NFTs Explained
Just when you thought you had a handle on Bitcoin, Ethereum, and all of the other cryptocurrencies jangling along the blockchain, along came NFTs, or non-fungible tokens. These basically represent digital certificates of ownership for, well, anything—a work of media, a digital asset, a physical object.
There’s a lot of hype and excitement surrounding NFTs, but it’s not always easy to get a concise explanation of what they really are and why people are willing to spend so much money to own one. What exactly is an NFT, and what do e-commerce companies need to know about them?
NFTs first made a big splash in the public consciousness with gimmicky sales of famous tweets and memes, as well as a few high-profile multimillion-dollar auctions of unique NFT artwork.
With the premise firmly established that there’s money to be made off of NFTs, we have seen an explosion of NFT creators and marketplaces angling to take advantage of this emerging technology.
That said, defining NFTs to people who aren’t fully immersed in the world of technology and crypto finance remains somewhat challenging. It’s not easy to explain to somebody why a JPEG of a pixelated monkey is worth thousands of dollars when they can just right-click on the image and save it to their desktop. Nevertheless, NFTs are quite real, and they really are changing hands for significant prices, and even if their bubble is destined to pop someday, it’s worth trying to understand what they are and why they’re such a hot ticket right now.
What Is an NFT?
Non-fungible tokens make it possible to provide proof that you own something intangible, like a work of digital art. Like a unit of cryptocurrency, an NFT is a data token that is entered into a distributed public ledger—the blockchain—that also records any transactions related to that token. This allows individuals to exchange tokens and establish proof of ownership without any third-party authority overseeing or verifying the transaction.
The thing that makes NFTs different is right in the name: they are non-fungible, which means that each one is singular and has no equivalent.
Your Bitcoin and your neighbor’s Bitcoin may have different entries in the blockchain, but they’re identical units of cryptocurrency—you can exchange one for the other and you both end up with the same thing.
An NFT can't be exchanged or replaced with something identical. Much like a series of limited-edition prints, you could mint several NFTs that represent the same piece of media, but each one would still be unique and the value of one would not necessarily be equal to that of the others.
What Is the Point of NFTs?
Right now, most people are buying NFTs as a speculative investment. Many of us remember the skepticism expressed toward cryptocurrency in its early days—and the huge spikes in price that followed. As the newest blockchain-based investment product, NFTs are attractive to anyone looking to get in early on what could be a highly lucrative new trend.
One area where NFTs might have more than just theoretical value is within the Metaverse, the coming virtual reality iteration of the internet that companies like Facebook (who have gone so far as to rename themselves Meta) and Microsoft have been investing heavily in.
In the Metaverse, people will exist as digital avatars that can be customized and personalized to their heart’s content. Human nature being what it is, we can expect that many people will want unique, one-of-a-kind virtual possessions to decorate their virtual lairs and avatars. The problem with this is that anything that can be created digitally can easily be copied digitally as well. The NFT framework allows people to make inarguable claims of ownership and uniqueness regarding their digital properties.
In other words, an NFT “proves” that your digital artwork is the original piece, or that your avatar’s virtual sneakers really are rare limited editions. Will this matter to the average Metaverse user? That remains to be seen, but it’s not hard to imagine some of the ways in which unique digital possessions might take on more importance in persistent virtual worlds.
Do NFT Investors Need to Worry About Fraud?
Until recently, NFT marketplaces have largely been based on blockchain transactions. To buy or sell an NFT, you would need to open up a cryptocurrency wallet and pay for the NFT by making a crypto transaction. Cryptocurrency, of course, is designed to operate outside the purview of traditional financial systems, making it difficult to prove or prosecute fraud. For the most part, it’s a “buyer beware” situation, where there is little recourse for fraud or errors.
However, as NFTs begin to move into mainstream consciousness, various industry players are working on making the marketplace more accessible to the average consumer. In practical terms, that means it’s becoming possible to buy NFTs with a credit card or digital wallet—which means that the world of NFTs and the world of chargebacks are starting to collide.
The potential value of NFTs makes them an attractive target for fraudsters looking to spend other people’s money for their own benefit, and the confusing nature of how NFT ownership works—and indeed, what an NFT really even is—means that friendly fraud is likely to circulate around them, too.
Conclusion
Nobody really knows what the future holds for NFTs. While plenty of people are putting lots of money on the line to bet on NFTs having a bright and profitable future, there is always the possibility that some exciting new digital collectible will become this decade’s equivalent of Beanie Babies.
With NFTs, both scenarios could come true—NFTs are more of a platform than a product in themselves, and it’s quite possible that some NFTs will hold and gain value while others become essentially worthless.
In the meantime, merchants may find themselves weighing opportunities to get in on the NFT game, either as creators, buyers, sellers, or facilitators. If you expect NFTs to intersect with your business operations in a meaningful way, take the time to learn as much as you can about them from both their boosters and detractors and pay close attention to the ways in which the NFT trade might be vulnerable to fraud and cybercrime.
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