The picture below is an NFT that belongs to a collection called Bored Ape Yacht Club (BAYC) and is valued at around $350,000 US dollars and now it’s mine.
Did I pay $350,000 to get it? Of course not, I pulled the biggest heist in history and right-clicked on it to save it on my computer.
My image is pixel by pixel exactly the same as the “original” but somehow no one would pay me a dime for it. Why? Because I can’t prove that I own it.
Proving Ownership of an NFT
To understand how “owning” an NFT is fundamentally different from “having” an image we need to talk about the blockchain.
In the simplest terms possible, a blockchain is a ledger of transactions that, once a transaction is added to the ledger, it can not be modified. When I say that it can not be modified I don’t mean that it should not be modified, I mean that it is technically impossible to do so.
Let’s say Bob is an artist and he’s good at creating digital images. He decides to turn his image into an NFT so he goes to the blockchain and registers the creation of the image. The process of creating an NFT is called “minting”.
Of course a real blockchain is not a notebook, it’s a network of computers where you can execute code called “smart contracts”. For Bob to be able to create an NFT he would have needed to create a smart contract first and then “mint” his digital image as an NFT.
The smart contract is what keeps track of who owns what image. In this case Bob only created one image, but he could as easily create multiple images and track the ownership of all of them using the same smart contract. But let’s keep it simple for now, only one image, only one owner.
You can programmatically interact with the smart contract and it will tell you who’s the owner of the image. In this case Bob. Interestingly, the image itself is not stored on the blockchain but on an external server, the smart contract only has a pointer of where that image is located. This might not be very relevant right now but it has very important consequences when it comes to the risks of owning an NFT. In another article I explore those risks at length.
To summarize, an NFT is an entry on the blockchain that has the information of who owns the image and where the image is located.
Of course Bob didn’t just create an NFT to brag with his friends that he owns one, he wants to sell it for a profit. Bob then goes to an NFT marketplace like OpenSea and puts his NFT for sale. Alice, who likes to collect digital art, likes Bob’s NFT and decides to buy it. A few weeks later the NFT increases in value and Alice decides to put it for sale again. Jim, who is an investor in new technologies, makes an offer and purchases Alice’s NFT. All these transactions are stored on the blockchain.
The blockchain itself doesn’t know if the NFT was gifted or sold or for how much money, it only knows that it has a new owner. Next time someone asks the smart contract who’s the owner of the NFT minted by Bob it will reply that it’s Jim.
Jim can now prove that he owns the NFT. That’s why his NFT has value while my image has not even if my image is an exact copy of the image referenced by his NFT.
You might still be skeptical. A regular person doesn’t know how to interact with a blockchain to know who’s the owner, for them, both images are exactly the same and that’s all that matters. Why does one have value while the other doesn’t?
The Odalisque in Red Pants
If you go to the gift shop of an art museum, you might be able to find a poster of your favorite painting displayed there for only a couple of bucks. If we find a poster that ‘s the same size as the original painting and we put the same frame on it, do you think visitors might be able to tell the difference if we replace the original with the copy? Probably not, but yet, one might be worth millions of dollars while the other just a couple of bucks.
In 2002 an art gallery in Miami notified the Contemporary Art Museum in Caracas – Venezuela that one of the museum’s most valuable paintings was offered to them for sale, the Odalisque in Red Pants by the artist Henri Matisse. The museum was in disbelief as the $3 million painting was proudly displayed in one of their halls. It was only after an expert analyzed the painting in the museum that it was established that it was fake. The original painting was stolen and a fake reproduction was put in its place without anyone noticing for who knows how long.
For the untrained eye, both paintings are the same, but only one is worth millions of dollars. The same happens with NFT, an “expert” (someone who knows how to interact with the blockchain) can tell apart the original vs a reproduction, even if both images look the same. That’s why NFTs are so valuable. It’s not about the image, it’s about the proof of ownership.
Conclusion
NFTs are one of the many innovations possible thanks to blockchain technologies. NFTs are not only used for static images but can be different types of assets: music, videos, 3D models, etc. NFT creates “digital scarcity” that up until recently was not possible and it’s proof of ownership is opening the door for interesting uses as in video games (play to earn).
Should the picture of an ape be worth hundreds of thousands of dollars? I don’t know, that’s for the market to decide but it is for sure more valuable than “just a jpeg”.