ELI5: What is an NFT?

When it comes to digital media — be it art, text, a copy of a piece of music — it’s pretty much never unique. That is, digital files can be copied with the click of a few buttons. (Ctrl C, Ctrl V, anyone?)

As a way to make digital copies of things ‘special’ or collectable, you can try to introduce the concept of scarcity. Scarcity drives value. After all, if a resource or commodity is limited or even unique, it’s worth more than something you can easily buy / produce more of.

That’s where non-fungible tokens (NFTs) come in. But what is an NFT, exactly? Here’s a simple ‘explain like I’m 5’ overview.

What is an NFT? The terminology explained

NFT is short for non-fungible token. When it comes to understanding what they are, then, it helps to know what ‘fungible’ means.

Fungible: equivalent and interchangeable.

For example, consider a book. You can pick up a copy of a book from the bookshop. If it’s ruined or lost, you can easily replace it with another, identical copy. That copy is exactly the same; it’s worth the same amount, it looks the same, and it has the same content. It’s fungible.

Now, consider the same book, but this time you have a signed, personalised, first-edition copy with a limited-edition cover. If that gets lost or ruined, you cannot replace it. It’s non-fungible.

Back to ‘what is an NFT?’

With that clarified, let’s go back to the central ‘what is an NFT’ question. NFTs are special, non-copyable tokens that come with any ‘special’ edition of some digital media you can buy. There’s a limited amount of them available with any given digital item.

So, you get the digital picture/ebook/music. But with it, you also get a non-fungible token that basically says: ‘This is one of 300 special copies of this digital item.’

Essentially, NFTs are the digital equivalent of making something special. Just like the way the special cover/edition/artwork makes a physical book special.

There is a limited amount of NFTs. They aren’t replaceable or copy-able. Sure, the digital thing itself can be copied, but the token can’t.

How do NFTs work?

Q: But wait, why can’t you just copy the NFT as well as the digital file?

A: The reason lies with how NFTs work, which is through blockchain.

NFTs are often talked about alongside technology known as ‘blockchain’. This is because without the blockchain, they wouldn’t work.

Blockchain: a growing list of records (known as ‘blocks’) that are linked or ‘chained’ together. Each new block contains information about the previous block, which guards them against modification.

Much like cryptocurrency, it’s possible to keep track of non-fungible tokens through blockchain. Who has owned them and who currently owns them (and so on) is all kept on record. In this way, then, NFTs are protected against replication.

What is an NFT most often used for?

With all that clarified, the final question remaining is what is an NFT typically used for?

At the moment, the biggest excitement around NFTs revolves around the world of digital art. When you make a digital piece of artwork, there is the issue that it’s easy for people to copy infinitely. NFTs allow value to be added to ‘legitimate’ copies of this digital artwork.

In short, they are enabling art collecting in the digital world.

Copy-pasting the artwork is still possible, of course. But without the token, it’s like you’ve bought a print of the art, rather than the art itself. Or, to return to the book analogy, it’s the difference between picking up a normal copy of a book from the shop, and purchasing the special edition version where only 200 were printed or signed.

What is an NFT?

TL;DR: a non-fungible token is something used to make digital artwork/media into something special or collectable.

And that’s the basics of non-fungible tokens.

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