The reason for this post is that every other description of NFTs describe what they pretend to be. In this blogpost, I drill down on what they actually are.
Note that this example is about “NFT artwork”, the thing that’s been in the news. There are other uses of NFTs, which work very differently than what’s shown here.
tl;dr
I have long bit of text explaining things. Here is the short form that allows you to drill down to the individual pieces.
- Beeple created a piece of art in a file
- He created a hash that uniquely, and unhackably, identified that file
- He created a metadata file that included the hash to the artwork
- He created a hash to the metadata file
- He uploaded both files (metadata and artwork) to the IPFS darknet decentralized file sharing service
- He created, or minted a token governed by the MakersTokenV2 smart contract on the Ethereum blockchain
- Christies created an auction for this token
- The auction was concluded with a payment of $69 million worth of Ether cryptocurrency. However, nobody has been able to find this payment on the Ethereum blockchain, the money was probably transferred through some private means.
- Beeple transferred the token to the winner, who transferred it again to this final Metakovan account
Each of the link above allows you to drill down to exactly what’s happening on the blockchain. The rest of this post discusses things in long form.
Why do I care?
Well, you don’t. It makes you feel stupid that you haven’t heard about it, when everyone is suddenly talking about it as if it’s been a thing for a long time. But the reality, they didn’t know what it was a month ago, either. Here is the Google Trends graph to prove this point — interest has only exploded in the last couple months:
The same applies to me. I’ve been aware of them (since the CryptoKitties craze from a couple years ago) but haven’t invested time reading source code until now. Much of this blogpost is written as notes as I discover for myself exactly what was purchased for $69 million, reading the actual transactions.
So what is it?
My definition: “Something new that can be traded on a blockchain that isn’t a fungible cryptocurrency”.
In this post, I’m going to explain in technical details. Before this, you might want to pause and see what everyone else is saying about it. You can look on Wikipedia to answer that question, or look at the following definition from CNN (the first result when I google it):
What is fungible?
Let’s define the word fungible first. The word refers to goods you purchase that can be replaced by an identical good, like a pound of sugar, an ounce of gold, a barrel of West Texas Intermediate crude oil. When you buy one, you don’t care which one you get.
In contrast, an automobile is a non-fungible good — if you order a Tesla Model 3, you won’t be satisfied with just any car that comes out of the factory, but one that matches the color and trim that you ordered. Art work is a well known non-fungible asset — there’s only one Mona Lisa painting in the world, for example.
Dollar bills and coins are fungible tokens — they represent the value printed on the currency. You can pay your bar bill with any dollars.
Cryptocurrencies like Bitcoin, ZCash, and Ethereum are also “fungible tokens”. That’s where they get their value, from their fungibility.
NFTs, or non-fungible tokens, is the idea of trading something unique (non-fungible, not the same as anything else) on the blockchain. You can trade them, but each is unique, like a painting, a trading card, a rare coin, and so on.
This is a token — it represents a thing. You aren’t trading an artwork itself on the blockchain, but a token that represents the artwork. I mention this because most descriptions about NFTs are that you are buying artwork — you aren’t. Instead, you are buying a token that points to the artwork.
The best real world example is a receipt for purchase. Let’s say you go to the Louvre and buy the Mona Lisa painting, and they give you a receipt attesting to the authenticity of the transaction. The receipt is not the artwork itself, but something that represents the artwork. It’s proof you legitimately purchased it — that you didn’t steal it. If you ever resell the painting, you’ll probably need something like this proving the provenance of the piece.
Show me an example!
So let’s look an at an example NFT, the technical details, to see how it works. We might as well use this massive $69 million purchase as our example. Some news reports describing the purchase are here: [1] [2] [3].
None of these stories say what actually happened. They say the “artwork was purchased”, but what does that actually mean? We are going to deconstruct that here. (The answer is: the artwork wasn’t actually purchased).
by Robert Graham, Security Boulevard | Read more:
Why do I care?
Well, you don’t. It makes you feel stupid that you haven’t heard about it, when everyone is suddenly talking about it as if it’s been a thing for a long time. But the reality, they didn’t know what it was a month ago, either. Here is the Google Trends graph to prove this point — interest has only exploded in the last couple months:
The same applies to me. I’ve been aware of them (since the CryptoKitties craze from a couple years ago) but haven’t invested time reading source code until now. Much of this blogpost is written as notes as I discover for myself exactly what was purchased for $69 million, reading the actual transactions.
So what is it?
My definition: “Something new that can be traded on a blockchain that isn’t a fungible cryptocurrency”.
In this post, I’m going to explain in technical details. Before this, you might want to pause and see what everyone else is saying about it. You can look on Wikipedia to answer that question, or look at the following definition from CNN (the first result when I google it):
Non-fungible tokens, or NFTs, are pieces of digital content linked to the blockchain, the digital database underpinning cryptocurrencies such as bitcoin and ethereum. Unlike NFTs, those assets are fungible, meaning they can be replaced or exchanged with another identical one of the same value, much like a dollar bill.You can also get a list of common NFT systems here. While this list of NFT systems contains a lot of things related to artwork (as described in this blogpost), a lot aren’t. For example, CryptoKiddies is an online game, not artwork (though it too allows ties to pictures of the kitties).
What is fungible?
Let’s define the word fungible first. The word refers to goods you purchase that can be replaced by an identical good, like a pound of sugar, an ounce of gold, a barrel of West Texas Intermediate crude oil. When you buy one, you don’t care which one you get.
In contrast, an automobile is a non-fungible good — if you order a Tesla Model 3, you won’t be satisfied with just any car that comes out of the factory, but one that matches the color and trim that you ordered. Art work is a well known non-fungible asset — there’s only one Mona Lisa painting in the world, for example.
Dollar bills and coins are fungible tokens — they represent the value printed on the currency. You can pay your bar bill with any dollars.
Cryptocurrencies like Bitcoin, ZCash, and Ethereum are also “fungible tokens”. That’s where they get their value, from their fungibility.
NFTs, or non-fungible tokens, is the idea of trading something unique (non-fungible, not the same as anything else) on the blockchain. You can trade them, but each is unique, like a painting, a trading card, a rare coin, and so on.
This is a token — it represents a thing. You aren’t trading an artwork itself on the blockchain, but a token that represents the artwork. I mention this because most descriptions about NFTs are that you are buying artwork — you aren’t. Instead, you are buying a token that points to the artwork.
The best real world example is a receipt for purchase. Let’s say you go to the Louvre and buy the Mona Lisa painting, and they give you a receipt attesting to the authenticity of the transaction. The receipt is not the artwork itself, but something that represents the artwork. It’s proof you legitimately purchased it — that you didn’t steal it. If you ever resell the painting, you’ll probably need something like this proving the provenance of the piece.
Show me an example!
So let’s look an at an example NFT, the technical details, to see how it works. We might as well use this massive $69 million purchase as our example. Some news reports describing the purchase are here: [1] [2] [3].
None of these stories say what actually happened. They say the “artwork was purchased”, but what does that actually mean? We are going to deconstruct that here. (The answer is: the artwork wasn’t actually purchased).
by Robert Graham, Security Boulevard | Read more:
Image: Security Boulevard
[ed. FYI: the cryptographic hash for the Beeple painting is (apparently): 6314b55cc6ff34f67a18e1ccc977234b803f7a5497b94f1f994ac9d1b896a017]
