What NFTs are and how they work

I have been casually following the story about non-fungible tokens (NFTs) but had little idea what they were other than that an NFT was some form of digital work that one could own. The radio program On the Media had an entire show where they talked about it and that rekindled my interest and gave me some idea about this new world of speculation.

Host Brooke Gladstone discussed NFTs with Anil Dash, one of the people who in 2014 developed the idea that led to NFTs. Dash says that he and an artist friend Kevin McCoy did this as a blockchain-backed means for artists to assert ownership over their digital work. Dash now says that that initial goal of creating ownership rights for artists seems to be in danger of falling by the wayside, to be replaced by the kinds of speculative behavior that we have seen before with bubbles.

The system of verifiably unique digital artworks that we demonstrated that day in 2014 is now making headlines in the form of non-fungible tokens, or NFTs, and it’s the basis of a billion-dollar market. Head-spinning prices are now being paid for artworks that, just a few months ago, would have been mere curiosities. Last week, Kevin Roose, a technology writer for The New York Times, offered a digital image of his column for sale in a charity auction, and a pseudonymous buyer paid the equivalent of $560,000 in cryptocurrency for it. McCoy has just put up for sale the very first NFT we created while building our system. Capturing an animation called Quantum, it could go for $7 million or more, Axios reports.

if you liked an artwork, would you pay more for it just because someone included its name in a spreadsheet? I probably wouldn’t. But once you leave aside the technical details of NFTs, putting artworks on the blockchain is like listing them in an auction catalog. It adds a measure of certainty about the work being considered. By default, copies of a digital image or video are perfect replicas—indistinguishable from the original down to its bits and bytes. Being able to separate an artist’s initial creation from mere copies confers power, and in 2014 it was genuinely new.

But the NFT prototype we created in a one-night hackathon had some shortcomings. You couldn’t store the actual digital artwork in a blockchain; because of technical limits, records in most blockchains are too small to hold an entire image. Many people suggested that rather than trying to shoehorn the whole artwork into the blockchain, one could just include the web address of an image, or perhaps a mathematical compression of the work, and use it to reference the artwork elsewhere.

We took that shortcut because we were running out of time. Seven years later, all of today’s popular NFT platforms still use the same shortcut. This means that when someone buys an NFT, they’re not buying the actual digital artwork; they’re buying a link to it. And worse, they’re buying a link that, in many cases, lives on the website of a new start-up that’s likely to fail within a few years. Decades from now, how will anyone verify whether the linked artwork is the original?

This somewhat tongue-in-cheek article explains what an NFT is and how it works.

“Non-fungible” more or less means that it’s unique and can’t be replaced with something else. For example, a bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. A one-of-a-kind trading card, however, is non-fungible. If you traded it for a different card, you’d have something completely different.

NFTs can really be anything digital (such as drawings, music, your brain downloaded and turned into an AI), but a lot of the current excitement is around using the tech to sell digital art.

You can copy a digital file as many times as you want, including the art that’s included with an NFT.

But NFTs are designed to give you something that can’t be copied: ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork). To put it in terms of physical art collecting: anyone can buy a Monet print. But only one person can own the original.

Here is one example. It consists of a memorable video segment that I originally saw some time ago on John Oliver’s Last Week Tonight when he was talking about cryptocurrencies. He had a clip showing a New Yorker named Carlos Matos who was flamboyantly promoting a cryptocurrency called BitConnect and spoke (and even sang) at their 2017 annual conference in Thailand about how much money he had made, that his $25,610 investment had grown by $100,000 in just a matter of months.

His wife kept warning him that this seemed to be too good to be true and that it was a scam but he refused to listen. She was right. It turned out that Bitconnect was a $2.5 billion Ponzi scheme that was shut down by the government. Matos claims that he was not part of the fraud but was one of the people who in the early stages of any Ponzi scheme do make some money and become enthusiastic promoters. He lost all his money later and his wife divorced him but is now trying to make some money by selling his viral video as 28 NFTs, each one dealing with one segment of his speech. He gave an interview about his experience.

