NFT is just a shorter way to say non-fungible token. So what then is a non-fungible token, you might ask? Well, Wikipedia defines the concept of fungibility like this:
"In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part."
And obviously something that is non-fungible is the opposite of that - it can not be divided up into smaller pieces in order to trade part of its value. To own it is "all or nothing." So, you might be wondering what that have to do with Art? Well, believe it or not, there hasn't really ever been an open source way to trade digital assets via the internet until the world's first cryptocurrency, Bitcoin emerged from the depths of cyberspace. Bitcoin would be the perfect for something like this, accept for the fact that 'a' Bitcoin can be divided up into 100,000,000 individual units (making the smallest one .000000001). So yeah, that works well for modeling something like gold coins, but not so much for art because the goal is to keep it represented as 1 whole item.
Enter Ethereum. Well, it turns out that there is a cryptocurrency that has the capability to handle something like that. There are other similar cryptocurrencies to Ethereum, but right now, its the only one with working smart contracts.
So yeah, to recap... Art is an example of something that holds value, can be traded for other things of value (similarly to money), but is not fungible. For example, obviously no one would try to cut a Basquiat painting in half, in order to trade half of it's value. So in the realm of cyberspace, we can set rules that model this property of collectible items.
How Do NFTs make trading digital assets possible?
There are 2 import aspects of cryptocurrency technology that are important to understand in order to understand NFTs and why they could be useful.
- First is what is called a blockchain. The details of how it works can be a little bit complex, but the main thing to know about it is that, it is a way of using mathematics (which surprisingly all humans can agree on) to verify that some 'blocks' of data can be verifiably linked to each other in chronological succession. To simplify even further, it means we have a way of verifying that a digital document originated from another digital document. This allows us to chain such documents together to keep a running history of data changes over long periods of time. If you've ever done any coding work on a team and worked with Git, blockchain is very similar to the way Git tracks code change history.
- The second piece of the puzzle is what is called a distributed ledger. This is what allows the whole thing work on the public internet. A ledger is just a list of transaction history. For example a basic bank ledger would show that some money has been subtracted from one bank account and added to another, and shouldn't allow anyone to spend more money than they actually have. Blockchains serve as the ledger for NFTs, but in order for them to be trustworthy publicly, a blockchain needs to be stored in multiple locations across the network so that any proposed changes to it have to be agreed upon by the whole network and not a single entity. This decentralization of the power to make changes is what contributes to the network being secure even though it is public (literally open to anyone).
So to sum it up, non-fungible tokens are just digital collectibles that live on a blockchain. The proof that you own it, is that you own the private key to a cryptocurrency wallet that allows you to transfer the collectible to someone else. So you can trade digital art or collectibles just like you would in the physical world.