Whitepaper

Recently, NFTs have gained traction in the news headlines, particularly for Jack Dorsey’s first tweet that sold for millions of dollars. However, not everyone knows about NFTs let alone cryptocurrencies and the blockchain. To explain NFTs, we will first dive into their predecessor cryptocurrencies, because both tokens rely on the blockchain for their existence.

By now, most people have likely heard of cryptocurrencies, such as the mainstream ones including Bitcoin, Ethereum, or even the alt-coin Dogecoin. Since Bitcoin launched in 2008, cryptocurrencies are a decentralized, digital asset that doesn’t rely on a centralized institution to manage and authorize the value of the currency. Rather, they are designed to be traded over the internet and not beholden to any centralized financial institution or government regulation. When buying cryptocurrency (and later NFTs), you will first need to establish your crypto wallet, which is a device or program that allows you to transfer and store cryptocurrency.

Cryptocurrencies can be transferred on a peer-to-peer network known as the blockchain. The blockchain is a public, distributed ledger that records bitcoin transactions in code with each one being implemented as a chain of blocks. Anyone can participate on the blockchain—no one has control over it. The blocks are then linked together on a chain of previous cryptocurrency transactions, also known as a cryptographic hash or “fingerprint.” The hash is an algorithm that produces the same output when given the exact same input file. Software logs each transaction as it happens so it is not lost or destroyed, enabling its authenticity. Known as “proof of work,” they can be processed peer-to-peer without the need for a trusted third party. If an input is altered, then the output would not be the same and the “fingerprint” changes. Every copy of the blockchain is updated simultaneously so the record of a transaction is identical and accurate.

Similar to cryptocurrencies, NFTs are issued on a blockchain—usually Ethereum or Flow—with their own “fingerprint” that enables them to be uniquely stamped. NFTs are “non-fungible” because they cannot be replaced or duplicated, much like a rare baseball card or the original Mona Lisa painting. While they can look alike, they are inherently original. Unlike cryptocurrency that is considered fungible and tradeable, NFTs are designed to be unique. NFTs can be anything digital, such as a drawing, music, gif, AI, digital art, a tweet, and more. They are bought and sold on the blockchain, usually through an online marketplace platform such as OpenSea or Crypto dot com. Cryptocurrencies are the only coin permitted to purchase NFTs, but not all platforms accept all types of crypto.

What makes each NFT fungible is the code that stamps the ownership of a certain asset. Each NFT is a unique token tied to specific data, usually a digital content file, and governed by a smart contract. The process of converting a media file or photograph into an NFT is called “minting.” The NFT is written into the blockchain with its very own unique fingerprint. While NFTs could be issued as a series of copies, each individual NFT has its own signature code and can be distinguished from its digital siblings. However, they cannot be copied and pasted to make more NFTs. Additionally, NFTs can only have one official owner at a time. NFTs can be owned by a specific person or a group of people.  Ownership records on the blockchain cannot be modified.

Powered by “smart contracts,” NFTs use these programs stored on the blockchain to automate the execution of a sale agreement between the NFT owner and buyer. For NFT sales, the smart contract’s programming enables the network to store the information that is indicated within an NFT transaction. The information is transparent and mutable. Smart contracts are self-executing and can check the terms of the contract have been satisfied. They can also execute terms without the involvement of a third party or intermediary. All participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss due to faulty contract negotiations. The information can be easily accessed on the blockchain, rather than collecting dust in some lawyer’s office.

Smart contracts enable NFTs to have permanent identification information, as alluded above, and to link to other digital assets, handling royalty payments, copyrights, merchandise sales, display instructions, and sell-on percentage clauses. They cover the actual rights being sold, known as the NFT license, which provides clarity on the rights transferring with the NFT upon its sale. The terms could be different for each sale, so they can be encoded into the blockchain to reflect this information. Also, smart contracts ensure that NFTs cannot be divided into smaller units to be sold (unless the smart contract permits it) or counterfeited, so they further enable NFTs to remain unique, digital assets. They verify the authenticity of the NFT by identifying the creator from the outset as well as its wallet address and its linked metadata on the blockchain. So, when you purchase an NFT, you can be assured that it is authentic, safe, unique, and the original piece.