Any form of digital content can be made into an NFT. Anyone can make something that they created into an NFT that is then put out for sale. I could, for example, make this blog post into an NFT and offer it for sale. (If you interested in buying it, drop me an email with your offer. The bidding starts at $100,000) My claim to be the creator of this content and thus entitled to be the original owner of the NFT and thus entitled to sell it is likely indisputable but that is not always true. In the case of the Matos BitConnect video, for example, is he, as the performer, the creator, or is the person who took the recording the creator? I suspect that as prices skyrocket for NFTs, there are going to be many legal challenges as to who the original owner is and has the right to sell it.

You may wonder, as I did, why anyone would pay to own a piece of digital content that you can see for free on the internet any time you want, like the Matos video. As far as I can see, NFTs are very similar to other forms of collectibles, except that they are in digital form. People buy expensive paintings even though all of us can see photographs and other reproductions of the same works for free. It is the ownership that is of value. What blockchain technology does is to provide authenticated ownership of digital items, and that item can be bought and sold just like any tangible collectible like paintings, stamps, and Beanie Babies. Blockchain ensures the provenance of the digital item.

The incredible prices being paid for some NFTs boggles the mind, with people paying hundreds of thousands of dollars for cat memes and the like. Why do they do this? Perhaps it is because it is not easy to get one’s hands on a Monet. Other collectibles can be equally difficulty to procure. But the internet makes things easy to buy. The world of technology keeps spawning new items for people with lots of disposable income to spend on collectibles of various forms, and the intrinsic value of the item has become immaterial. As one of the people promoting NFTs and who sold 100 images of a rock that he got from Clipart from Windows 95 says:

“[W]e saw that we’re like damn, like, that’s so stupid. It’s going to move. That’s like the kind of thing in crypto. Sometimes it’s like the dumber the investment, the better it is.

[T]he community is around sort of flexing and what they are flexes at to say. I just spent $2 million on a pet rock. The more useless thing you can throw your money at like the bigger status symbol it is.”

I don’t get it but then, I never get it.

Which NFTs will have lasting value and which ones will turn out to be bubbles remain to be seen.

I for one have no desire to be part of this world but I can see people being drawn to them in the hope of making a lot of money quickly. It seems to me to be driven by FOMO all over again, the next big thing until a new one comes along and the money starts chasing after that.


  1. garnetstar says

    I don’t get it either: I do have this primitive problem with things that don’t exist materially. They may have value, but my ape brain doesn’t understand them.

    There’s one difference when it comes to art: you do get a different experience when you’re looking at the actual original than when you see a reproduction. You can see the actual work of the artist, the brushstrokes, say, or the actual color scheme wholly uninfluenced by reproduction. You can look at the art close up and far away, seeing how it’s different. Then there’s the size and the space it’s meant to fill up. And, all that.

    Putting originals on a blockchain doesn’t sound like it helps artists so much: like they say, it’s like listing it in a catalogue, no one can see it, etc., unless a reproduction is put out there, and then, isn’t viewing the reproduction exactly the same experience as viewing the original? If you wanted the original, wouldn’t it be better to incorporate some kind of indelible (if such exists) digital mark or signature?

    It’s an inherent limitation of the artform, it seems.

  2. says

    The block chainatics are looking for new ways to make sequential hashing seem sexy. I think it was Lamport who first cooked that idea up back in the 50s or 60s. The old Soviet encryption suite GOST used cipher block chaining of arbitrary-sized blocks of zeroes to authenticate messages and integrity (unfortunately it was a known plaintext) -- I believe the term “block chain” itself is reference to cipher block chaining, which is a feedback mode in Feistel network ciphers since the 60’s.

    Block chain is *yawn* but there are suckers with money excited about it and cryptographers are preening hard in the 15 minutes they’ve got. Good for them.

    Block chain doesn’t really do anything more than public key signatures with published certificates, and copies of the data published in duplicate, except its a whole lot slower and uses stupid amounts of bandwidth. In principle it bypasses the need for a trusted third party, but you can n-way split keys and escrow them.

