What Are NFTs and Why Are They a Big Deal?

August 12, 2020

Along with stablecoins and DeFi, non-fungible tokens - or NFTs - are one of the most important and exciting developments in the blockchain industry. For most, however, NFTs are still largely a mystery. What are they and what’s so special about them? That’s what I’ll explore here.

Fungible vs Non-Fungible

In order to understand non-fungible tokens, let’s first establish what fungible means. It’s a fancy word for a concept you understand quite naturally. Let me explain with an example.

A dollar is fungible because two dollar bills have exactly the same value. If I give you one dollar and you give me one, neither of us have gained or lost money. Each dollar is of the same value. Commodities like oil, wheat, gold, and cryptocurrencies are fungible too. This bitcoin is of the same value as that bitcoin. This ether is the same as that ether. According to Merriam-Webster: fungible means “capable of mutual substitution.”

Non-fungible, then, means the opposite. Not capable of mutual substitution. Trading cards are a good example. You wouldn’t ever agree to trade your rare Mewtwo Pokémon card with someone else’s common Pikachu card. A common Pikachu card is fungible with another common Pikachu card, but it’s non-fungible with all other Pokémon cards.

two rows of four Pokemon cards
Trading cards are good examples of non-fungible items

We now understand what non-fungible means. It’s not a new concept. Millions of people play trading card games, collect unique weapon skins in Counter-Strike, and trade rare items in World of Warcraft. So why is non-fungibility such a big deal in the blockchain industry?

NFTs and Blockchain Technology

When you buy a pack of physical trading cards, they’re yours. You can play with them, sell them for a profit, cut them in half with a pair of scissors, burn them in your backyard. There’s no central authority that prevents you from doing any of this to your cards. We take this deep, real ownership for granted with our physical items, but it’s not a property that extends to the things you collect and buy online.

Consider the following: to play a game like World of Warcraft, you need to install Blizzard’s online gaming platform. Doing so means you agree with its terms and conditions, which drastically limit your freedom to do what you want with the items you accumulate in Blizzard games. For example, let's look at point 1.C.iii, iv, and v in the T&Cs, which prohibit the player from:

  • Gathering in-game currency, items, or resources for sale outside of their platform or games.
  • Performing in-game services in exchange for payment.
  • Using the platform for esports without obtaining permission from Blizzard.
  • Using an unauthorized cloud gaming service to stream game content.

The list goes on and on. But the big one lies in point 4 of their T&Cs. It’s about the assets and content that users create in their games. Word for word, here’s what it says:

You hereby grant Blizzard a perpetual, irrevocable, worldwide, fully paid up, non-exclusive, sub-licensable, right and license to exploit the User Content and all elements thereof, in any and all media, formats and forms, known now or hereafter devised.

So not only does Blizzard layer restriction after restriction on you, they also place you in a legal framework where anything you ever create in a Blizzard game is fully owned by the video game company and not by you. Consider how they phrase it too: “exploit the User Content.” Doesn’t have a nice ring to it, does it?

All this isn’t meant to point fingers at Blizzard. You could look at the T&Cs of most video game companies and find similar conditions. My point is that you’re very limited in the things you can do with your assets if they’re stored on a centralized server, even if you were the one who created those assets.

Until 2008, we had no good way of addressing this. Enter blockchain technology. Combining the ideas of P2P, cryptography, and incentivization protocols, whatever you own on a blockchain is finally fully yours. There would be no centralized authority to stop you from doing what you want with your digital assets.

a row of four Gods Unchained cards
A few of my Gods Unchained cards

Gods Unchained is a trading card game that runs on the Ethereum blockchain. I have a collection of over 500 cards, some of which I’ earned through playing the game, some of which I bought directly from Gods Unchained or from other players on platforms like OpenSea. I can do whatever they want with my cards, because I fully own them, and this deep ownership has resulted in a healthy economy of people buying and selling Gods Unchained cards.

That’s why blockchain technology is such a big deal for NFTs. For the first time in online history, we have a way to fully own digital assets. This has deeper implications than you might initially think. For example, it makes digital land possible. People are spending tens of thousands of dollars on parcels of digital land in Decentraland. Would you spend that money if what you’re buying would never be entirely yours? If it wasn’t decentralized? If some centralized entity could go bankrupt or decide to take it all away? I bet you wouldn't.

In Conclusion

NFTs are unique, non-interchangeable digital assets that have become part and parcel of the blockchain industry. Whether it’s digital land, art, trading cards, or kitties, blockchain technology allows people to fully own NFTs without having to rely on a centralized authority who can take it all away at a moment’s notice.

This has already enabled people to buy and sell big-ticket items and even allowed people to earn a living wage in doing so. How this will continue to change society is hard to predict and probably still largely invisible to us today, but there are already many indicators that NFTs on blockchain technology are a powerful and transformative innovation.