THE QUICK & DIRTY GUIDE - TO NFTS HUSSEIN HALLAK
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THE QUICK & DIRTY GUIDE TO NFTS Written by HUSSEIN HALLAK
ART YOU CAN’T HANG?!
Most of what you will read about Enabled by the game-changing
NFTs focuses on how people breakthrough of blockchain
with too much money are buying technology, NFTs are an
worthless things using NFTs. innovative solution to severe
problems plaguing the music,
Art that you can’t hang on your art, and content creation
wall for $1.5m, the Nyan Cat industries.
meme for $590k, a video clip of
LeBron James dunking for So what the heck are NFTs?
$200K, even Jack Dorsey’s first
tweet for $10M! How do they work?
Just like the discourse around And why should you care?
Bitcoin, Blockchain, ICOs, and
DeFi, the focus is almost
always on the hype and
not on substance.
Presented by
STONE OR PLASTIC?!
What do you think of when you The small community kept track
first hear ‘tokens’?! of the transactions orally, just like
Arabs kept track of poetry,
Do you think of round pieces of poets, and tribes.
metal or plastic?
One day a Rai stone sank into
Come with me to Yap islands, the ocean as it was being
part of The Federated States of transferred on a canoe, but the
Micronesia, an island country in community still used it as money
the western Pacific Ocean even though no one could see it
associated with the United or had physical access.
States.
The Rai was a token used as
Up until the 20th century, native currency, and the community
inhabitants of Yap islands used kept an oral ledger of its
Yapese stone money. transactions.
Yapese stone money was made It may sound ridiculous today.
out of large stone disks called Stones, not to mention
Rai, weighing over 8,000 immovable ones, are not money!
pounds, and created from the
limestone deposits of the nearby
island of Palau.
Rai stones were not moved
when spent but simply changed
owners.
A large (approximately 2.4m [8 feet] in height) example of Yapese stone money (Rai) in the village of Gachpar
LET’S SAY YOU WERE
TELEPORTED TO VEGAS
You would think colourful casino games in an arcade.
chips are money.
We can say a token can be
Both the Rai stone and whatever you want it to be, as
casino chips served as long as others agree with
a visible and tangible you on what the token is
representation of value, or what it represents.
a token.
The critical difference
A token is a thing that between a token coin
serves as a visible or and a currency or
tangible representation legal tender coin is a
of a fact, quality, feeling, legal tender coin is
etc. It can be a voucher issued by a governmental
you can exchange for authority and is freely
goods or services, it can be a exchangeable for goods.
ticket that gives you access to
certain privileges, or it can On the other hand, a token coin
be a plastic disk you is limited in use and is often
use to pay for issued by a private company,
group, association, or
individual.
WHAT IS A DIGITAL
TOKEN?
Until the last few decades, all Crypto tokens usually represent
tokens were physical tokens; a particular fungible or non-
however, we got digital tokens fungible asset or utility.
with the advent of technology.
You may be thinking, Wait, what?
A digital token is a unit of Cryptography! Blockchain!
information exchanged between
users or machines to facilitate Am I supposed just to know
and represent a real-world what these are?!
transaction. The transaction can
And what the hell does ‘fungible’
be anything from an online
mean?
money transfer to subscribing to
a service. Ok, let’s break it down.
What about crypto tokens?
With the introduction of bitcoin
and the rise of blockchain
technology, we got crypto
tokens.
Crypto tokens are digital tokens
created using cryptography and
exchanged exclusively on
blockchain networks.
FUNGIBLE!
WHAT’S THAT?
Fungibility refers to the gave you a Canadian 100 dollar
interchangeability of a note because they do not have
good or asset. Put the same value.
simply, when
something is
fungible, it means
every other thing
like it has the
same value.
Fungibility is a core
property or money.
Let’s say you have a 100 US
dollar note. You probably don’t
care if someone took it and gave
you another 100 US dollar note
We can say US dollars are
in its place.
interchangeable and therefore
For you, it’s the same; it holds fungible. However, US dollars
the same value. and Canadian dollars are not
interchangeable, therefore, not
One may be a little worn out, fungible.
crumbled, or someone decided
to use it as a temporary notepad.