    Back when I used to publish code, I signed a manifest of hashes with my PGP key that was on the MIT servers and elsewhere. A lot of us did that but we didn’t call it “NFT” and it wasn’t inefficient enough, apparently. I was curious whether anyone ever checked the signatures and I am pretty sure nobody did because I released a tarball of the firewall toolkit signed with a PGP key claiming to be Bill Clinton with a tiny RSA key -- and nobody noticed.

    Speculating on bitcoin and NFTs is gambling. That can be lucrative and entertaining but its not groundbreaking, except in terms of how inefficient and stupid it is.

  3. says

    Suppose I use an Epson inkjet printer to print you a digital photo. The bits comprising the image, that are rendered onto the paper by the printer are not unique -- I can make 1000 prints that are for all intents and purposes identical. If there is value to the image it’s whether I can control the quality. I know many photographers who keep the full resolution versions of images closely held and only publish downsampled versions that won’t print as large or as well. That allows the artist to control/create scarcity and therefore value. As one of my photographer friends says “the only thing of value on an inkjet print is my signature”

    This is an old problem. Ansel Adams notoriously did “limited edition” prints from some of his negatives over and over. He didn’t even do the prints anymore, John Sexton did them to Adams’s spec. The only contact Adams had with the print was when he signed it. Declaring such and such a “limited edition” was manipulating the perception of scarcity. I know one photographer who punched a hole in the negative and attached it to the back of the print, to manipulate scarcity. He used to shoot a couple rolls of pictures he thought were marketable! It’s all about manipulating apparent scarcity.

    The whole point of digital media is that it can be perfectly copied with high reliability and no loss of quality. If an artist wishes to manipulate scarcity, they should sculpt or paint and leave digital media alone.

    However, consider Beeple. Beeple makes a 3d scene using digital assets and textures using (let’s say) Blender. The images rendered out of Blender are performances, if you will, of a “score” scripted in Blender and as Blender’s renderers change the performances will change, too. What is scarce and valuable? Beeple can render an infinity of views of the same scene in Blender. If I wanted to feel that I “owned” an original of Beeple’s art I want a rendering (the print) and the only copy of the Blender file (the negative) that created it. Beeple missed a trick by not selling those!

  4. Holms says

    It should be pointed out that the NFT does not actually grant you ownership of anything. Take for example Twitter CEO Jack Dorsey’s NFT for the first tweet he ever made. The person buying it paid about $2,900,000 dollars for the privilege, but that person does not own the tweet. The tweet is still to be found on Dorsey’s twitter feed, with Dorsey as its author. What the person bought is a unique receipt of sorts, a special internet link pointing to an entry in a database of NFTs. The database contains many such entries, with each entry being pointed out by its own unique NFT.

    Owning the NFT to the tweet entitles the owner of the NFT to say “I own the NFT to this tweet”. That’s it. They do not own the tweet, they own the token linked to the database entry which certifies that the token is linked to the tweet.

    Have you heard of those companies which claim to sell the naming rights to stars that don’t yet have a name? They take people’s money, and in return they maintain a database of people that have paid to name a star, which star they chose, and the name they gave it. The star is real, the astronomical coordinates are real, but all the purchaser gets for their money is a database entry showing that John Doe purchased the naming rights to some star and called it “Jane’s Star” for his wife. In all practical senses the star does not have that name, it is just an entry in a database that says so. He has been scammed.

    Those companies are scams, and NFTs are identical. Money is being accepted, and in return the purchaser gets a unique database entry saying they own something they don’t actually own.

  5. garnetstar says

    Thanks, Marcus @3, for shedding some light on this. So, are you saying that digital art and artefacts *are* inherently difficult or impossible to sell with benefit to the artist, because, as you say, it’s impossible or very difficult to manipulate them to manufacture scarcity?

    I can see that. As you say, even with a photo on film, you can make many prints and change each one subtly, it’s only the negative that is unique. You know code: is there no way to embed some indelible mark or signature into a digital artefact?

  6. John Morales says


    You know code: is there no way to embed some indelible mark or signature into a digital artefact?

    Yes, and no.

