What actually is NFT

The first tweet ever tweeted in the history of Twitter. The tweet was by Jack Dorsey. "I'm one of the co-founders of Twitter." And this tweet was somehow just purchased for $2,915,835.47. Are you serious? And it's not just a tweet. Few months back a single jpeg sold for 69 million dollars. The NBA is selling little moments of basketball games for hundreds of thousands of dollars. This is all sorts of digital things that people are purchasing a version of them for lots of money. There are three simple letters that you need to understand to understand what's going on here. Those letters are NFT.

What is exactly is an NFT? Why would you pay for an NFT? When you can look at it for free? Is this a gigantic bubble just waiting to burst? I believe in this space with my whole heart . I'm just fascinated by it, all of it. This story is much bigger than a $600,000 cat gif or a three million dollar tweet. It's a story about human psychology and how the way we value things is shifting because of technology. A technology that some people think may revolutionize our society, while at the same time accelerating the climate disaster. It's really nuts, it's all of these things together and I wanna explain it to you.

NFT stands for non fungible token. It's this very specific word that economists use, it has a very precise definition. I wanna use a different word for fungible for a second. Let's just use the word replaceable. Non-fungible means non-replaceable, you can't replace it, there's only one of them, it's unique.

Non fungible. Let me give you an example of something I feel very strongly about. Let's say you want to buy an orange jacket which costs $39. If you purchase one of these jackets for $39, you don't care what specific jacket they send to you, they're gonna make thousands of jackets in your size, send them to stores, send them to people, and they will send one to you, you don't care which one it is. The jacket is fungible, it's replaceable. As long as you get one that's identical to the rest, it's worth the same to you, they're interchangeable. However, let's talk about one orange jacket that has been with me for a very long time. This is the original, If I went onto the website and paid $39 for an orange jacket that was this exact same model, it would not be this jacket which I own. This jacket is non-fungible. It is the only one on the planet that exists. It has emotional value. It has significance. It is a very valuable thing because it is scarce. There is only one of them, it's valuable to me at least. And I kind of fell in love. Okay, we can put these down for a second.

Everything in our economy is one or the other, fungible or non-fungible. A sack or rice is fungible, you just want a sack of rice, you don't care which one it is. The Mona Lisa, non-fungible, there's only one. Unsurprisingly, non-fungible things are way more valuable than fungible things. To that's the NF in NFT, non-fungible.

Now let's talk about the T, which is token. This is a very internet-y word. And to explain this, I have to explain something called the blockchain. Luckily, there's a way to understand this. Let's say I want to buy three slices of pizza from my friend Anna. She charges me six dollars for these three slices. I don't use cash anymore, so I pull out my debit card, my bank card, and I swipe on her little terminal. As soon as I swipe this card a message is sent to my bank and it says hey, Dams, who has an account at your bank wants to spend six dollars on pizza, and that money needs to go to Anna's bank. This is like the bread and butter of what a bank does, all day, they document every transaction that comes in from all their customers, they send out money to the other banks, and at the end of the day they have a tally of all the money that went out of your account and into your account and they can give you a number. They can say based on all of these transactions, you have $50 in your bank account. And so when that request comes in as I swipe my card my bank is like okay, based on all of your transactions you have $50 in your account, I can send six dollars to Anna's bank, approved. And they approve the transaction. Once that money comes into Anna's bank, Anna's bank is doing the same thing. They're like oh cool, she had $80 and now she has $86, and they add it to her record.

More and more your money is just a number on a screen. It's the result of a bunch of transactions. You don't barter with physical things, you don't use cash as much. So the bank keeping meticulous records of every transaction becomes really important. We trust the bank to do this correctly. With the rise of the internet, people started to wonder. Is there a way that we could do this same thing, coordinate this same transaction of transfer of money between two people without the bank? The result is a very clever concept called the blockchain.

The blockchain fulfills the same thing the bank was doing, but instead of doing this privately on my bank account and talking to Anna's bank, all of the transactions are actually recorded publicly on the internet.

