Did you know that the founder of Twitter, Jack Dorsey, sold his first-ever tweet to a Malaysian Businessman for $3 million? The tweet, published on March 21, 2006, simply said: “just setting up my twttr.” You also may have heard about Nyan Cat – a video game character that was sold for $631,000. Both the tweet and Nyan Cat exist as non-fungible tokens or NFTs. What is an NFT and why is this concept so popular? How is it connected with blockchain? Let’s dive in.
NFT stands for a non-fungible token, where “non-fungible” actually means “non-replaceable.” The concept of fungible and non-fungible assets is old in economics. Fungible assets are replaceable and non-unique. A bag of rice is a fungible asset because it can be replaced by another one of the same kind and value.
Vice versa, non-fungible assets are unique and non-replaceable. One of the greatest non-fungible assets in the world is the Mona Lisa. As a one-of-the-kind masterpiece, it definitely can’t be replaced by anything else.
As for the word “token,” it has a definition of representation of something tangible. Therefore, in digital world, we define NFT as a digital representation of something which is non-replaceable. NFTs are stored on the blockchain.
What is Blockchain?
If we look at the term at the highest level, blockchain is a chain of blocks, each of them consisting of three parts as shown in the picture below. The first one is a set of data, like a row in a database. The second part of the block is hash – its fingerprint, which makes it unique. This hash is derived from the data, so if the data changes, the hash changes as well. The third constituent of a block is the hash of the previous block that defines the block’s position in the chain. For example, block five includes the hash of block four, and that is how it knows that it is the fifth one in the chain. Except for the very first block, called Genesis block, each block in a chain includes its own hash and that of the previous block.
One of the most prominent features of blockchain is its immutability, meaning that not a single block can be changed without breaking the chain. If a hacker changes data in one of the blocks, say, block number two, the block’s hash is to change as well. Now the whole chain gets broken because the third block is now pointing at something different.
All over the globe, blockchain is actively used for cryptocurrency transactions. If you transfer some bitcoins via a blockchain, the transaction will be watched by a so-called peer-to-peer (P2P) network – computers or people who are watching every single activity that is happening in a blockchain. This is another reason that makes Blockchain immutable, as all changes need to be accepted by this P2P network. Cryptocurrency, such as bitcoin, is stored on the blockchain along with NFTs. NFTs differ from cryptocurrency by their uniqueness.
Cashless Payments and Bitcoin
Let’s go back in time and remember how the whole trading system started. Back then, there was no money, so people exchanged things. If someone had a bag of rice, they could exchange it for a jug of milk. But how did they know that one bag of rice is equivalent to one jug of milk? They didn’t. Most often, they had no idea about the value of their commodities. Whatever the two traders agreed on, was the value. There were no standards for barter and no authority to determine the exact value of the commodity. That’s the reason paper currency was introduced.
Now, imagine a farmer going to Starbucks and asking for a coffee for $5. They decide to pay using a barter system, by giving $5 worth of rice. Will it work? Of course not. In Starbucks, the farmer pays for coffee using his bank’s debit card. And the bank transfers $5 to Starbucks’ bank. All these transactions are recorded in the bank’s ledger.
All payments, especially cashless ones, are being very closely monitored by two mediating authorities: 1) the bank that makes sure there is enough money in the account to be transferred over and 2) the other bank that makes sure the money is actually transferred. The second authority is the government ensuring that the transaction isn’t involved in any unlawful activity.
What if someone wants to get a coffee at Starbucks, and decides to pay using Bitcoin? In this case, the payment is not monitored either by banks, or the government. Instead, thousands of computers in a P2P network will record the transaction details, in its own ledger, which is what Blockchain is.
Due to its unregulated market, cryptocurrency may cause fear and mistrust in society and without attention from authorities, it can pave the way for nefarious activities. Another concern is that the computers serving bitcoins use so much energy they can significantly aggravate climate change.
Circling back to NFTs and Jack Dorsey. He wants to sell his unique tweet for $3 million on the blockchain. A Malaysian businessman comes over and says he wants to buy it. The P2P network confirms the businessman has cryptocurrency worth $3 million. He does. So, the $3M worth of cryptocurrency gets transferred to Jack Dorsey on the blockchain. The Blockchain ledger records all the transaction activity, and that Jack gave him rights to the tweet which now belongs to the businessman.
There is an ongoing discussion regarding whether NFTs are real, or if they have any real value. In our example above, what did the businessman actually buy from Jack Dorsey? That’s where human psychology comes in. Value of anything is the value perceived by society. For example, currency bills are nothing but pieces of paper with pictures on them. What is the Mona Lisa? Is it just a piece of wood and canvas covered in some paint? To some, yes. However, art collectors are paying fortunes for pieces of wood covered with paint. Regardless of whether it is a physical or digital work of art, as long as society acknowledges its value and someone is ready to buy it, it’s real.
Blockchain Use Cases
The following is a brief list of the most popular blockchain business use cases:
- Information sharing between mutually distrusting parties
Blockchain removes the need for a trusted third party to mediate between these parties. A good example of this would be International Payment transfer using Lumen.
- Chain of custody
A transparent record of events that can’t be tampered with taking place against an asset. A good example of this would be using Blockchain to track product Supply Chain.
An asset can be placed on a blockchain with a unique ID and the provenance can be further tracked. A good example of this would be putting a unique id of a diamond on blockchain by diamond trader firms like DeBeers. In fact, NFT is an example of a provenance use case.
In 2022, Orion Innovation and Bobby Bonilla have made it possible for fans to become a part of Bobby Bonilla Day by creating a series of NFTs, including a “1 of 1” matching the most famous sports contract of all time with a digital version. Read our case study to learn more about Bobby Bonilla and ‘The Contract’.
Orion works with the latest technologies to inspire and accelerate business transformation through digital innovation.