What Are NFTs and Why Do They Matter?

by Pranav Ramesh
March 15, 2022

Baseball cards. Paintings. Human hair. Plants. Cookie Jars. Dolls. Sculptures. If you’ve ever noticed, people collect many different types of items. Some of the things people collect are incredibly valuable. Others…not so much. And not only do humans collect some eccentric items, but we tend to build communities of like-minded people based on what we collect.  

NFTs (non-fungible tokens) can be added to that list as one of the newest things people collect, even though they’re not “physical” things. NFTs have been garnering a lot of attention lately, in part because of the astronomical sale prices some have fetched, but also because of the buzz around NFT marketplaces and all the potential that lies within.  

Are you looking to educate yourself about them? Let’s learn more about NFTs to see if collecting them, or investing in them, could make sense for you.   

What is an NFT? 

NFTs are one-of-a-kind digital assets (often artwork, but increasingly collectibles, event tickets, and even tweets) that exist entirely in the virtual realm. NFTs, a wholly digital commodity, are not interchangeable (hence non-fungible) which means they are totally unique. This is unlike paper bills and other cryptocurrencies, which have unique markers to identify them, but identical functionality. 

Pieces exchanged in NFT marketplaces are usually organized into sets that share some similarities. These sets, or collections, can vary wildly in substance, from collectible trading cards to art pieces to virtual spaces in online games. One study of the NFT revolution categorized collections into six types: Art, Collectible, Games, Metaverse, Other, and Utility. 

Why do NFTs have value while other digital assets don’t? 

NFTs have revolutionized the market for digital assets because of their ability to guarantee ownership of a digital piece. Think about the value of a physical piece of art, say a Monet or a Murakami or a Kahlo without any provenance associated with it. The provenance of a piece is that crucial bit of information detailing, generally, who created the piece and serves as a record of ownership used as a guide to the piece’s authenticity. Who would willingly purchase a piece of art without the ability to prove authenticity and ownership? It’s not just high-end art that values authenticity and provenance. Even used cars have increased selling value when their history and provenance can be authenticated! 

Before NFTs, there was no way to determine who owned a piece of digital art from someone who downloaded a copy of the file to their computer. We know a basic principle of markets is they can’t operate without clear rights of ownership. In order to have a functioning market, and for someone to buy a product, it needs to be clear who has the right to sell that product. And once sold to a new “owner” there needs to be able to be something that can confirm a transfer of ownership from the person selling the product to the buyer/new owner. NFTs created a market because they give the seller and buyer something that represents ownership.