Blockchains and Non-fungible Tokens

A digital image was recently auctioned for more than $69 million. While that amount of money is eye-opening, perhaps equally interesting are the facts that the bidder (1) paid for it with cryptocurrency and (2) received not the actual image but rather a non-fungible token (NFT).

So what the heck is an NFT? Fasten your seatbelts because this will take some explaining. An NFT is a specific kind of data on a blockchain. A blockchain is a record-keeping system that is difficult if not impossible to forge because it is based on a digital distributed public ledger that maintains authenticity through a series of checks and balances on many computers distributed throughout the world. Blockchain technology was originally created to enable transactions of cryptocurrency (of which Bitcoin, Ethereum, and Dogecoin are a few examples) but have extended to other use cases like NFT transactions.

Unlike cryptocurrency which is fungible, meaning that it is replaceable by another identical item (e.g., I could give you 1 Bitcoin, you could give me 1 Bitcoin, and we’re even-steven), NFT is not fungible (i.e., not interchangeable). Therefore, by their very non-fungible nature, NFTs cannot be used as currency, but they can be used to represent proof of ownership by 1 individual. This comes in handy for digital creations such as images and music files where the original file could be copied an endless number of times, but proof of ownership is intended to reside with a single owner. In this manner, an NFT is a digital certificate of ownership and can also be bought and sold.

So back to the original story, the person who bought the digital image for $69 million did not receive a physical print of the image but rather a digital certificate of ownership in the form of an NFT. That NFT could then be sold for whatever price is mutually agreed upon by the seller and buyer, and it could be done via a 1-on-1 manner or auction, as long as it is paid for with cryptocurrency so that it can be stored and validated in a blockchain.

This is potentially good news for artists as well as buyers and collectors of artistic creations. For more information about NFTs, check out this FAQ.