It’s still a 100 US dollar note, and
it has the same value.
However, you wouldn’t feel the
same if someone took
your 100 US dollar
note and
BITCOIN
On October 31, The identity of
2008, a link to a Satoshi
paper authored Nakamoto
by Satoshi remains a
Nakamoto titled mystery till today.
Bitcoin: A Peer-to- A pseudonym used
Peer Electronic by the person or
Cash System was persons who developed
posted to a bitcoin. After releasing the
cryptography mailing bitcoin white paper, he, she, or
list. they created and deployed the
bitcoin software on January 3,
To many probably, this was just 2009.
another attempt to suggest a
solution to some of the technical The bitcoin network became a
challenges of using peer-to- reality when people started to
peer distributed networks. download and run the bitcoin
software on their computers, and
The paper described “a the first block of data was added
system for electronic to the chain.
transactions without
relying on trust.”
A couple of
months
earlier, on
August 18,
2008, the domain
name bitcoin.org was
registered.
WHAT IS
BLOCKCHAIN?
Blockchain is a technology that You are also limited to sending
enables the creation of and receiving transactions to the
decentralized networks of countries that PayPal is willing to
computers (nodes) that can serve and people approved to
securely exchange transactions have a PayPal account.
without the need for a
centralized authority (server or You pay what PayPal decides
group of servers). you should pay for transactions
and exchange rates.
In a network like PayPal, a
centralized authority (server or PayPal holds all the power; you
group of servers managed by are just a customer.
PayPal admins) regulates,
validates, verifies, and keeps a
record of all transactions in a
centralized database.
PayPal executives or anyone in
PayPal with the right admin
access or power can choose to
shut the services of PayPal at
any moment, and you will lose
access to any money you have in
PayPal, in addition to the ability
to perform transactions using
PayPal.
In a blockchain network, every Since each public blockchain is
computer (node) regulates, decentralized and not owned by
validates, verifies, and keeps any entity, each public
track of all transactions on the blockchain network has its own
network in an unchangeable currency used for transactions.
(immutable) record (ledger).
For the Bitcoin network, that
There is no central authority in a currency is bitcoin; for the
public blockchain network, no Ethereum blockchain, it’s ether.
one can shut it down, and no
one can prevent any node from Currencies used in blockchain
joining from any part of the networks are usually issued
world. through a computational process
called mining that involves
You can send and receive running complex mathematical
transactions from anyone, processes that require a lot of
anywhere in the world. computing power.
Just like the Internet is made Blockchain networks also have
possible through a set of cryptography at almost every
technologies, protocols, and level, including creating their
software coming together to currencies; that’s why we call
enable you to make an Amazon those currencies
purchase. Blockchain is made cryptocurrencies.
possible through a set of
technologies, protocols, and
software coming together to
allow you to send a monetary
transaction to someone without
relying on the likes of PayPal.SO WHAT’S CRYPTOGRAPHY? Cryptography is a method of protecting information and communications through codes so only the parties in that communication can read and process its information. Cryptography in Bitcoin prevents any alteration or manipulation because it secures the transactions and blocks of data by complex mathematical algorithms that are extremely hard to break. Simultaneously, cryptography makes it easy and fast to verify and validate Bitcoin transactions and blocks.
BLOCKS! IS THAT WHY
WE CALL IT A “BLOCK”
CHAIN?
Yes. In a blockchain, data is structures that only maintain the
stored in a chronicle ledger, latest data set.
where each entry (block) is
linked directly to the What a blockchain
previous entry (block) and architecture provides is
all the other previous immutability, i.e. prevention
entries (blocks), forming against fraud and attempts
a chain of blocks to manipulate the data.
— a block chain.
With a blockchain-based system,
Ledger-based data any change to any data will
structures are nothing change the whole blockchain
new; however, they are due to the connection
considered slow and between the blocks.
wasteful because
storage was limited.
