A Simple Guide to Understanding NFT and Cryptocurrency

It makes me sad that people have trouble understanding what NFT is, but still get swept up in all the debates. This guide tries to help you understand the basic of it.

The first part contains to-the-point explanation, as simple as I can make it. The second part contains more explanation so you can understand how this all came to be.

Part I: The TL;DR

So what is “NFT”?

“NFT” is like digital papers saying “you own this thing now”. Creating and trading just one of these digital papers use up at least as much energy as letting your computer run for whole years.

“NFT” exist in the “blockchain”, which is kind of like a version of the internet, but works differently. Don’t worry about this yet. I go over that in Part II.

NFT is short for “Non-Fungible Token”. I also go over that in Part II.

What about “Cryptoart”?

When an NFT is made for an art piece, we call it cryptoart.

The word comes from “cryptocurrency”, which is the currency used in the blockchain. I go over what that means in Part II.

Why do people like it?

NFT can be sold for a lot of money. It can also be sold for very little money, but those don’t get talked about as much. People who support NFT says it’s good for artists because it lets artists earn money from their work.

There are also those who likes it because buying and selling NFT uses cryptocurrency instead of traditional banking. We’ll talk more about cryptocurrency in Part II.

Why do people say it’s bad?

The energy to create just one NFT is like flying on an airplane for hours, or the electricity usage of a single family for a whole month. This is a lot of energy, and that energy is generated somewhere, creating waste in one way or another. This waste is then dumped on the environment.

Considering the environmental issues we’re already facing today, using NFT is only making things worse.

Why is it using so much energy?

It’s because NFTs exist on the blockchain. The blockchain does a lot of difficult math just so it will be impossible for someone to create fake records. I talk about this more in Part II.

Is there another reason why people don’t like NFT?

Yes, here’s another thing: NFT has no legal meaning. Even though the certificate itself can’t be copied, the art it links to can still be used like any digital image. It doesn’t stop other people from using the art. Moreover, anyone can make an NFT of anything, including of other people’s works, even if an NFT is already made for those works before.

A lot of artists are worried that people will make NFT out of their art without permission. This is already happening.

Any other problem with it I should be aware of?

Yep. NFT is traded with “cryptocurrency”, which is like a form of digital money, and cryptocurrency’s value goes up and down very quickly. Cryptocurrency is created and traded the same way as NFT, so they also use a lot of energy.

I go over what “cryptocurrency” is in Part II.

Can’t artists just earn money without using NFT?

They absolutely can! Artists can sell physical prints of their art, they can sell hi-res version digital copy of art, or you can commission them to create a piece of art made especially for you!

Trading NFT is only a big deal now because it’s trending news and because some expensive purchases are being made. Some people are lured to it now by the idea of getting rich quickly off it .NFT and the trade of cryptoart have actually existed for a couple of years.

Part II: Let’s talk about the blockchain

To really understand what NFT is or why it even exist in the first place, we have to learn about the place that it exist in: the blockchain.

Okay what is a blockchain?

A blockchain is like thousands of interconnected machines, spread across the globe, whose sole purpose is to keep records of the ownership and transaction of tokens. So when someone owns X amount of tokens, the blockchain will keep record of that. When someone send Y amount of token to someone else, the blockchain will keep record that they lost Y amount of token and the receiver now have Y amount of token.

Some tokens are used as money. We call this kind of money cryptocurrency. Different blockchains have different cryptocurrencies. Bitcoin and Ethereum are examples of cryptocurrencies.

Unlike records kept on the internet, records on the blockchain is secure and nearly-impossible to fake. I’m simplifying this a lot, but this is because whenever there’s a transaction, every machines in the blockchain will start doing very tedious math to create a record of it. The machines who get the math right will then be awarded some amount of cryptocurrencies. We call this activity mining.

This mining takes up so much power that faking a record will be very difficult to the point of impossibility. Someone once described it as keeping your car idling 24/7 creates solved Sudoku that can be used to buy drugs.

Some people have dozens of these machines made especially to mine the blockchain. We call these dozens of machines as a crypto farm.

To keep the blockchain secure, the math used to create records in it gets more difficult as more mining happens. This means that the more transactions there are on the blockchain and the more tokens there are in that system, the more power will be consumed for each transaction. It will then be more expensive to mine more cryptocurrency. This is one of the reasons why the value of cryptocurrencies (e.g. how much it’s worth when exchanging to other currencies) go up and down a lot.

So what’s NFT’s place in all this?

Cryptocurrencies like bitcoin can be split as many times as you want. You can have 1 bitcoin, you can have 0.5 bitcoin, or you can have 0.00001 bitcoin. 1 bitcoin can be exchanged for 1 bitcoin. So if you give 1 bitcoin to someone and then receive 1 bitcoin from someone else, what you have doesn’t change.

Most tokens, like cryptocurrencies, are fungible. “Fungible” is a technical term which means something is replaceable with something else of the same worth. NFT, which is short for “Non-Fungible Token”, is not like that. You can’t split an NFT into half of itself. If you give an NFT away and then someone else gives you an NFT, what you have will be different. Each NFT is unique and only one of itself can exist in the blockchain.

NFT can have data attached to them. NFT for artworks usually have things like the URL of the image, the artist, the date, and all of that attached to it.

NFT can be created in a blockchain through a process called minting. Doing so also requires machines to do very tedious math that requres a great amount of power.

Note that the blockchain only contains the NFT, not the image. An NFT also only contain the URL of the image, not a copy of the image itself. It’s a certificate, not the image itself.

But why does blockchain exist in the first place?

Blockchain and cryptocurrencies are created as an alternative to normal banking procedure. In the real world, banking and transactions has some central figures to manage it, usually banks and governments. Even when a transaction is done in cash, those cash are first “created” by the government.

With blockchain, there isn’t a central figure who oversee the economy. Everything is left to the machines in the blockchain, and these machines are spread across the globe with various owners. If something goes wrong, or if your cryptocurrency gets stolen, or if you lost the password to your account, there is no government or police for you to ask for help.

I’ve heard that blockchain is the future. is this true?

The technology is still being developed. It’s possible that in the future, they can find a way to make the blockchain secure without using unreasonable amount of energy. It’s possible that in the future, blockchain will replace traditional banking entirely.

But the future is not today.

So is blockchain and NFT a good thing or bad thing?

That’s for you to decide. This article is just meant to give you a basic understanding of the whole thing.

If you’re interested in the topic, please search and read more about it! A lot of what I’ve explained here are just simplified explanations.

For starters, this article is a great at explaining how much cyptoart is costing the environment. It can be very technical, though: https://memoakten.medium.com/the-unreasonable-ecological-cost-of-cryptoart-2221d3eb2053

Okay, but what’s your opinion on it, article author?

Well if you’re asking me…

I personally think NFT and blockchain in general, as they are used today, is doing a great damage to the environment. This damage is not worth the value we get from using it. No matter how useful NFT can be, it’s not worth this.

The way value is decided in cryptocurrency also makes me uncomfortable. I think the technology is still very fragile and not yet ready for widespread use.

It also makes me uncomfortable the way art is attached to NFT and then be treated like a commodity. Art is so much more than a thing you can buy and sell. Art is so much more than a price tag attached to it. A lot of rich people buy NFT only because they want to sell it again for a higher price, not because they care about the art piece, and that makes me sad. We can do better than this.

We can always try to do better.