    Being a digital artefact, such a code can easily be part of it (cf. steganography), OTOH, being a digital artefact, any portion of it can be manipulated.

    More to the point, when it comes to digital artefacts, a copy is no different to the original.
    Not even slightly.

    (Also, cf. ‘dust theory’ — any sufficiently large collection of entropic data will contain a subset matching any given subset of data)

    Basically, NFTs are just a pointless way to get bragging rights amongst the clueless.
    They have no intrinsic or extrinsic value, only pseudo-value.

  7. says

    So, are you saying that digital art and artefacts *are* inherently difficult or impossible to sell with benefit to the artist, because, as you say, it’s impossible or very difficult to manipulate them to manufacture scarcity?

    Not exactly -- the artist has to be careful how they sell digital assets. Usually that means that the actual source bits are kept and some kind of rendering of the bits is sold to maintain scarcity.

    With a 3D scanner, a CNC machine, and a big chunk of marble, one could actually reproduce an exact copy of Michaelangelo’s David. An artist nowadays has to think of maintaining scarcity before and after rendering a work if they want to sell it in a scarcity economy.

  8. lanir says

    Short version: Because files do not change when they’re read, common image file and webpage formats don’t include crypto, and digital files are designed to be infinitely copyable, NFT stuff is substanceless hype. Details below.

    If you want to understand what’s going on with digital files you can think of them like a book. What is a book? It’s a lot of letters making up words that make up sentences. The sentences give you enough information to build a mental framework that conveys an idea.

    With a real book you can differentiate different print runs, editions, etc by making one large type or in a different font. You can use different cover art or make it paperback or hardcover. You can add art or maps or diagrams and tables. You can add a foreword or afterword to comment on the work. You can print it on different types of paper. You can number each copy and sign them. There are a lot of things you can do.

    Digitally there isn’t much. Where a physical book only has to be something we can look at and make sense of, computers require a strict format for data or it’s incomprehensible gibberish to them. You have options for converting between different formats for most types of content but you can lose data that way. For example if you took Marcus’s original post which is in HTML format you could copy and paste it into a plain text document. But doing so would remove a lot of formatting and all multimedia content. No video, no links, no line down the side, color changes or larger font for quote marks on the quoted parts. That data would all be lost. And either version would have to be copied as-is to display correctly. Add gibberish at the end to make your copy unique and you either break the format or you see said gibberish tacked onto your message.

    On the other side of things, we are really bad at repeating patterns we don’t recognize. It takes a human a lot of work generally to memorize something in a language they don’t speak and copy it down later. A computer doesn’t have such problems. They can shuffle files around whether they understand the contents or not. And computer files are designed to be copyable. Nor do they change when read. If you download one if the icons on this page you have the same image file as the server that hosts it. If you close it and open it again or copy it to a USB drive it’s still the same image because the files are all identical.

    Because of this, the token may be no fungible but the resource it points to can never be. It’s a bit like having someone famous sign a blank paper for you. The signature is disassociated from their work. That’s the kindest light I can think of to view this in. There just isn’t much here.

  9. says

    There is no such thing as an original image online. The original data is on a hard drive or server somewhere, but every image people see is newly generated.

    Anyway, NFTs are like printing up a certificate of authenticity and selling that. What’s particularly funny is watching people online who are very into cryptocurrencies and NFTs getting confused and treating it like copyright, getting very worked up about what they see as violations of their assumed ownership of the image (which is even more amusing considering how many NFTs are created that point to works owned by other people who did not give permission for this). Yes, sometimes the creators will also transfer ownership of that copyright and then there is legal standing over illicit use but NFTs are an entirely different matter. I’m curious what kind of legal protection the owners of NFTs even have. Right now it all seems to be a big handshake agreement that people own these things.

  10. xohjoh2n says

    @10 except you can hug a beanie baby. There’s not much you can do with an NFT… except hopefully sell it to someone more stupid than you…

  11. brucegee1962 says

    I keep thinking of Dutch tulips with these things. Surely the eventual crash is inevitable, and the whole thing is just a method of transferring money from the gullible late adopters to the savvy early adopters. Right?

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