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An NFT titled "SHIFT//" by Mad Dog Jones is on display during a press preview of the Natively Digital: A Curated NFT Sale at Sotheby's on June 4, 2021 in New York City. (Cindy Ord/Getty Images/TNS)
Video clips of basketball highlights. Digital works of art. A yacht in the metaverse. Cartoons of apes, cats, frogs and hipsters.
These are just a few examples of the digital collectibles sold as non-fungible tokens, many at forehead-slapping prices. NFTs have become a hot commodity among crypto investors and celebrities, who have shown off their purchases on late-night TV and social media — causing some critics to wonder about the financial interests being served.
NFTs work much like bitcoin and other cryptocurrencies, but with a key difference: Each NFT is unique and indivisible. That allows them to serve as proof of ownership for items that may themselves be easily copied and shared online.
An NFT enables people to declare, “This particular copy is the authentic original, and here’s who owns it.” Although NFT sales aren’t immune to fraud and other crimes, the tokens themselves are extremely reliable as ownership records.
Still fuzzy on the details? Here are some of the basics.
How does all this work?
Non-fungible tokens are bits of data that represent items, whether digital or physical. In many cases, the tokens merely point to a specific thing stored somewhere else — on a computer server, say, or at a city hall.
What makes them special is the way they are protected against duplication and tampering. NFTs are secured with powerful encryption and then recorded in a digital ledger known as a blockchain — in most cases, Ethereum.
The point of blockchain technology is to maintain records without relying on a central authority, such as a bank or a government. Instead, the information is spread among the thousands of computers that perform the math that maintains and adds to the blockchain.
Adding an NFT to a blockchain creates an immutable record of who owns the item associated with that token. The blockchain will also record future sales to keep track of who owns the item, through a system of encryption keys that preserves the anonymity of everyone involved.
What’s the purpose of an NFT?
To offer proof of authenticity in a world where illegitimate copies look exactly like the real thing.
Let’s say I want to sell a digital photo I’ve taken of an amazing sunset. To increase the value, I could promise the buyer that I will make no more copies of the photo. But that won’t stop other people from making copies if the buyer displays the photo on Facebook or Instagram.
If I create an NFT of the photo, however, the buyer can now be assured that his or her copy is the only legitimate copy — provided, of course, that I don’t turn around and create another NFT of the same photo. And the new owner can then assure future buyers that the picture is the original.
That’s important if buyers place more value on the original version of an item than on a perfect digital copy. That’s up to the market to decide, ultimately. But NFTs are also being attached to unique items in the physical world, such as paintings, property titles and jaw-droppingly expensive sneakers, where proof of authenticity is crucial.
One other feature of NFTs is the potential to require subsequent buyers to pay royalties to the original seller. This capability is baked into some types of NFTs, such as those basketball highlights. But a standard way to charge royalties is just now emerging and would need to be widely incorporated to be effective.
Nevertheless, it’s the flexibility of contracts on the blockchain that is causing many people with digital assets to look at NFTs as a way to create new revenue streams. The music industry in particular is exploring the possibilities opened by NFTs, such as new variations on music and merchandise sales. And for artists, tokens offer yet another way to deal with fans directly, in control of their own intellectual property.
But really — why do people buy them?
Judging by the remarks of one member of the group that paid $69 million for a collage of JPEGs by the graphic illustrator Beeple, it’s all about the cheddar. “This is going to be a billion-dollar piece someday,” an NFT collector and cryptocurrency investor known as Metakovan told Artnet.com.
Metakovan said the work is valuable not because it’s an NFT but because of the 5,000 days it took to produce, one illustration per day. “Skill is transferable and technology becomes obsolete. The only thing you can’t hack is time, and this piece represents 13 years of time,” the collector said.
Nevertheless, it’s hard to ignore how much the value of some NFTs has climbed from sale to sale. For example, the Verge noted the case of the investor who bought a different Beeple NFT for $66,666, then sold it four months later for 100 times that amount.
In that sense, the appeal of NFTs is similar to the appeal of cryptocurrencies. The items are scarce, and as long as demand remains strong, you’ll be able to find someone who will pay more for your NFT than you paid to buy it. And if you’re paying for NFTs in cryptocurrency, as is often the case, you may be using gains from one to cover the ballooning cost of the other.
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Three hundred thirty-one years ago, the first piece of paper money was printed in the United States. The Massachusetts Bay Colony supposedly issued those first bills to fund military action in King William’s War. Flash forward to today, and those bills are as ubiquitous as the British pound or Chinese renminbi. In recent years, however, there have also been talks that those bills may be replaced with a newer form of money altogether: cryptocurrency.
