NFTs Explained by a Communications Graduate
By Lizzy Carmine (she/her), illustrated by Yi Jong (she/her)
Editor's note: this article expresses the author’s views, and we recommend readers also do their own research on this topic.
Usually when I hear the words “bitcoin” and “investing” my eyes glaze over; the concept of things I can’t physically use has always been difficult for me to wrap my head around. Cryptocurrency, the stock market, and shares in particular have been victim to my uninterested mindset. Recently my friend told me they made the equivalent of about $10,000 NZD in cryptocurrency from selling a non-fungible token (NFT). Then, I became intrigued.
This mysterious cyber dollar world has always been a daunting idea to even think about. I think it’s safe to assume I'm not the only person baffled by the cryptocurrency realm. So with that being said, welcome to my guide in understanding the NFT kingdom! Here you will find a condensed introduction to non-fungible tokens, backed by fact checked and peer reviewed articles and investor advice from business and investor news and social media.
Let’s start at the beginning with blockchain.
Bettina Warburg, co-founder of Animal Ventures and a researcher of transformative technologies, explained to me and 4 million others via a Wired YouTube video the concept of blockchain, and this is what I learnt. Blockchain allows people to trade assets without using an intermediary institution such as a bank. Think of blockchain as a massive digital book that is written in code. Every time a trade or transaction is made and verified by blockchain participants, it gets logged into this digital book that is stored across a network of computers, completing the transaction. Once logged, the data can not be deleted. Essentially, blockchain is an always growing digital receipt of the transaction history of blockchain users.
Are you still with me? Okay, good!
People are using blockchain because it decentralises trade, and in doing so has the potential to rewrite the rules of our economy. How? Well, because it’s useful in wide scale digital marketplaces and platforms when being used for distance trading without authority institutions. Illegal items can be sold on blockchain, such as drugs, but mostly decentralisation takes away power from big banks and spreads control across blockchain users instead. So you’re probably thinking “how can I trust blockchain users?” It’s less about trusting the users and more about trusting the technology. To ensure the authenticity of buyers and products, the technology has levels of self-identification for users to attain through providing identity verifying documents, like a passport.
How does blockchain relate to NFTs?
Blockchain is commonly associated with bitcoin, and this is where cryptocurrency and NFTs enter the chat. Bitcoin, if you’re unfamiliar, is a popular digital currency that has contributed hype towards blockchain’s reputation of being a “get rich quick platform”. Yes, blockchain is used in the cryptocurrency realm, however, if blockchain becomes a mainstream trading platform it will just make trading goods and services easier.
In summary, blockchain is a platform that people use to trade assets such as cryptocurrency. You can buy NFTs with cryptocurrency, see where I’m going with this? Cryptocurrency explanation time!
Jake Frankenfield created a peer-reviewed explanation of cryptocurrency. Jake explains cryptocurrency as a “digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.” Cryptography is an “encryption technique” that only the sender and receiver can view. The point of cryptocurrency is that it has no attachment to “central authority” and therefore is “theoretically immune to government interference or manipulation,” says Jake.
There is an extensive list of different types of cryptocurrency but currently the most well-known include bitcoin, Ethereum, Tether, Cardano, Binance Coin and XRP.
When I first heard of cryptocurrency I didn’t understand why anyone would want to invest money in digital coins that you can’t use at your local café to buy lunch. It made absolutely no sense to me and seemed kind of sketchy.
The most logical cause of action was to turn to “For Dummies” for help. I needed things to be be explained on the most basic level. Cryptocurrency professionals Peter Kent and Tyler Bain say, “decentralization of cryptocurrency is actually what makes it trustworthy. In general, more decentralized cryptocurrencies are likely to be more stable and likelier to survive (long enough for you to profit from mining) than more centralized and less distributed cryptocurrencies.”
To break that down further, as the owners of cryptocurrency via blockchain rise, the control is spread amongst more people. Which opens up the social consensus of the network and diversifies the power, affecting how blockchain and cryptocurrency are used.
Now that we have learnt about the foundations that allow NFTs to be bought and sold, it is time to get into the thick of it.
In Kara Murphy’s article “NFTs: What They Are And How They Will Impact Photography'', Kara explains NFTs in relation to photographers, which makes understanding NFTs way easier for me personally.
Kara explains that a non-fungible token is a “unique digital asset that lives on blockchain technology.” NFTs are “unique and cannot be replaced” unlike cryptocurrency. NFTs “prove ownership” and in relation to photographers, this prevents their images from getting copied or stolen. It’s important to know that NFTs are not limited to photos and can prove ownership of animations, music clips, event tickets, and videos to name a few.
The crazy thing about NFTs is that they are commonly being bought with Ethereum or ETH, which when converted to NZD can be in the thousands depending on the market. Currently, on the 28th of September 2021, 1 ETH is worth $4,267.52, so an artist who sells their artwork for 3 ETH has cracked it!
You’re probably wondering why people are spending so much money on digital files; I was dumbfounded at first too. However, upon opening up the Foundation app. I discovered an endless realm of auctions from scenic photography to digital animations. It's literally a whole new world.
Developers of the NFT platforms that showcase digital files encourage artists to use the platform through buying their artwork to ultimately boost platform usage. Collectors, however, also support artists in the hopes of re-selling that one-of-a-kind NFT for a profit. Every time an NFT is re-sold the original artist gets a profit of 10% too!
And the communication centre used to bring the NFT community together? Twitter.
Search #nftcommunity on Twitter and you will find NFT buyers and sellers communicating via retweets, likes, and comments. As an artist, networking with collectors is essential to selling your art work; it just happens in 150 characters or less.
At this point, the NFT/cryptocurrency world seems pretty dreamy, right! Well here’s the catch.
“Non-fungible tokens (NFTs), are at least partially responsible for the millions of tons of planet-heating carbon dioxide emissions generated by the cryptocurrencies used to buy and sell them,” reports Justine Calma.
Science reporter Justine Calma wrote an article titled “The Climate Controversy Swirling Around NFTs”, in which she explains the effects of crypto art on the planet.
The issue is, Ethereum is “incredibly energy hungry”. There is no institution security overseeing transactions; many popular cryptocurrencies have systems that “force people to solve complex puzzles using energy-guzzling machines,” says Calma.
The negative environmental impact is “energy inefficient on purpose” because it’s expensive to use excessive amounts of energy and therefore is a preventive measure to avoid interference of the ledger.
Ethereum owners are hopeful that Ethereum’s promise to rapidly reduce their environmental impact by switching to the “proof-of-stake model” will come to fruition in the near future. This model allows users to “lock up some of their own cryptocurrency tokens in the network to “prove” they’ve got a “stake” in keeping the ledger accurate” rather than paying for “huge amounts of electricity to enter the game,” says Justine.
The final opinion:
The opportunity for artists to create freely without the pressure to please social media algorithms, and be open to new audiences who are solely interested in buying art is a very positive aspect of NFTs. Especially in a world where the COVID-19 pandemic restricts in-person interactions.
NFTs feel really liberating, taking the “control” from a few powerful people and spreading it amongst the NFT community. Conversations in my flat about the economic possibilities of cryptocurrency in everyday living feels exciting, but also very distant. Could cryptocurrency create a fairer way for the world to trade, without individual countries’ currency separating us all? Obviously it’s a very privileged mindset to assume that everyone in the world has access to the digital platforms they would need, but it’s an interesting idea to think about.