Your Kids Know More Than You: NFT Edition

The ABCs of NFTs.

0:00 / 0:00

Just when you thought you had a handle on cryptocurrency, there’s a new frontier — non-fungible tokens (NFTs). NFTs are, suddenly, everywhere, and the term sounds like it requires a Master of Econ to understand it. Don’t panic. You’re already pretty familiar with fungible goods, since the most common one is money. A $20 bill or a Bitcoin is fungible, Picasso’s “Guernica” is not.

Are we having fungible yet? 

Fungibility, which sadly has nothing to do with mushrooms, refers to any good that is mutually interchangeable with another. A $20 bill has a fixed value, and it’s functionally identical to all $20 in that currency. Shares in a company are fungible — a share in GameStop is the same as any other share in GameStop. Commodities work in the same way: the market agrees on the price of a barrel of oil or an ounce of gold, as long as it meets a “basis grade” standard. Regular cryptocurrencies are fungible tokens (FTs): Bitcoins are digital, but all have the same value.

Contrast this with your child’s crayon drawing attached to your fridge: could you exchange that for a precise dollar amount? Maybe Grandma would buy it… if the price were right, but your bank almost certainly won’t, as that (charming) doodle is non-fungible. It’s a unique artifact with no set value, and it’s not intrinsically interchangeable with other works or assets.

Welcome to the NFT party

A non-fungible token is a digital object that’s one of a kind. The ownership of the object is traceable, standardized through the same blockchain technology that enables cryptocurrencies. (A blockchain is an impenetrable ledger of transactions shared across a network, allowing users to store both cryptocurrencies and NFTs in a secure digital wallet.) This technology enables users to officially “own” an image, video, or even a tweet. Although someone can still take a screenshot or otherwise copy your prized piece of multimedia, they won’t have the unique code that proves it truly belongs to them. Since these things are one of a kind, they’re worth exactly as much (or as little) as someone else will pay for them.

So which kind of token is better?

There is no right answer to this. Cryptocurrency fungible tokens (FTs) fluctuate in value, but at least that value is universally agreed upon. At any given moment, an Ether is worth as much as an Ether, nothing more or less. This makes FTs liquid, since you can easily sell them, and it makes them (reasonably) reliable, since you can know their current worth.

NFTs are tougher to value. Because they’re unique, it’s difficult to know the market value until you try to sell one. Of course, uniqueness signals scarcity, and that scarcity is driving demand, with year over year growth up 38 060%. 

So, is this a bubble or a wise investment? If the Cryptopunks know, they’re not saying. 

We’re happy to watch from the cheap seats.