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Why NFTs Matter

Welcome to 2021, the Year of the NFT. Full of fanatics and skeptics alike, the NFT has taken the cryptocurrency world by storm and has somehow made lots of people lots of money.

NFTs come in many forms: generated avatars (CryptoPunks and the Bored Ape Yacht Club), sports highlights (NBA’s TopShot moments), plots of digital land (Decentraland), and more. The craze clearly isn’t isolated to a niche community; even Facebook has completely rebranded itself towards a universe where we “own” virtual assets.

There are so many articles discussing NFTs that I would probably die of old age trying to recollect everything I’ve heard and read about them, recreate people’s arguments and counterarguments, and recount their active and proposed use cases.

This post will try to discuss something more meaningful than digital trinkets: it’s about relationships. Fundamentally, issuing a token codifies the potential for a relationship, and buying that token immortalizes it.

What’s an NFT, anyway?

First, a quick primer on what an NFT even is. Those of you reading who are tired of hearing again and again about the meaning of an NFT should skip ahead to the next section.

Fungibility

NFT stands for non-fungible token, which sounds even more mysterious initially. The idea of “fungibility” is tied closely to the concept of uniqueness: if something is fungible, I can give you a replacement or replica and it should be worth just as much. The dictionary defines it as:

exchangeable or replaceable, in whole or in part, for another of like nature or kind

TheFreeDictionary

A dollar bill, for example, is fungible: no dollar bill is worth more or less than any other (collector’s versions aside). The same concept can be applied to cars, desks, and almost any item you buy at a big-box store.

A master’s artwork is an example of a non-fungible item: there is one, and only one, of da Vinci’s Mona Lisa. Even if I can create a replica that is completely indistinguishable from the original, it will not be a true replacement. The first print of a comic book or baseball card is another example of a non-fungible item; the second print, however identical, simply will not do. Things with sentimental value are typically non-fungible, as well.

Basically, for all intents and purposes, non-fungible = unique.

Tokens

A token is exactly what it sounds like: having a token in an arcade lets you play a game, and having a token on a blockchain lets you do “something” with it. That “something” depends on the token, of course. For example, the Brave browser offers people tokens for watching privacy-respecting ads. More commonly, however, tokens are traded for other tokens or “real” cryptocurrencies (like Bitcoin).

Tokens don’t have to mean anything and they can be created (or “issued”) by anyone. I could issue a “best friend token”, and anyone who I sold it to would “be” my best friend. A government could issue a “citizen token”, and anyone owning the token would “be” a citizen. I say “be” in quotes here because these tokens are nonsense, of course: neither friendship nor citizenship can be bought/sold.

In the context of NFTs, the “token” part is related to some non-fungible item. For example, digital artists can issue tokens representing their work and ownership of the token represents “ownership” of the work. This is exactly what happened with the artist “beeple”: he “sold” his work, “Everydays - The First 5000 Days” to someone for $69 million (The Verge).

I put quotes around “ownership” here because it’s a weird, nebulous concept and not one I’m interested in discussing. Whether or not owning a token means owning an item is a dead horse beaten down by plenty of other discussions. There’s something far more interesting at play, here.


In summary, when you hear that someone owns an NFT, you should translate that into hearing that they hold a token that represents some unique digital asset.

Why They Matter

Ironically, the folks criticizing NFTs often use the true conceptual value of an NFT in their counterargument for why NFTs are useless. This reddit comment actually offers some genuinely good critiques of NFTs as they stand today, but then throws this in:

the non-fungible (un-reproduceable) part of NFTs is usually just a receipt pointing to art hosted elsewhere

Or, as another example, edent’s article on blockchain-less NFTs notes that

In essence, [that’s] all an NFT is - the seller signing a statement that the buyer has sent them money related to a thing.

Yup.

That’s exactly what I want to explore further. Everyone is overlooking this subtlety: NFTs provide a receipt of a specific relationship. It’s formulated as an ownership transfer, but that’s not where its intrinsic value lies.

It’s not about “buying” a particular item.

It’s not about “owning” some arbitrary digital trinket.

It’s not even necessarily about the price that you paid.

The value of an NFT is that it’s an irrefutable, public, and digital record of a specific relationship between the buyer and seller.

To relate this to the current NFT world, it’s not about “owning” the art; it’s about demonstrating a relationship with the artist. It’s about the existence of the transaction itself and what it represents. It’s an enhanced digital receipt.

Digital Receipts

Obviously, the idea of a digital receipt isn’t new.

