What are NFTs, one of the most discussed issues recently, and what are they for?
Advisory Board Member of Paribu
In the recent days, I shared my analyses regarding NFTs on the program ’10 Soruda Kripto Para Dünyası’ (The World of Cryptocurrency Explained in 10 Questions) hosted by Gizem Uzuner Gençtürk.
Alright, then what does NFT mean, where does it come from and what are its features?
What does NFT mean?
NFT is the abbreviation standing for the term “non-fungible token” and to understand what it is, probably first we need to discuss the meaning of “fungible token”:
The word “fungible” indicates that the tokens can be traded or exchanged for one another.
Let me explain it with an example: If you give TRY 10 in your pocket to me and I give you TRY 10 in return, nothing is changed for either of us. They can substitute one another. This is one of the indispensable features of money.
Thus, the digital versions of the assets which have this feature that is mostly utilized for currencies are called fungible (identical to each other/interchangeable) tokens.
Non-fungible is the antonym of this word, it means single, unique or inimitable. It can be translated into Turkish as “tekil token” (singular token) or “tekil belirteç” (singular determinant).
For example, even two cars of the exact model produced in the same year by the same car brand differ from each other after being driven by two different drivers. It holds true for your mobile phone as well.
The physical world generally consists of these kinds of singular assets which do not resemble each other. So, the form of this singularity, which exists in the physical world, adjusted to the digital world is called NFT.
Let us take a short break here and discuss the history and philosophy of this process.
Digitalization and scarcity
The core of the issue lies in digitalization and scarcity…
We, especially the ones born between 1960 and 1980, have been going through a very interesting period. Because we did not only experience the pre-digital era (I call it the physical or analogue era), but we are also going through all phases of digitalization.
While switching to the digital world, we benefited from the blessings it brought along as far as possible. To illustrate, we can communicate with anyone regardless of which part of the world they are with the devices we have at hand, or we can execute the necessary transactions at the comfort of our armchair.
On the other hand, we sometimes faced certain scarcities of the digital world. One of the most important scarcity was the issue of copying in the digital world. How do you own digital work, such as a digital painting “physically”? If you move your cursor on top of it, click on the right button of the mouse and choose “Copy”, you can easily download it to your computer.
Wearing does not exist in the digital world, moreover, it is possible to create thousands of identical products thanks to the low costs of copying and digital storage. This is a serious issue since the less a product produced is the higher its value and a decrease in its value is experienced in direct proportion to its reproduction.
This main issue of the digital world was resolved thanks to blockchain. Blockchain technology allowed for the limited production of digital assets without a need for confirmation from any centralized institution.
As you all know, the first application that introduced and utilized blockchain technology is Bitcoin. It managed to create a currency limited to 21 million in numbers. From this aspect, the digital world provided for scarcity, which is one of the most important features that makes money valuable in the physical world.
On the flip side, digital currencies needed to allow for anonymity in the sense of both shopping and storage, similar to the banknotes we use in the physical world. That is why they were designed so that any piece of them can be interchangeable with one another.
When it comes to NFTs, they actually carried this feature of scarcity to the extremes and turn it into singularity and uniqueness.
What is so special about these NFTs?
At this point, it will be useful to provide some dry facts. What kind of featured do these NFTs have? Let us explain this in points:
- Singularity: You can create any NFT as a single one. Please pay attention, we are not talking about the digital asset, which NFT indicates the ownership of. You can easily copy that digital asset, for instance in .jpeg format. However, the NFT indicating who the real owner is single. By writing it on the blockchain, you announce it to all the world.
- Providing definitive and complete ownership: What makes a blockchain special is that the information written on it is saved in a way that does not allow for any retroactive change. Therefore, when you purchase an NFT, the ownership of the digital asset indicated by the NFT will be transferred to you. For instance, purchasing the NFT of a character you created in a virtual game proves that the ownership of that character only belongs to you. At the same time, it gives you the right to transfer the character to other virtual games and to play it there.
- Programmable: Essentially, the NFTs are digital assets created by smart contracts. How they act is determined by the rules indicated and written on the smart contract in advance. In fact, it is quite an important feature. Because you can include any rules you wish in a smart contract. It can bring many novelties, for example regarding the copyrights. To illustrate, if you give the artist not only the revenue from the first sale of the product but also 10% of the profit yielded from the further sales, the smart contract will send that part of the profit yielded at the next sale to the address of the artist.
Let me answer some questions that come to mind regarding NFTs.
How physical assets are carried to the digital world?
What kind of a transfer is it? In short, it is the act of turning a digital or physical asset into a token. Well, how does a physical asset transform into a token? It does not work that way of course. What comes to the digital world is not the asset itself but the ownership of it!
The pith of the matter is when the creator of any work wishes to transfer the ownership of that work to someone else, they perform it via blockchain. Blockchain saves the transfer of the ownership of the work permanently and that it cannot be changed later. In short, not the work itself but its ownership is recorded on blockchain.
But digital works can easily be copied, right?
Here comes the most frequently asked and misleading question about NFTs: “I can right-click on any work I see on my screen and download it to my computer.” Definitely. The same work is now on your computer. But what about its value? Is it also the same?
Let me explain it by an example: The Famous Painting “Mona Lisa” Where is it? At Louvre Museum. But if you like, you can download a high-resolution copy of it to your computer via Google Arts and even hang it on your wall after printing it on the color printer, right? Alright, is the value of the painting you hang on the wall is the same as the one in Louvre? Of course not.
The concept of ownership in the digital world should be reviewed
Unfortunately, for us, who were brought up in the physical world, our minds are used to the fact that ownership exists as something physically at hand. Just like purchasing a painting and hanging it on the wall home.
Yet, when we switch to the digital world, we need to put such stereotypes aside and review the concept of “ownership”. Since a work existing in the digital world actually consists of digital 1’s and 0’s, in other words, it does not physically exist, we do not need to hold it in our hands. What matters is who has the original ownership of this work.
So, when an artist transfers the ownership of the work he created to someone else by saving it on the blockchain, he announced this transfer to the whole world in fact. What is deemed valuable here is the transfer of this relationship and ownership, not the fact that a copy of the work at any size, which is measured by megabytes, is on your computer.
This example may help us to view the issue from a different viewpoint: The cost of a book does not exceed TRY 5-10 included the cost regarding paper, printing etc. When you buy it from a bookstore, you pay TRY 30-40. Okay. However, if this book was printed in the past and you have the first edition, this probably makes it more valuable. What if this first edition was also signed by the author? Then the value is multiplied. As you see, the value of the work is not determined by how much it costs physically but by a lot of other factors.
Why the work itself cannot be written on the blockchain?
A similar question may directly pop up in your mind: “Alright, but if we are talking about digital work, isn’t it better if we save it directly on the blockchain? Why do we write only its ownership?”
There are various answers to this question, but the most important one is the technical restrictions of blockchains. As you know, the data saved by blockchains are stored by thousands of machines. While this decentralization makes the blockchain relatively more sheltered, it also brings certain disadvantages along. And that is the fact that the data storage capacity of thousands of machines is limited. Therefore, the information written on the blockchain is mostly limited. For example, 1 MB of knowledge is written on the Bitcoin chain every ten minutes. The size of the knowledge stored on Bitcoin so far is around 340 GB. Now, have a look at the size of a JPG file on your computer: You will see that it is at least 2-3 MB. Come and try to write this file on blockchain.
In the next article, we will be seeking the answer to the question “How is the value of NFTs determined?”
Bu içerik en son 26 October 2022 tarihinde güncellenmiştir.