-chain authentication. The value proposition is that the NFT is “THE” one, even if everyone else can have a copy of the same image/music/data. Maybe many are relying on the old “greater fool” theory in finding a buyer later on?

So, it’ll be interesting to see how it all plays out. Beanie babies? Pokemon cards? (Is my cynicism showing?)

3

I am pretty skeptical of NFTs, but I think this analogy is a pretty good one. Art is a strange space, and what people are willing to pay for is often not something that can be reasoned from first principles. People are willing to pay a lot more for a signed/numbered print than for a normal boring one. Why? I don’t think it has anything to do with the fact that the actual artist used their hand to sign or number it. A fancy authoritative stamp would likely be just as good. There’s a confluence of “beautiful/culturally relevant” and “scarce” that makes art highly prized.

I think that a lot of this is a bubble, but some of it is also self-dealing/manufactured price pumping. The recent newsworthy event where some NFT sold at Christie’s for millions, for example. The buyer is a crypto entrepreneur in the NFT space. $69 million is a pretty well spent marketing budget if it gets everyone talking about it.

4

Yes, the insane art pricing part is suspect. What I am seeing is newer artists being able to create a new revenue stream with smaller amounts (multiple $100/$1,000), which is accessible at the retail consumer level. Also, the interest in clips of notable sports plays feeds into the existing sports memorabilia market at the same retail consumer level.

5

From what I can tell, you seem to understand it about as well as anyone writing about the topic now.

I’m not sure how ownership of NFTs is shared between multiple people. NFTs are both non-fungible and non-divisible so the blockchain won’t record half an NFT with different owners or more than one holder of the single whole NFT. That said, the holder of an NFT could be a wallet that has multiple owners or that is owned by an entity, like a corporation, with multiple owners. If that’s what you mean by sharing ownership, then I think you are spot on.

I think this is a close analogy but I would say it’s more like owning an original painting than let’s say one of 1000 numbered prints or an original sculpture rather than a signed baseball that is essentially indistinguishable from thousands of others signed by a ballplayer at a convention.

Scarcity. Yes, it’s artificial scarcity but that’s the answer. There are only so many copies and there are more people who desire them at some price. By making them scarce, the items find their ways into the hands of people who value that scarcity the most, which means they pay prices higher than all the other people in the world who can’t or won’t pay that much. This is a form of price discrimination - that is, separating the group of people who are willing to pay more for a good than others and finding a way to charge them different prices.

For some people at least, I think the fact that the artist hand signed it is important. They might not be willing to purchase an authorized numbered print that wasn’t hand-signed. For others the numbering or a fancy stamp might be enough.

Agreed. I’m not interested in playing in this space but I kind of get it. People collected trading cards for 100 years and the rarer the card, the better more valuable it is. These tokens are unique. There is some guy who wants to be the only person to own the awesome moment that his favorite player for his favorite team sunk the buzzer-beating game winning basket in the seventh game of the championship. People will talk about the game for years. He owns the bragging rights among collectors like him for that moment forever.

Except, of course, he doesn’t really own it. He owns a one-of-one print but the NBA can later release another one-of-one print that probably won’t be worth quite as much (because it will be seen as sham copy by some) or even a series of 100 of them and flood the market.

This is the same argument with bitcoins - they can’t hold their value because people can just come out with a bunch more cryptocurrencies and flood the market. Somehow, despite the arrival of etherium, ripple, dogecoin, etc., this hasn’t really happened with bitcoin. Maybe NFTs will be the same way.

6

I used to know nothing about NFTs. Then I watched SNL the other night, and now I think I might know a negative amount.

7

Thanks for the responses so far. So it seems I sort of understand things, but I’m still not quite sure I get it. Which is OK, not all the world is there for me to get, but it does sort of make me feel like the old coot doddering on in bewilderment about the kids these days with their block-chains and bit-coins and whatsits. Which I’d figured was a stage I still had a good five years at least to reach.