In today’s world, storage
is very affordable. A ledger-
based system that keeps
all the history of data
changes can
become essential
compared to the
current dataHOW DO WE GET
CRYPTO TOKENS?
Crypto tokens are created Assets like stocks can be
through tokenization, converting tokenized using a blockchain-
rights to an asset into a digital based system, eliminating the
token protected by cryptography, need for a central authority,
tracked and exchanged on a intermediaries, or intermediaries
blockchain network. to manage the exchange of
those assets or stocks.
Tokenization and creating pieces
of information that correspond to In a blockchain-based system,
fractions of a real-world asset the rules can be built into the
can be done without using a blockchain software; it applies to
blockchain and without everyone eliminating the need for
cryptography, using existing a regulating body.
centralized networks.
After all, that’s what the stock
market is. With every stock you
purchase, you own a fraction of a
company.
However, maintaining and
running a stock market requires
massive investment in
technology infrastructure,
partnering with intermediaries to
handle the clearing and
settlement. There is also a need
for regulators to make sure
everyone plays by the rules.WHY DO WE NEED
CRYPTO TOKENS
ANYWAY?!
Let’s take a more in-depth look Intangible assets lack physical
at why we should consider substance and usually are very
tokenizing assets. hard to evaluate. They include
patents, copyrights, franchises &
Assets are the cornerstone of licenses, music, digital art,
business and trade. They are the goodwill, trademarks, and trade
resources we use to create, names.
deliver, and capture value.
Despite a turbulent 2020, global
Assets are classified into two intangible value is now at an all-
major classes: tangible and time high of US$ 65.7 trillion.
intangible.
Tangible and intangible
Tangible assets have a physical assets each face unique
substance, such as currency, challenges when it
buildings, real estate, vehicles, comes to trading
inventories, equipment, art them:
collections, precious metals,
rare-earth metals, fossil fuel, and
crops.
Recent estimates place the
current value of all real-
world assets at
around $256
trillion
globally.
Tangible
assets are
costly to move
and transfer.
Intangible assets, while
easier to move and transfer, are
difficult to subdivide.Depending on the asset, trades When an asset is tokenized, it
may have to go through becomes much easier to trade,
extensive regulatory processes, and it can be made accessible
require high fees, and take too from anywhere in the world.
much time. Tokens, after all, are pieces of
information that can be
Trading these assets also suffers transmitted on the internet and
from the challenges of doing tracked using a distributed
business using centralized ledger (a blockchain).
systems, the need for trusted
intermediaries, the high costs,
the lack of efficiency, and
security and privacy
vulnerabilities.
These challenges make markets
highly illiquid and not within
reach of most people.WHY SHOULD I CARE?
WHAT’S IN IT FOR ME?
Tokenizing assets is one of the It’s an asset that is highly illiquid.
most transformative aspects of You are centralizing your risk in
the new blockchain world we are one asset in one location when
living in today. you can use the same
investment to diversify your
For the first time, everyday portfolio by owning fractions of
people can build wealth through properties in the best cities in the
fractional ownership of assets world.
that appreciate with time.
And because of the
Suddenly, building generational decentralized, trustless,
wealth through homeownership, immutable qualities of
which is becoming more and blockchain, we can democratize
more out of reach, is now within access to such assets by
reach. reducing entry barriers, lowering
the costs, increasing
By tokenizing real estate, anyone
transparency, significantly
can own fractions of properties
increasing efficiency, and
in several key markets, like
enabling innovation.
Vancouver, for example, where
property prices are ridiculously
high.
Why work all your life to own one
property?!WHAT ARE THE
DIFFERENT TYPES OF
TOKENS?
Before we jump into NFTs, we the well-known platform tokens
need to explore the different are:
types of crypto tokens.
