What are NFTs, and why are people paying millions of dollars for them?

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A few days ago, the musician Grimes sold some animations she made with her brother Mac on a website called Nifty Gateway. Some were one-offs, while others were limited editions of a few hundred – and all were purchased in about 20 minutes, with total revenue of over US $ 6 million.

Despite the high price tag, anyone can watch or (with a simple right click) save a copy of the videos, which show a cherub ascending to Mars, Earth and imaginary landscapes. Rather than a copy of the files themselves, eager buyers were given a special type of redeemable certificate called a “non-fungible token” or NFT. But what they were really paying for was an aura of authenticity – and the ability to someday sell that aura of authenticity to someone else.

NFTs are a cultural response to the creation of technical shortages on the Internet, and they enable new types of digital goods. They are making forays into the realms of great art, rock music, and even the new mass markets of NBA virtual trading cards. In the process, they also enrich some people.

How NFTs Work

NFTs are digital certificates that authenticate a claim of ownership over an asset and allow it to be transferred or sold. The certificates are secured with blockchain technology similar to that underlying Bitcoin and other cryptocurrencies.

A blockchain is a decentralized alternative to a central database. Blockchains typically store information in encrypted form on a peer-to-peer network, which makes them very difficult to hack or tamper with. This in turn makes them useful for keeping important records.

The main difference between NFTs and cryptocurrencies is that currencies allow fungible trading, which means anyone can create Bitcoins which can be exchanged for other Bitcoins. NFTs are by definition non-fungible and are deployed as individual chains of ownership to track a specific asset. NFTs are designed to uniquely restrict and represent a single claim on an asset.

And this is where things get weird. Often, NFTs are used to claim “ownership” of a digital asset that is otherwise completely copyable, pastable and shareable – such as a movie, a JPEG or other digital files.

So what is an original genuine digital copy?

Online it’s hard to say what authenticity and ownership Really nasty. Internet culture and the Internet itself have been motivated by copying, pasting and remixing to spawn new forms of authentic creative work.

On the technical level, the Internet is precisely a system for effectively and openly taking a series of ones and zeros of this computer and make them accessible on this computer elsewhere. The content available online is generally what economists call “non-competing goods,” which means that one person viewing, sharing or remixing a file does not in any way prevent others from doing the same.