So let's redo this example in a crypto world. Anna charges me six crypto coins for my three slices of pizza. I go to swipe my proverbial bank card to say yes, I want to pay you six coins. Instead of the bank seeing that request for a transaction and trying to validate it, it goes on to this public record where a bunch of people's computers all around the world are keeping track of every single transaction of everyone always. If I don't indeed have the six coins in my account to pay Anna, all of the people's computers who are keeping track of every single transaction will notice that there's a discrepancy. They'll be like whoa whoa whoa dude, you don't have six coins. We're looking at every transaction ever and you don't have six coins. Your transaction is rejected. If I do have six coins, all of the computers looking at the public record will see that request for a transaction and they'll be like yep, approved. You have six coins and now Anna has six coins. And they'll write that transaction into the public record. Now Anna having those six extra coins is now the business of everybody, everybody now knows that.

The point here is that the group verifies the legitimacy of every transaction by keeping an eye on every transaction to make sure that it adds up. Okay, so you're wondering what does the blockchain and this public record have anything to do with cat gifs that sell for $600,000? Well I'm about to tell you. So in my pizza example we talked about blockchain as a way to verify currency transaction. I pay you this much, you pay me this much and everybody knows how much everybody has because it's all public. But this is where it starts to bend my mind a little bit, what if we apply this to something that isn't money or currency? There are tens of thousands of NFTs of all kinds. Some music is being given tokens, lots of art is being minted as tokens and being bought and sold, and then of course there's NBA Top Shot highlight moments, these Top Shot moments from your favorite NBA players have been turned into non-fungible tokens. Jesse made headlines the other day when he paid $208,000 for a Lebron James Top Shot. It's the weirdest thing.

As soon as humans have enough abundance to have their basic needs met, food, shelter, warmth, et cetera, the next frontier is to create value in things that have no inherent value. The value turns into psychological hype. Excitement around a certain thing. We've been doing that forever, I mean the whole art industry is based on the idea of a bunch of people deciding that this painting, this little bit of canvas and wood and paint is valuable, and thus it is valuable. The only different about now is we now have the technology to do this in a non-physical way using this very sophisticated internet technology that is maturing very quickly.

Okay, so this is a lot of hype, and I know you're thinking like cool, there's a bunch of rich people online buying and trading digital art, and there's millions of dollars worth of cards,

I thought you said that this was gonna have the potential to change the world. And I'm getting there, but first I need to talk about the crazy flip side to the NFT fad. The reality is that the technology that is the backbone for all of this, the blockchain stuff that we've been talking about relies on the public ledger thing that I talked about. That is the sort of heart and soul conceptually, but mechanically, like physically what it relies on is computers doing a bunch of little calculations all day and night forever. These computers aren't real computers, they don't have any memory, or screens, or anything. All they do is just make little micro-calculations all day, all night.

Most NFTs are stored on a blockchain called Ethereum. And as of now, in June 2023, the Ethereum blockchain is using 112 terawatt hours of electricity per year. And you're like what's a terawatt hour of electricity? That's the same amount of power as the country of Netherlands. A reminder that generating electricity usually comes from power plants that are burning fossil-fuels, that are putting carbon into the atmosphere which is a big problem. It is a lot of energy. And to think that that much energy is not being used to like, move people around or produce things, it's used to crunch numbers in a weird computer warehouse somewhere so that somebody can buy a fake token of a thing that we only.

It's such an ironic moment where it's like this is all digital, it's all fake, it's not real, but it's having deeply real world effects. I just wanna finish this article now, talking about what this might mean for our world going forward. This is definitely hype, and that's the whole point. I mean these speculation markets are all about hype. We see this all the time with new technologies and new things that people get excited about. Right now I think we are probably in that stage of NFTs. It's hype, it's novel, it's exciting, but what it's doing is it's pushing our minds to think differently about how we validate and verify things I just know that this is a crazy moment where we're getting our heads around a new technology and what it means, and eventually will adapt. This won't be crazy, this won't be novel anymore, prices are going down, but the technology that allowed it all to happen will probably stick around.