What Are NFTs and How Do They Work?
Everything you need to know about non-fungible tokens, asset-backed NFTs, and the fractional collectible market.
Are questions like “what are NFTs and how do they work” burning into your brain these days? Trying to figure out what all the hype’s about? You’re in the right place. In this guide, we’ll cover all the basics of NFTs so you can catch up with the crypto craze, understand when and why this asset type got so popular, and get started investing in fractionalized asset-backed NFTs yourself. Don’t worry, you don’t have to know what any of that means just yet — we’re going to decipher all the lingo and break down the basics. Let’s go.
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What Are NFTs and How Do They Work?
NFT stands for non-fungible token, which is a digital asset that is completely unique. Units of currency like the US Dollar and even cryptocurrency tokens like Bitcoin are all worth consistent values. If you exchange one five-dollar bill for another, the value in your wallet stays the same. One Bitcoin is equal in value to a second Bitcoin. While NFTs can certainly be traded or exchanged for other assets or currencies, the unique nature of each NFT means that while you will end up with something else of value (even of equal value) the asset itself will not be the same. A dollar is a dollar is a dollar, but each NFT is a one of a kind.
The nitty gritty of how these digital assets work opens the door to two other distinguishing qualities of NFTs: They are indestructible and they are verifiable. As part of the crypto world, every token is stored on a blockchain — an immutable ledger recorded and upheld by publicly distributed consensus. In other words, a whole lot of computers around the world are all devoted to maintaining the blockchain at the same time so that no one person or group can exercise their own influence over the collective record. If one computer goes offline, nothing happens to the blockchain because there are countless others constantly saving and updating the record. Indestructible? Check.
Each time an NFT is created, sold, traded, or transferred in any way, that transaction is stored in a smart contract on the blockchain. That’s how NFTs are verifiable — every single NFT is completely traceable all the way back to its initial creation. Ownership, provenance, and authenticity can all be proven at any point thanks to the time-stamped smart contracts stored on the blockchain.
The Evolution of NFTs: A Brief History
Okay, so now you know what an NFT is and how it technically works. Now you’re probably asking: What in the world is an NFT? As in: what kind of assets are we talking about here? The answer is that any virtual asset can be minted as an NFT. In-game items and accessories, videos and digital image files, Tweets — they can all be minted as legitimate NFTs. Typically when you buy an NFT, you’re buying the proof that you own a digital asset. The contract is the priority, as opposed to the asset itself. So if I buy a Picasso and hang it in my own house, that physical asset is mine, all mine. I control who gets to see and interact with it. But if I buy an NFT created by the hypothetical digital artist Picass0, that image can still exist on the internet for all to consume even though I am technically (and contractually) its one and only owner.
Why did NFTs become popular? It’s hard to say. A perfect storm of the global pandemic, economic evolution, wealthy people looking for new investment opportunities, and blockchain tech being ready and poised for growth certainly helped. The fine art world also did a lot to inspire the NFT boom; because proof of ownership is such a critical benefit of NFTs, digital art has become one of its most prominent applications. You’ve seen the headlines about Beeple’s $69 million NFT — sure, anyone can right click and download the image file, but only one person can claim ownership over that original piece of digital art.
Here’s a lightning round of slightly easier questions: When did NFTs become popular? 2020. When was the first NFT created? 2014. Thinking the NFT boom all happened very quickly? You’re correct. Here is a brief rundown of the timeline and the major players in NFTs:
- 2014: Kevin McCoy creates a video clip called Quantum, registers it to the Namecoin blockchain, and sells it to Anil Dash. It is the first non-fungible token tied to a piece of art ever stored on a blockchain.
- 2015: Ethereum launches the first dedicated NFT project, Etheria, at DEVCON1, the company’s first developer conference. The Ethereum blockchain has only been around for 3 months at this point. (Most of the NFTs that came out of Etheria sat unsold until 2021.)
- 2017: Various studios and companies start launching their own NFT projects and blockchain games around the same time, including CryptoKitties, CryptoPunks, Curio Cards, and others.
- 2018: In response, Ethereum releases the ERC-721 standard, codifying the term “NFT” in the public lexicon. Rapid development continues (NFT-based blockchain game Axie Infinity launches in the footsteps of CryptoKitties in March 2018) and new industries seek a way in (20th Century Fox releases NFT movie posters ahead of Deadpool 2’s box office opening in May 2018).
- 2019: Experimentation dominates while NFTs continue to fly under the radar. Nike patents a system called CryptoKicks that uses NFTs to digitally verify ownership of physical sneakers.
- 2020: The global pandemic changes everything and the NFT frenzy officially begins. The value of the global NFT market triples, reaching a total of more than $250 million. The US Patent and Trademark Office receives three applications for NFT trademarks.
- 2021: The artist Grimes sells $6 million worth of digital art as NFTs. Beeple’s Everydays: The First 5000 Days sells for $69.3 million at a March auction in partnership with Christie’s. Twitter CEO Jack Dorsey sells an NFT of his first ever Tweet for $2.9 million. The now infamous Bored Ape Yacht Club launches in April and accumulates over $1 billion in sales. The US Patent and Trademark Office receives over 1200 NFT trademark applications. Global NFT sales pass the $17 billion mark.
All About Asset-Backed NFTs: Merging Digital and Physical Items
You’ll notice that on that list of highlights, Nike snuck in a whole new application of the technology in 2019: real-world asset-backed NFTs. Although the digital art community is largely credited with inspiring the NFT surge in recent years, NFTs are also regularly being used to prove ownership and authenticity of real-world physical assets. It works for limited edition sneakers — and even baseball cards! — in the same way that it works for NFT artists; the NFT in these cases is a smart contract that proves ownership of the asset, regardless of whether it is a digital file or an item in the physical world.
Dibbs puts a twist on that concept by allowing multiple people to own portions of a single NFT that represents a real-world object. Dibbs’ asset-backed NFTs link each physical baseball card (or other collectible item) to a digital token. You can buy a portion of that NFT and share digital ownership with other collectors, or you might eventually buy, sell, and trade your way to total ownership of that digital asset.
Say you own a fraction of a number of different Pokémon card NFTs, for example — you might set out to flip less valuable ownership in order to acquire the resources to buy up more shares of a single high-value card. Instead of an all-or-nothing approach to ownership of a single physical item, Dibbs makes collecting more accessible. By fractionalizing each NFT, Dibbs gives more people the opportunity to invest and creates flexibility so collectors can diversify their NFT interests across multiple assets. That means you can get started with far fewer resources and have the option to course correct or change your strategy with agility and ease. Then you can buy, sell, and trade fractionalized asset-backed NFTs in the same way you would any other crypto asset, all within the Dibbs platform.
Ready to start trading fractionalized asset-backed NFTs on Dibbs? Sign up for an account today.