NFT is a phrase that is popping up everywhere. Investors talk about NFTs with a mix of praise and terror. It’s a buzzword in the art community. You see a lot about them, but what are they? Why are they so popular?
The only way to properly answer these questions is to take a dive into the mechanics of NFTs. This is going to be a technical discussion, and by the end, you’ll have a better idea of what an NFT is and how it works.
What Is an NFT?
For starters, NFT stands for non-fungible token. Essentially, it’s a digital certificate of authenticity that cannot easily be forged or replicated. You can compare it to a physical certificate of authenticity. The purpose is to demonstrate that the certified object is what it claims to be and not a replica or replacement. NFTs do this in a digital space.
How Are NFTs Used?
With this idea, NFTs are often used to verify ownership of digital information. Currently, the most common use is to certify ownership of digital art. As an example, the founder of Twitter created an NFT of his very first tweet and sold it. Someone now owns that tweet.
Another common example is with video game companies. For their games, companies create unique digital art. They can sell NFTs of this art for fans of the game who want to own something exclusive related to the game they enjoy.
How Do They Work on a Technical Level?
NFTs use blockchain to verify authenticity. Originally, NFTs were built on Ethereum, which is one of the most-used blockchain systems. An NFT is created as a unique entry in the total blockchain ledger. Ownership of that NFT can then be transferred on the blockchain ledger to verify a change of ownership.
How does that work?
Blockchain keeps a digital ledger by encrypting information through a hash function. The entries in the digital ledger can be decrypted with a unique digital key. Instead of providing that key for decryption, blockchain encourages large numbers of users to try to guess the key.
Since the hash function is so complicated, no single computer could guess the key in a lifetime. It takes very large numbers of computers to guess a key correctly. When someone does guess the key, it verifies that “block” on the digital ledger, and the system moves on to verifying the next block.
All of the information on the ledger is publicly visible, so it’s easy to identify the current owner of the NFT. But, since verifying the ledger is so difficult, it’s virtually impossible to forge ownership of the NFT.
It’s important to understand that the blockchain builds on itself. In order to decrypt the next entry in the ledger, the previous entries are used for verification. So, if you wanted to forge an NFT, you couldn’t start in the middle of the ledger. You would have to forge the entire blockchain, and that’s what makes blockchain verification so secure.
On top of that, blockchains are decentralized. There is no master blockchain ledger stored on a server somewhere. Instead, it is stored across all of the users that participate in the verification process. So, if a single user wanted to forge their own blockchain, all of the other users would contradict the forgery, and it would become obvious. This ultimately means that there is no centralized place a person could hack in order to manipulate the blockchain ledger.
Here’s the bottom line: due to the use of blockchain verification, NFTs are robust digital certificates of authenticity. The fact that they can verify unique ownership of something is what makes them so valuable, potentially.