NFTs Explained: Myths and Misconceptions

– For the sake of
consistency in this video I'll be using the term artwork throughout to refer to
any sort of digital asset whether it's an image,
a video, and in theory an NFT can really refer to anything both physical or digital. There's timestamps below, you hover over the timeline,
or look in the description. So feel free, jump around if you're more curious about
one of these over the others. Also a quick disclaimer
before we go further, NFTs and more generally
all cryptocurrencies are a very complex issue
both from a technical and also a social standpoint. This video isn't an endorsement
for or against NFTs. And unfortunately a 10
minute video is not nearly long enough time to get into all of the intricacies and
complexities of them. This video is really just
my attempt to demystify some of the Arcana of
NFTs as I understand them so that you can hopefully
have a more informed opinion about these issues for yourself.

All right, with that of
the way let's dive in. Now to understand the first assumption the artwork itself is non-fungible. It will be helpful to
understand what fungibility and non-fungibility actually mean and where these terms come from. And before looking into NFTs, I actually had never heard the term before and I had no idea what it meant, but for anyone coming
from economics or finance is most likely very
familiar with the term. In the simplest sense, fungibility or two things are fungible, if they're capable of mutual substitution or if you can exchange them. So fungible goods, we're all familiar with this is something like cash or dollars.

If I give you five $1 bills and you give me one $5 bill back that exchange is equal for both of us. Now have two goods that are
fungible can be exchanged. What does it mean for a
good to be non-fungible? Well, the most basic level it means the goods can't be exchanged. A common example of a non-fungible good is often a collectible. Let's say I have a first edition Boyle Charizard Pokemon trading card. Now, since this Charizard
Pokemon card is non-fungible. I can't just walk into a coffee shop and give them a Charizard in exchange for something
like a coffee or a bagel. If I did want to purchase something with the value of the Charizard, I would have to first go through a market or a network or something like eBay convert or sell the Charizard into dollars and then use those
dollars to buy the coffee or whatever else I want.

Now that we hopefully have
an idea of the difference between a fungible and
a non-fungible good, What does it mean for
a token to be fungible? Now for NFTs, we'll often
assume that the art itself is also non-fungible. Now with an NFT, the only
thing that is non-fungible, that's unique is the token of the artwork. It's an image you can make as
many copies of it as you want. Anyone on the internet can
view it and download it and it can be passed around
and shared between friends and the common retort
is sure the digital file can be copied, but I'm the one who owns it just like as many people
can take a picture of the Mona Lisa at
the Louvre as they want but the museum itself
actually owns the artwork.

But again, this is where the
connection between something like physical art and NFTs really starts to breakdown and to
understand why it breaks down. Let's walk through a simplified process of how creating an NFT actually works. So let's say you're an artist and you have a really
awesome digital painting. So you bring that digital painting to an NFT marketplace,
something like Mickey gateway, in this example.

You upload your image in the
marketplace mints, a token. The token itself is this
the unique identifier. There's only one of them to
sequence of numbers and letters but it doesn't actually
contain the artwork. The artwork isn't somewhere hidden in these letters and numbers. Although the token really is, is essentially a locator or an address. It points to wherever the
actual image or the file lives in this case, an NFT
marketplace's servers. So let's say an art collector comes along and they really like your piece.

They'd go to the NFT market, and in exchange for some amount of payment the collector gets this token or rather a sequence
of numbers and letters. They don't actually get your image. That image still lives somewhere in the NFT marketplace's servers. All that the NFT or really
all that the token really does is it says this art collector bought this unique identifier that points to this digital image that lives somewhere in
this marketplace's servers. Now just because an individual
owns a token in the process there's no transfer of
copyright or trademark.

You as the artists still
officially have copyright you still can determine when, where and to whom
that image is shown. For example, just because
someone bought an NFT doesn't mean they bought
the rights to use your image or your likeness and something
like an advertisement. Second, there's actually no
transfer of the asset itself. Again, that image or artwork still lives somewhere on the internet, whether that's in the
NFT marketplace's servers or wherever else the token points to. The collector doesn't
actually get something like a special file that's
cryptographically signed. And the third kind of weird subtle thing is that you actually mint
an NFT of some artwork. You don't have to be the original artists. Now, if someone makes an NFT
of some other artists' artwork chances are that if it
becomes widely known that token itself won't be worth much since it's not a token that
the actual artists created.

So while NFTs are supposed to limit things like forgeries for digital assets there's still kind of this meta problem of how do you know and how do you verify the person who actually created
the NFT in the first place was the original artist or had consent from the original artists? And with this third point, I imagine there's going
to be a lot of messiness, both legal messiness, but
also messiness of provenance.

Or rather what's the lineage of where this digital artwork came from? And while there are solutions
to a lot of these things. I just want to make it
clear that NFTs themselves don't have any safeguards built into them. And now for our final
misconception that the art or the digital asset is what
actually contains the value. Going back to our collector let's say he pays $1 million
for the NFT of some artwork. And again, the NFT itself
actually just is something like a URL that points to
the actual image or file or digital asset in this case, let's say it's inside NFTs R US. So the value of this $1 million actually lives in the token or the NFT.

And you might be saying, oh that's pedantic John, the
NFT actually just represents or is the stand-in for
the digital art itself. But let's say that artwork is
actually a pretty common image that lives in thousands
of places on the internet. The value actually lies in the collector's ability
to say with this NFT I essentially have a
certificate to this artwork. There might be thousands
of these images out there but only one of them has
this NFT, this specific NFT. Just like if you have a
fender Stratocaster guitar if someone like Eric
Clapton played and signed. There might be thousands of similar or identical
Stratocasters out there. But since you have the
one that has the signature of Eric Clapton, this is
Eric Clapton's guitar. That's what contains all the value. And in this regard an NFT can be almost thought of
as a digital signature. And the last assumption let's say three B, is that NFTs are forever but let's say that this
collector, as this NFT, they bought for a million dollars, you would hope that
sometime in the future, maybe 10 50, a hundred, 150 years that an NFT will still hold the same value and still point to that
same digital artwork.

But if NFTs R Us suddenly goes to bust or some other NFT marketplace or startup that issued you your NFT goes bust, well the actual artwork or image might still exist somewhere. The fact that an NFT points to a specific location, now that NFT or that
identifier that you bought for a million dollars points
essentially to nothing. And again, this is wrapped up in the fact that an NFT is really
just a location identifier or something like a glorified URL. And again, there are
ways to get around this, say if you store the actual digital asset on something like a peer to peer network or content address storage like IPFS. Your token in theory will point to something that is much more resilient to individual companies
or servers going down.

But again, this isn't actually encoded in the NFT specification. So hopefully this video cleared up at least some misconceptions about NFTs that you might've had. And again, this is a very kind
of complex and nuanced topic much more than I could cover
in this short YouTube video but I'll link to some of
the better resources I found out there about this
subtlety and nuance of NFTs both from a technical
and a social standpoint. And if you made it this far, thank you. Hopefully you had fun watching this video.

I sure had fun making it. If there's a specific thing
that you're especially curious about or have been really
wondering about with regard to NFTs, leave a comment below and I'll be sure to address
it in my future videos. And if you're interested in these types of explainer video content,
feel free to subscribe. Because I'll be posting a lot more videos like this on a lot more diverse topics. (upbeat music).

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