What is cryptocurrency? Is it really likely to replace our current cash system? Stacker answers all these questions and more in our closer look at Bitcoin and the world of cryptocurrencies. Using news reports, financial websites, and industry resources, we’ve answered the 10 most pressing questions you have about cryptocurrencies. While the topic is a complex one, we’ve done our best to discuss it in layman's terms and have avoided the more highly technical aspects that tend to bog down the discussion rather than carry it forward.
So read on to learn who invented this new form of money, how it’s mined, and what, exactly, Elon Musk has to do with it all. You’re sure to walk away with a better understanding of what Bitcoin is and how it affects your life.
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First things first: What is a cryptocurrency? In short, they are digital currencies that are protected by cryptography (a method of safeguarding information through complex codes). This encryption makes them incredibly secure and almost impossible to counterfeit or double-spend. Most cryptocurrencies work using a new technology called blockchain, a decentralized technology that's spread across many computers.
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As stated above, blockchains are a new form of technology that records information. Termed distributed ledger technology, these blockchains keep records across a large number of computers (rather than on a single computer server), grouping the data in sequential blocks. Once locked into place, these blocks cannot be changed or altered, meaning that records of who mined a currency or spent it are never called into question, and cryptocurrencies can never be stolen the way a credit card can.
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No. By their very definition, Bitcoin and other cryptocurrencies are completely democratic and aren’t overseen by a central authority in the way that the U.S. dollar is. A true peer-to-peer payment network, cryptocurrencies can only work if all participants use the same software and abide by the same rules. This provides a strong incentive for a consensus to be maintained, or else Bitcoin will cease to have any value and all users will lose their cryptocurrency wealth.
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The interesting thing about cryptocurrencies, and bitcoin, in particular, is that they are largely self-perpetuating (with the exception of the genesis block). New bitcoins are mined (or minted) by being the first person to correctly verify one megabyte of existing bitcoin transactions. This is incredibly time-consuming work that involves a lot of computation power, but these days it is not the only way to obtain bitcoin. Bitcoin can also be bought or earned by doing things like publishing an article on a website that pays via cryptocurrency.
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Yes, and no. In 2021, much of what cryptocurrencies are is more theoretical than practical, which is further demonstrated by their purchasing power—or lack thereof. While bitcoin can and has been used to buy real things (you can use a third-party app called Purse to use bitcoin to buy items on Amazon, and it has often been used on the Silk Road to buy drugs), you certainly can’t just walk into a grocery store and buy a gallon of milk with a bitcoin or two. In fact, even apps like Purse or PayPal, which allow purchases to be made with bitcoin, convert the cryptocurrency into fiat money before making the transaction, so you aren’t technically spending that bitcoin or Dogecoin, but rather its legal tender value.
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So if you can’t spend a bitcoin or unit of cryptocurrency, why were they invented? The answer may lie in the text of the genesis block of Bitcoin, which reads: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” (Alluding to a headline from The London Times.) This seems to imply that the founder had a lack of faith in the banking system and was looking for an alternative way to store and protect their wealth, as well as wanting to disrupt the control of the money supply and empower the individual when it came to their finances.
Bitcoin is widely considered to be the world’s first cryptocurrency. Yet, despite having existed for just over a decade, no one actually knows who founded it. The original Bitcoin whitepaper thate outlines how the currency works was published by Satoshi Nakamoto, the same person who mined the first bitcoin block, but the individual’s (or group of individuals’) identity remains a mystery. There are dozens of theories out there about who they are, but none have been definitively proven, making this a Holy Grail-level mystery of our time.
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Financial pundits aren’t yet convinced that Bitcoin, or similar cryptocurrencies, will replace the dollar, pound, or yen in any real way. However, as a scientific and technological innovation, cryptocurrencies are massively important. In particular, the blockchain system that governs most of these currencies has the power to change the future. Blockchain allows us to move information securely and authentically and can be adapted for things like voting, maintaining inventory records, and identifying exploited labor practices.
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The number of cryptocurrencies is always growing, so it can be difficult to pin down an exact count, but as of April 2021, there were over 10,000 different types of cryptocurrency. This includes coins, like bitcoin and Dogecoin, as well as tokens, which represent a tradable asset or utility (like 10 hours of free streaming on a service or a certain number of loyalty points from a company).
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Almost every discussion of cryptocurrency winds its way to Elon Musk, so how does he fit in with all of this, exactly? Only as an ardent supporter of and believer in cryptocurrencies, really. Many have theorized Musk is actually Nakamoto (he’s not) or the mastermind behind Dogecoin (that would be Jackson Palmer), but really, Musk is simply one of the most outspoken tech leaders on the topic. Both of his companies, Tesla and SpaceX, are heavily invested in cryptocurrency and have engaged with the idea of accepting them as cash-equivalent payments for goods and services, but aside from that, Musk is no more special in the development or growth of these cryptocurrencies than you or me.
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