That’s a good point, and goes some way towards explaining the very outliers of this phenomenon; of course, those are the ones you hear about, rather than the mundane transactions at fractions of that prize.

That’s also interesting, and helps legitimize this sort of thing, to me (not that my appreciation should necessarily carry any weight), although if you want to support some emerging artist, you can always do so via Patreon and the like.

Right, sorry, you can’t have co-ownership of the same NFT, but of the same artwork, as you can create multiple NFTs from the same piece.

I think this helps me somewhat—in my head, it’s still kinda like, right, but why are these things actually worth anything. But it’s not the thing itself that’s worth anything (otherwise, the downloaded copy of this ten second video would be just as well worth the $6.6 million as the NFT), it’s its uniqueness—which is interesting, since there’s not even a potential physical claim legitimizing this uniqueness: it’s a wholly abstract commodity, in this sense. I’m not sure I can think of any others in that category…

8

Speaking as a pensioner who doesn’t have a mobile phone :fearful:, I’d like to see if I’ve got the concept of NFTs.

Using a computer file called a blockchain one person can prove they are the sole owner of ‘something’ (does this something have to be a computer file as well?)
But anybody else can have a copy of the something - so the value of the NFT is just that you have the original, correct?
And this value of the NFT can be worth millions. :flushed:

Is this like one person owns the Mona Lisa, but anyone can have a copy?

9

The blockchains NFTs use are programmable, so you can have co-ownership in a variety of ways. The simplest way would be “OR” ownership, where multiple people just know the same private key and have control over it. You can have “K of N” joint ownership, where there are N owners and it takes K of them to agree on a transfer (for any K and N). You can probably do all sorts of other things that may or may not make any sense mapped onto the real world.

10

I think so, but “The Mona Lisa” is a piece of digital art. I think it’s a bit more like a Signed Print, though, as there may be more than one NFT copy of a particular work.

11

I think the skepticism here is largely warranted. I frequent Hacker News, a tech-savvy group that occasionally gets on the hype train for new technology, and even they are largely dismissive. There are lots of discussions; here’s one: What is an NFT from an artist’s perspective? | Hacker News

12

What do you mean here? A cryptographic token is what it sounds like; in this case someone can prove that he or she owns a particular token, for instance via a secret key which no one else knows, but the point of a digital file (which can be a work of art) is that it is merely a number, and in theory anyone can write that number down in their notebook as well.

There is something called DRM where computer programs try to make you prove you purchased some sort of license, but my point is that, when it comes to digits, there is no “original” file in the sense of there being an original painting or set of prints or similar.

13

An analogy might be like an artist who has a limited printing (10) of one of their works of art. The posters are essentially identical and the artist hand signs and numbers each one with 1/10, 2/10, … 10/10. Even though the posters are essentially equivalent, some people might want the 1/10 print more than the 10/10 print, and therefore the 1/10 print would be more valuable.

It will likely be the same with NFT. The first NFT for work X is going to be the most valuable. The artist can sell subsequent NFTs for the same work, but the blockchain will make it evident who owns the first NFT for work X, who owns the 2nd, 3rd, and so on. All the NFTs for work X represent the exact same thing, but the first one given out is the most valuable.

14

It’s not quite the same though, in the sense that the only thing scarce here is the NFT itself. And it gives you no right of control of the artwork whatsoever, A signed print means there will never be another print exactly like it. A numbered print run means there will only be that number of prints in existence ever,

You could spend $69 million for the NFT representing a GIF, and then post the GIF online to show the world - and get a copyright takedown notice because the NFT does not equate to ownership and copyright law applies.

Or,you could buy an NFT to say you ‘own’ the very first post on the Straight Dope, but then the Dope could be shut down and deleted. Your NFT dossn’t protect you from that.

I can think of valid reasons for NFTs. For example an NFT could be used to verify that you were the original creator of something widely copied.