You get one every time you make an online purchase, and plenty of payment processors let you verify that receipts are legitimate via digital signatures.1 In fact, this lets digital receipts correlate even better than the receipts we have in the physical world: a “certificate of authenticity” can be convincingly forged, but a digital signature cannot.

Even in the world of digital receipts, though, accessibility is a problem. Yes, I could integrate Stripe into my storefront, then check signatures on a payment action, then sign the payment action myself, then finally broadcast it to the world alongside the identity of the purchaser. However, that seems… impossibly complicated for most people.2 I could similarly follow edent’s guide, “An NFT Without a Blockchain,” but it’s again a complicated, multi-step process involving obtuse tools.

There’s a number of problems in these systems:

  • identity management: for each seller to be able to uniquely broadcast a receipt, they need to be able to digitally sign it.

  • transparency: for a seller to be able to broadcast receipts to the world, they need to do it intentionally.

  • specificity: a seller using this method has a highly-customized method for broadcasting the receipt.

I’ll expand on each of these in turn, and explain how NFTs issued on a blockchain are different than digitally-signed receipts. The chain has “batteries included” in a way that simply impossible without it.

Identity Management

To digitally sign something, you first need an asymmetric public/private keypair. As a seller, not only do you need to have a “personal” keypair (one that identifies you as a seller), you also need a “per-product” keypair (one that identifies the thing you sold). Without the latter, you can’t get the specificity of an NFT: an owner of your token can only claim that they bought a piece of art from you, not a specific piece of art. They might be able to get a receipt signed for your store, but not for your item.

With a keypair for every product, you can refine buyers' relationships exactly. You can issue a separate token for the “first edition,” a token exclusive to your subscribers, a token for family, etc. Of course, you need to take into account what it means to transfer these tokens, but that’s up to you.

Creating a keypair isn’t trivial for a non-technical person. Starting up a blockchain wallet application, though, is. They solve this usability problem: account creation is trivial and digital signatures are baked directly into the very concept of a transaction.

Transparency

The complicated, manual chain of events necessary to prove the aforementioned relationship suffers from a lack of transparency. The buyer has to trust the seller to provide him with a valid receipt, then one of them has to intentionally broadcast the receipt to the world.

In the case of a public blockchain, neither party has to trust the other, and the whole world can see the exchange take place automatically.

Specificity

The chain described above will also be specific to every seller. Are you using Stripe, PayPal, in-app purchases, or something completely different as your payment mechanism? Are you going to broadcast the sale on Twitter, your personal website, your Etsy page, or what? What if you have to migrate to another payment platform?

There are tons of complications and nuances when the steps of a “non-chain NFT” are held together by glue and pinky-promises.

Blockchains again solve this by being public and all-inclusive: creating the receipt is just a matter of sending someone a token. The transaction is the public record, already signed, and you just need to demonstrate ownership over the seller’s account. You don’t need to do anything except choose a token and press “sell” (or “send”).

It also helps that blockchains are decentralized: anyone can use it and anyone can verify that the receipts are valid.

The Value of a Relationship

“Okay that’s all well and good,” you say, “but is there really any value here?”

I’m sure nearly anyone on Earth would agree that a pair of shoes signed by Michael Jordan is worth more than the exact same pair of shoes without the signature. Why? Because of the signature, yes, but there’s more to it… The signature can be perfectly replicated, but the genuine, authentic signed sneaker will still be worth more. Why? Because there’s an underlying relationship with Michael Jordan that the sneaker represents.

The additional value from integrating NFTs into the blockchain itself is in how simple and standardized the process is. Sure, nowadays we have people thinking they “own” digital art that anyone could Ctrl+C, Ctrl+V as many times as they want, but the underlying relationships cannot be replicated, even digitally.

There will always be one true original purchaser of beeple’s “Everydays”, but it’s not the bytes of the digital artwork that hold value. By owning his token, not only can you say “Yeah, I bought beeple’s art,” but you can also prove that you were to whom beeple sold the art, and not even beeple can deny that.

It’s the relationship with beeple that’s worth $69 million.


  1. Briefly, a “digital signature” is exactly what it sounds like: I give you a receipt that says “you bought X from me for \$Y” and sign it with my private key, adding a signature $S$. Assuming my public key is, in fact, public (and authentic), anyone can take that receipt and verify that my public key validates the signature. ↩︎

  2. Yes, it’s possible, but even as a technical person, that seems like much more effort than its worth. It reminds me of the famous HackerNews thread in which technically-minded folk roasted the Dropbox founder for something that you could “already build quite trivially by getting an FTP account, mounting it locally with curlftpfs, and then using SVN or CVS on the mounted filesystem.” Ok, cool. And how would that ever have mass appeal, exactly? ↩︎