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What Is A Non-Fungible Token Or NFT? A Nifty Answer!

The 69 Million Dollar Question

Let’s start our journey into the world of NFTs with a riddle: What type of art can you get for about $69 million?

Probably plenty of things, but if you were going to blow a large amount of money on a single item you might consider

what is a non-fungible token?

The “Femme au béret et à la robe quadrillée (Marie-Thérèse Walter)”, painted by Pablo Picasso in 1937 and last sold in 2018 for a touch under £50 million

Or perhaps:

The digital artwork, “The Everydays: the first 5000 Days” created by Mike Winkelmann in 2021 and sold in the same year for $69.3 million.

You’ll notice I used the word “created” when talking about “The Everydays: the first 5,000 Days” – that’s because there’s a significant distinction. It’s not a painting delivered in physical form by a famous artist, rather it’s a digital collage of 5,000 digital images. It’s currently also the highest price paid for a Non-Fungible Token (NFT) - in this case at an auction by Christies. 

While it may sound strange or unwise to buy just a jpeg, what constitutes art is in the eye of the beholder. With the art world, booming asset prices and lockdown savings fuelling interest in NFTs, perhaps the artist, Winkelmann explains it best: “Honestly, at the end of the day, if somebody will pay for it, then you can sell it.”

What is a Non-Fungible Token? What are NFTs?

A Non-Fungible Token is a digital token that can’t be replaced – it’s unique, just like the Picasso.

Generally, digital assets can be infinitely recreated with very little effort – indeed, you can still do that with the NFTs mentioned above. This is similar to having a print of the Picasso – many people have a print of a famous artwork in their homes, and this does not change the status or ownership of the original. NFTs make this distinction between original and copy possible in the digital world and it's done by associating the NFT with a unique cryptographic key that defines it as the original.

The cryptographic key, which is just a string of numbers, could obviously be altered or recreated, so to maintain uniqueness, an extra step is needed. The cryptographic key needs to be recorded in a public ledger, or as popularly known a blockchain. The public ledger means there is no single source of truth that can be altered or deleted. The ledger is distributed across a vast number of machines. If you alter the ledger in one place, all the other places remain unchanged, and you can’t alter all of them. This asserts the originality and ownership of the digital asset so it can be collected and traded in much the same way as an original Picasso.

As you can see, it’s simple!

If you want to know more, here is a pretty good video explaining NFTs, what they are, what they’re based on and what they mean or could mean today and in the future.

So why does this matter?

There is a lot of hype about NFTs in the market today. However, despite news reports, eye-wateringly high values and the digital sale of popular internet memes such as “Charley Bit my Finger” and “Nyan Cat”, the trade is still in its infancy. As the market in NFTs grows, financial institutions need to understand what the implications could be for them.

In our next post in this series on NFTs, my colleague Erik Stretz is going to take a look at the wider impact of NFTs for financial services organizations and in particular the implications for fraud and anti-money laundering.

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