But buying and selling NFT’s for goods you don’t control as some sort of quasi-ownership strikes me as being a sign of us being in a giant asset bubble, and some tech guys invented a way to get some of that sweet, sweet bubble money. Tulip mania is just around the corner, followed by a lot of pain when the bubble pops.

15

Thanks. I didn’t understand this and I really didn’t know that multiple ownership was baked into the NFT blockchain technology. Lesson learned.

It’s an analogy and, like all analogies, it’s imperfect. There is only one person with the secret key, who can prove ownership or give ownership to someone else. You are correct that the owner could give away their secret key. To use another analogy, someone could own a nice Ferrari but leave it parked on a public street with the keys in it and the motor running too.

Right. This is what today’s buyers are counting on.

I think it is a pretty good analogy. The only thing scarce about a famous painting is the painting itself. They are endlessly reproduced. Numbered prints are essentially identical and they tend to get their value not from low numbers but from condition and provenance (e.g., did they come from a famous person’s collection). Buying a painting or a numbered print also doesn’t give you the right to reproduce it. Even if you bought a numbered print direct from the artist, the artist (barring odd contracts) still has the copyright to the work and she can choose to make a million more prints (numbered or not) later.

You might be right. For what it’s worth, my money is currently invested consistent with your thesis. But the truth is, I don’t know how to value an NFT in the exact same way that I don’t know how to value a bitcoin. I remember when people thought $1,000 for a bitcoin was a ludicrous bubble and it couldn’t possibly go higher. I didn’t buy when it was $1,000 because I didn’t know what drives the value of bitcoin. All I could say then was that I don’t know how to value it so I’m not sure if $1,000 is high or low so in my ignorance, I chose to leave it out. I couldn’t know when to buy or when to sell. In the absence of any informed way to determine what’s a good price, the only price you can rely on is the market price. In retrospect, of course, it turns out that $1,000 per bitcoin was actually quite low.

I don’t know if NFTs are cheap or expensive right now. I’m guessing expensive but that’s just an uninformed guess not supported by anything.

16

Yeah, maybe. Let’s check back in another decade.

The thing about NFTs is that I can’t understand the use for them outside of pure speculation. Bitcoin has its uses in transferring money discretely/somewhat beyond the reach of governments. I’m not convinced that those uses will support its valuation, but there’s at least something there. Actual art can be displayed to show off to people. What can you do with an NFT that’s plausibly worth millions of dollars, now or in the future?

17

You misunderstand me. I did not mean that you can copy your secret key, enabling someone else to expropriate your token, though you are right about that. I meant that—forget about tokens and certificates—a completely digital work of art is a number, and therefore may be copied. There is no “original”, not even in the sense that you might own a first edition of some novel where I only have an e-book of the same text.

18

I did misunderstand you and thanks for clarifying. Yes, someone else can copy the art with perfect digital fidelity. What they can’t do is make a block chain ledger that says they are the owner of the first NFT, just as I can’t be the owner of the first Fountain even if I could get the exact same model of urinal and get an expert forger to use the same type of pen to write the same R. Mutt signature. It wouldn’t be the original and the people who care about the original and who know it was lost would not convey to me the admiration they would convey to a person who truly had the original.

19

AFAICT, an NFT is basically like a non-physical (immaterial? intangible?) security hologram used to ID non-physical things like a an artist’s digital “work”.

If a caught ball or a used uniform acquires value (let’s say it was Player X’s 9,000th home run ball) then officials (e.g. MLB) might affix a security hologram to it to ID it as that specific and unique item. This serves as proof of provenance.

To me an NFT is the same thing but it’s 1’s and 0’s instead of a fancy hologram sticker. Either one identifies the item in question as genuine.

20

That’s exactly what it is. That’s what the art or collectibles market is based on. Speculation. Doesn’t matter if its physical or digital.

ETA: Banksy’s gonna have so much fun with this if he hasn’t already. I could see for example, QR codes incorporated into his street art leading to who knows what kind of NFT tricks.

Also ETA: Maybe he’s already there.