Last year, a JPEG photo that you can find on Google was sold for 69.3 million dollars. The NBA sells little clips of basketball games that you can watch on YouTube for hundreds of thousands of dollars each. These are known as NFTs. But why would you buy something if you could just see it online at the same quality as if you owned it?
NFT stands for non-fungible token. Fungibility refers to uniqueness, or whether something can replace it. By being non-fungible, it basically means that these tokens are unique. For example, the Mona Lisa is non-fungible because there is only one of it, and you cannot find an exact replacement; however, a sack of rice is fungible. There are millions of them. Now that we understand the non-fungible part, let's try to understand the "token" part.
To understand a token, we must refer back to the Blockchain. Historically, if you wanted to send money to someone else, you needed a middleman. When you pay for your Netflix subscription, you tell your bank to send money to Netflix's bank. What the Blockchain does is that it tries to remove the middleman, so when you send money to Netflix, you directly send them the money without the bank ever needing to be involved.
It does this by recording all transactions publicly on the internet instead of privately through the bank. So now, when you pay for your subscription, instead of the banks keeping the record, it is a network of individual computers worldwide owned by different people that all confirm your transaction. By viewing your past transactions, these computers can verify that you have enough money to pay Netflix. If your transaction is approved, it is recorded down by everyone for future reference. This network of different computers is called the Blockchain.
So how does this have to do with anything? A token is a unique line of code representing ownership in something intangible such as an image or video. By using the Blockchain, people can keep track of who owns this line of code. If you buy an NFT through the Blockchain, everyone in this network can see that you purchased it and confirm that you bought it. Although someone else can screenshot the NFT and try to sell it, its code won't match the one on the Blockchain, so other people won't recognize them as its owner. That's why NFTs are non-fungible; you can't claim ownership or create a copy of it without everyone in the whole network recognizing it.
Although there is no actual tangible value in NFTs, people still buy them because others perceive them as valuable. And as more people recognize their value and are willing to pay for it, its value increases. As the price rises, more people want to join, creating hype, increasing prices, and creating a feedback loop. That's how NFTs came to popularity.
Some say NFTs are useless, while others argue that they can be used to tokenize tangible things like property and make it easier to buy and sell. Like crypto, the prices of NFTs are volatile and prone to manipulation. No one can guarantee if it will grow in the future, but it is an exciting thing to learn more about. While you think about if NFTs live up to their hype, we'll talk more about how hype can impact the markets with Meme stocks.