Ether (ETH) by
Ethereum, a blockchain
platform with smart
Payment Tokens contract capabilities
(Cryptocurrencies) EOS by EOS.IO, a
blockchain platform
These are native cryptographic with smart contract
assets of a particular blockchain capabilities.
network, intended to fulfil the
functions of a currency, mainly as ADA by Cardano, a blockchain
a medium of exchange and store platform with a
of value. Some of the well-known research-first driven
Cryptocurrencies are: approach
• Bitcoin Lumens by
• Bitcoin Cash Stellar, a
blockchain
• Litecoin platform
• Monero focused on cross-border
and multi-currency transactions
• ZCash
Utility Tokens
Platform
Utility tokens are intended to
Tokens give holders perks such as
access to the network,
Platform tokens are usually application, or service, or voting
associated with blockchain rights.Some of the well-known
platforms that provide the ability utility tokens are:
to build decentralized
applications — Dapps.Some ofBAT - Basic Security Tokens
Attention Token (on
the Ethereum Security tokens qualify as
Blockchain): can be “investment contracts“ or
exchanged between securities and therefore are
publishers, advertisers, subject to securities registration
and users on a browser requirements.These tokens are
called ‘Brave.’ Brave is classified as securities in the US-
designed to increase privacy via based on the Howey Test, which
blocking third-party ad trackers the US Supreme Court created
while monetizing user attention for determining whether
and rewarding content creators/ something qualifies as security:
publishers accordingly.
It is an investment of money.
GNT - Golem
Network Token (on There is an expectation of
the Ethereum profits.
Blockchain): is used
to provide everyone The investment of money
with access to the is in a common enterprise.
necessary distributed Any profit comes from the
computational energy at a efforts of a promoter or third
low cost on the Golem party.
marketplace.
Security tokens are usually the
FUN - FunFairToken (on the ones resulting from tokenizing
Ethereum Blockchain): issued by tangible or intangible assets.
FunFair Technologies so players
can use it to play casino games.
FILECOIN: issued by the
Filecoin project to give
access to a
decentralized storage
system.Natural Asset Tokens Natural asset tokens represent natural assets such as gold, oil, natural gas, base metals, carbon credits, and energy. Examples of natural asset tokens: POWR - Power Ledger Token lets users buy and sell electricity using Power Ledger, a blockchain-based, peer-to-peer energy platform.
custodian holds the underlying
Crypto-Fiat asset(s).
Currencies and
• USDT by Tether, USD Coin
Stablecoins (USDC) by Coinbase, and
Paxos (PAX)
Unlike Bitcoin, Litecoin, and
other cryptocurrencies and • Digix Gold Token (DGX), Tether
tokens that experience high price Gold (XAUT)
volatility, stablecoins are
designed to maintain a relatively • Libra by Facebook
stable value.A stable coin is tied Financial institutions use these
or ‘pegged’ to an underlying stablecoins to facilitate fast and
asset or currency, including: low-cost cross-border transfers.
• Fiat currencies. A crypto-asset Decentralized non-custodial
can be related to one or more
stablecoins: managed in a
fiat currencies.
decentralized fashion, usually
• Real-world assets such as operated through smart
securities, commodities, real contracts, that have reserves in
estate, and financial assets. cryptocurrency rather than fiat.
• Crypto-assets. Dai is a stablecoin
cryptocurrency that aims to keep
Stable coins can also be its value as close to one United
algorithmically controlled to States dollar as possible through
mimic monetary policy and automated smart
adjust the supply of tokens to contracts on
match demand to keep the price
stable.
There are two categories
of stable coins:
Centralized
custodial
stablecoins: a
centralizedWHAT ABOUT NFTS?
The challenge CryptoKitties is an excellent
with the discourse example of an NFT.
around NFT is this
constant comparison The first game of its kind built on
between the real world the Ethereum blockchain,
and the digital/virtual world and CryptoKitties is a product of
the very simplistic statement of Dapper Labs, which is valued at
“buying art you can’t hang on
your wall!” alluding to the
ridiculousness of such a thing.
So let’s break it down and dispel
the misconceptions.
First of all, WTF are
NFTs?
Crypto Collectibles or Non-
Fungible Tokens (NFTs) are
crypto tokens.
