What is an NFT?

Introduction and Motivation

If you are reading this, chances are that you have heard that NFTs are:

A get-rich-quick scheme
A scam
A non-sense image sold at high prices
An instrument of speculation where the last one standing loses

Let us put that aside for a moment and focus on why they exist.

We live in a world that relies on standards. Just as we use 5G, Wi-Fi, and Bluetooth as means to interact between devices, NFTs are a standard to identify unique objects (ERC-721 token standard).

Sure, but why should I care?

Proving that you own an item is not an obvious thing to do. Traditional physical and virtual goods are subject to duplicates, imitations, and forging. The main reason is that physical and virtual goods are built on stuff that doesn’t guarantee uniqueness. For instance, someone may claim that they are the owner of your car if they get a hold of your documents and they manage to fake them. The way we have solved this problem is by creating strong central authorities that bureaucratically prevent and punish forging and identity theft. However, centralized systems have the drawback of being time-consuming, resource-intensive, and not scalable. For example, getting a certified notarized copy of a document to show it to foreign authorities is an expensive and slow process.

NFTs are a way to show that we own a unique thing without centralizing the authority. NFTs are immutable (cannot be changed), meaning that no one can change the ownership of your NFT as long as they don’t have your wallet keys. Sure, they can download the content (e.g., image, text) of your NFT and make funny claims that they own it, but they cannot cryptographically prove that they are the owners of it, because they do not have a key that matches your wallet.

We believe that beyond proving ownership of unique items, the value of NFTs is about creating decentralized relations between the contract developer (e.g., artist) and the token owner.

ℹ️

The bottom line is that just as with any technological breakthrough, understanding the value of NFTs requires us to think of it as a tech standard for proving ownership of a unique good and that it works thanks to advances in blockchain technologies. Classifying this tool as a “get-rich-quick-scheme” or another scam would be as saying that all of the stocks are bad based on the fact that some companies have made scams.

What is an NFT?

Most of the time when we talk about NFTs, we refer to a token, which is an object with the following main characteristics:

Belongs to a smart contract
Has a unique identifier
Points to a metadata file

Being part of a smart contract helps us validate that we are using the token linked to the right address. The uniqueness of the identifier guarantees that there is no other token with the same id. Finally, the token contains a link to the metadata file that provides information about the token itself (e.g., name, description, attributes) and that metadata itself may contain external links to other resources (e.g., images, videos).

In general, when you own an NFT, you own a token in a smart contract, and the token contains metadata pointing to additional information about the token itself. The link to the metadata file may change if the smart contract allows it, but the fact that you own a token cannot be changed unless you transfer the token to another person.