So, a guy just spent $1.3 million dollars worth of Ethereum for a picture of a rock. I know what you’re thinking… WTF?!
Okay so NFT, a combination of letters that i’m sure you have heard recently, it has become a hot topic, and if the phrase ‘digital collectibles’, confuses you, you’re not the only one.
One major question is ‘How can you ‘own’ a picture or digital item?’, to explain this, we first need to ask ‘what does it mean, to own anything?’
This is a question that might sound weird, because since we were children we have always intuitively known what it means to own something, or not.
However, I’m sure there were times in your childhood where you weren’t entirely correct in your assumption about what you owned, maybe you had a dispute with another kid about who’s toy firetruck it is, or who’s cake it is, or who was first in line, and you passed on the question to an authority, be it a teacher or a parent, who after hearing the dispute, decided who the rightful owner was, be it a firetruck or position in a queue.
As you get older, you start to pick up on these unwritten social rules of ownership and it becomes intuitive, but of course, disputes still happen.
So, as a society we need a system in place that we collectively agree upon, so that we can always resolve these disputes, in a fair, and just way.
Introducing the latest in ownership technology; Property Law.
Now, that super exciting term usually boils down to contracts, written documents that say, for example, ‘House number 3, on 52nd street, rightfully and entirely belongs to John Doe’.
But we have a problem, John Doe could have written that himself, and it could in fact be somebody else’s house entirely, or John could have never even heard of the house or the document and wants nothing to do with it.
We need some kind of system, a unique identifier for each member of society to double check how John Doe ended up owning that house, which more or less, is two questions; did he build it? Did he buy it? And if he did buy it, who did he buy it from, and further, who did he buy it from?
We need a sort of ‘chain’ of ownership, that goes all the way back to the houses creation, that the government can check during a dispute, to verify that John does actually own that house.
Introducing the latest in ownership technology; Signatures.
If we just get everybody who builds a house to sign it with their unique signature that only they can produce, then whoever buys that house from them, can request a written document that says ‘I, Bob the builder, legally transfer my ownership of this property to john doe, signed; Bob’
This is good, because now if somebody random enters the house, and the owner gives him a quick little left-right-goodnight, he won’t get in trouble, because he legally owns the house, and the intruder will feel the full force of the law when he is in prison.
Now this ownership gives john a lot of options, he can live in the house, destroy the house, sell the house, and he will never need a word of approval from anyone, because everyone agrees, that is Johns place.
This situation where everybody collectively agrees on the truth of ownership, is called consensus. And this system expands beyond houses, we can reach consensus on who owns a phone, a car, a private jet, or a painting…
But what about digital art? Or a photograph? What if we wanted to own something that wasn’t physical, and we didn’t want to depend on the government and pesky contracts and signatures (which can be forged) to keep track, and enforce, who owns what?
Introducing the latest in ownership technology; Blockchain.
Remember a minute ago when I said;
‘…we need a sort of ‘chain’ of ownership, that goes all the way back to the houses creation, that the government can check during a dispute, to verify that John does actually own that house.’
Well I said ‘chain’ on purpose, sound familiar? Blockchain right? This is essentially at the heart of what blockchains are, a complete written history (ledger), of who owns what, over time.
But if we already had a consensus system in place, why would we need blockchains?
Well, remember, we ideally don’t want to depend on the government and pesky legal contracts that can cost a fortune to have lawyers write, and may have loopholes in, that could be exploited later by someone trying to steal your stuff.
Remember all the options that our friend John Doe had after buying his house? Well when you think about it, ‘buying a house’ is really just buying the right to those options, to live in or sell it etc… without being punished by society, aka, the law.
But john could still demolish the house, or pretend to have ownership of it and sell it, or just live in it until somebody kicked him out… only difference is, he would go to prison afterwards.
Well that’s where blockchain comes in, because blockchain is a system that doesn’t rely on any central authority such as the government (to decide who owns what) we are able to trade tokens between each-other, and if you try to trade a token that you don’t own, instead of being punished for it afterwards, you simply wont be able to in the first place
This is because of the way that blockchains are built, the fancy term for it is ‘Distributed Consensus Mechanism’, which just means that everybody involved in the network collectively decides who owns what, and the responsibility of that is distributed across the network to all of its participants, rather than to a single entity such as the government.
Now, this is great for tokens that are created by miners (I’ll explain that in another article), but tokens such as Ethereum and Bitcoin have an attribute called ‘fungibility’, meaning they can be cut into pieces, and swapped for each-other, you don’t have to have 1 Ether, you could split it in half and have 0.5 Ether.
But with artwork, you cant cut it in half, so if you wanted to send the right to the option of selling (aka ownership), your digital photo, you would want a system in place that you could prove your own ownership of that item as a whole.
This is where Non-Fungible Tokens come in (NFT’s)
The Ethereum network put in place a system for this, where anybody can upload photos to their Ethereum account as NFT’s, and instantly give themselves ownership of it, in other words, the right to sell it to somebody else.
So now, instead of having physical Pokemon cards, for example, (which can be faked btw) we have a way to create digital collectibles, and trade them amongst each-other, keeping track of every trade that has happened on a completely transparent ledger of that items movements.
Anybody, anywhere, can look at the Ethereum blockchain, find the digital signature of an NFT, and trace it back to its origins, from the original NFT creators Ethereum account, and verify that it is indeed a limited edition charizard number 5 from dopeNFTartist69.
And there are companies, such as my good friend Vinay Gupta over at Mattereum (www.mattereum.com), that are combining the functionality of NFT’s with real word property law, contracts, and ownership of real world items.
In fact I was actually in the room when the worlds first legally binding NFT transaction took place at the Mattereum Hackathon a few years back.
Anyways, I hope this has been useful to give you a bit of context around NFT’s, and why people are spending millions of dollars worth of Ether on collectible Jpegs.
Follow me on my socials if you found this useful :);
Instagram: @angelo.ramana @permissionlessltd