However, unlike fungible crypto
tokens, each NFT is unique, $2 billion at the time of writing
different, distinguished this article.
from another NFT, and
cannot be CryptoKitties was started by a
duplicated. DJ from Vancouver, Canada, who
loves cats.
Each CryptoKitties token
represents a unique virtual cat
that people can purchase, trade,
raise, and even breed with other
CryptoKitties.Dragon
#896775 Gen 9
and make it so that the
Snappy Cooldown (30m)
Buy now price
ownership of that ID means the
600 ETH ownership of the physical or
$999k+ USD
digital asset.
So when you own an NFT, you
get all the benefits from that
ownership of the
physical or digital
asset it
represents.
So a Non-
Fungible Token
is:
•Proof of ownership of
a real or digital asset
Think of them as digital trading
cards that people can get to • A unique ID number
mate with each other :)
• All the identifiable
In reality, an NFT is just a unique characteristics of the
number, an ID. We then attach asset
information to make it mean
• All the rights and
whatever we want it to mean.
privileges that come with
When it comes to CryptoKitties, ownership
the ID points to a unique digital
• Coded, packaged,
cat with specific characteristics
encrypted using
(colour, eyes, shape, attitude,
cryptography
breed… etc.)
• Recorded and tracked on
We can attach those IDs to any
a blockchain
physical or digital asset or thing1910, Girl with a Mandolin (Fanny Tellier) Oil on canvas, 100.3 × 73.6 cm Museum of Modern Art, New York
WHAT’S POSSIBLE WITH
NFTS?
Many will live their life without • Sell the digital right to own a
the prospect of seeing a Picasso digital version of the painting
in real life, but with tokenization, that can be represented by an
it is possible to change that. NFT called PicassoDigital.
Picasso’s masterpieces are in If you decide to own a high-end
short supply and cost a fortune. print, say print 34/100, you also
The cheapest drawings are worth receive an NFT called
hundreds of thousands of PicassoReal proving that you are
dollars, and the most expensive the owner of that print.
was sold for $179 million.
You can verify that the owner
So if we want to make a Picasso didn’t issue more than 100
masterpiece available for many PicassoReal tokens and find out
to own and enjoy the return on how many were sold.
their investment, we must
tokenize it. You can choose to hang on the
print and sell it later for a higher
That’s one way, but if the owner price. When you do, you also
of the Picasso is not willing to transfer the ownership of the
share its ownership, they can NFT to the person who bought
still: the print to prove they are now
the rightful owner of the print.
• Sell the rights to 100 high-end
prints in real size; each can be However, if someone got the
represented by an NFT called print illegally or created a fake
PicassoReal. print, they can’t prove the
ownership since they do not
• Sell the rights to 500 high-end have the NFT representing that
prints in a smaller size; each print.
can be represented by an NFT
called PicassoSmall.WHY ARE CREATORS
AND ARTISTS EXCITED?
are getting anywhere between
30–50% to do that.
Fast forward 10–20 years, and
you are freaking Picasso; your
paintings are selling for millions
at auctions.
Awesome, right?! No.
You don’t see a penny of those
millions because you do not own
the art being sold, you don’t
know who owns it, and you have
no way of tracking it.
In yesterday’s world, artists and
creators were beholden to
industry, intermediaries, and
platforms and had to adhere to
their terms and conditions.
If Picasso was starting his artistic
journey today, he could use NFTs
to tokenize his artwork, be it
physical or digital.
Picasso in 1904.
Photograph by Imagine you are Picasso in your And as his name gains more
early years, you are still
Ricard Canals.
recognition, he can keep track of
unknown, and to earn some all his artworks as they are being
income, you sell your paintings sold and traded. And through it
and artworks for whatever all, he can earn royalties, sell
people are willing to pay you. directly without paying any
commission to brokers or
A few years pass by, you gain galleries, and he can enforce a
some publicity, and now you specific usage for his work, so it
have some galleries brokering can’t be displayed, sold, or
the sales of your artwork. They traded without his permission.WITH PROOF OF
OWNERSHIP, YOU CAN
DO QUITE A LOT
Using NFTs, artists get paid,
continue to get paid and
maintain control over their work
and creations.
Put simply, NFTs give the power
back to artists and creators.
With proof of ownership, you can
do quite a lot:
Sell anything that someone else
finds valuable — Jack Dorsey is
auctioning his first tweet
ever as an NFT, and at the
time of this writing, it’s
worth over $10 million!
Earn royalties on what you own
and what you create — All
EulerBeats original owners will
earn 8% of the revenues on each
print sold of the original.
Celebrate with your customers
and reward them - Taco Bell
celebrated the return of potatoes
to its menu with taco NFTs that
sold out in minutes. Now, they’re
reselling for thousands of dollars.Prove your ownership anywhere and everywhere as the value of the assets appreciates — CryptoPunks have sold for a cumulative $43 million.
THE NFT MARKET
According to NonFungible.com, exclusively available on their
the largest database of platform.
blockchain gaming and crypto
collectible markets, more than • SuperRare is a marketplace
128,226 sales took place with a for digital works of art from
staggering volume of over $185 leading artists and creators
million. around the world.
These include digital art, digital • OpenSea is a peer-to-peer
music, virtual real estate, VR marketplace for the biggest
wearables, gaming assets, collection of rare digital items
blockchain domain names, and crypto collectibles.
luxury goods, and more.
• Rarible allows digital artists
There are many NFT creation and creators to issue and sell
(minting) marketplace platforms, NFTs. Rarible is also a
exclusive membership-only marketplace.
platforms and do-it-yourself (DIY)
platforms.
• Nifty Gateway teams up with
Top artists and brands to
create collections of limited
edition, high-quality Nifties,Beeple’s opus.
Created over 5,000 days, the collage is the
first purely digital artwork (NFT) ever offered
at Christie’s. It sold for…$69m USD!
CAN HISTORY HELP US
PREDICT THE FUTURE?
When we first got the internet, Soon everyone will be
everyone predicted video collaborating to create infinite
conferencing. It took us 40 years digital artwork like Beeple’s
and a global pandemic to get opus. Created over 5,000 days,
some decent video conferencing, the collage is the first purely
and we are still not there! digital artwork (NFT) ever offered
at Christie’s. It sold for…$69m
What no one predicted is the rise
USD!
of Facebook, TikTok, Uber, and
Airbnb. Bands like Kings of Leon will
release their albums as an NFT
Innovations enabled by
so their fans can unlock all kinds
blockchain technology free the
of special perks like limited-
internet from the grip of
edition vinyl and front row seats
centralized power-hungry
to future concerts.
corporations. It gives us the
power to decide what matters to And creators who go viral for a
us, what we value, what we are meme like Nyan Cat can enjoy
willing to pay for, and how to pay more than clout and followers
for it. and earn six figures for their
work.FINAL WORDS If you feel overwhelmed and do The problem is, as you can not get what the hype is all probably tell from the length of about, you are justified. Most of this article, it’s quite challenging what I read out there just takes unless you know everything for granted that non-fungible we’ve discussed so far to fully tokens are the greatest thing explain NFTs and their impact. since sliced bread because, you know, blockchain and stuff, artists are getting paid, and it will all work out; who cares if it’s just hype.
In a few years, people of development, established
will be using NFTs without markets require more than the
the need to understand “newer is better” argument.
how they work. Just think, out
of all the people using email, Whether the NFT hype continues
how many understand how it or goes away, they are here to
works?! stay as a vital component of the
new blockchain world taking
Tokenizing assets may seem like shape right in front of our eyes.
the logical move that goes along
with the progress and There may be opportunities to
advancement of technology. make money with NFTs.
However, considering the However, as an innovation that’s
challenges of implementing a still in its infancy, there is much
technology as complex as to explore in the coming years.
blockchain, still in its early stages
THOSE WHO ARE WILLING TO GO BEYOND
AND INVEST IN LEARNING AND EDUCATION
WILL PROBABLY BE THE NEW WORLD’S
BIGGEST WINNERS.You can also read
