What's An NFT? And Why Are People Paying Millions To Buy Them?

The artist Grimes recently sold a bunch of NFTs for nearly $6 million. An NFT of LeBron James making a historic dunk for the Lakers garnered more than $200,000. The band Kings of Leon is releasing its new album in the form of an NFT.

At the auction house Christie's, bids on an NFT by the artist Beeple are already reaching into the millions.

And on Friday, Twitter CEO Jack Dorsey listed his first-ever tweet as an NFT.

Safe to say, what started as an Internet hobby among a certain subset of tech and finance nerds has catapulted to the mainstream.

Which leads to some obvious questions. Chief among them: What on earth is an NFT?

NFT stands for what now?

It stands for "nonfungible token."

Nonfungible, meaning you can't exchange it for another thing of equal value. A $10 bill can be exchanged for two $5 bills. One bar of gold can be swapped for another bar of gold of the same size. Those things are fungible. An NFT, though, is one of a kind.

The token refers to a unit of currency on the blockchain. It's how cryptocurrency like Bitcoin is bought and sold.

"Remember those days where people would line up for the newest Nike Air Jordan sneakers at the physical store? This is the new digital equivalent," said Katie Haun, a general partner at the venture capital firm Andreessen Horowitz.

"It's everything that brings together culture, and it's also a bet on the future of e-commerce," Haun said.

Still. What exactly do you get when you buy an NFT?

This question unleashes a fury of debate among NFT enthusiasts. The answer is not simple.

Are you buying what amounts to an Internet trophy? Clout? A feeling? A digital collector's item?

Perhaps, but you are also purchasing a kind of bar code, almost a certificate of authenticity that serves as proof that a certain version of something is uniquely yours.

"The underlying thing that you're buying is code that manifests as images," said Donna Redel, who teaches courses on crypto-digital assets at Fordham Law School. "You're buying a different format of art."

But note that when you buy an NFT, you're usually not getting the copyright or trademark to the item. And just because you own an NFT doesn't mean there aren't endless other versions of that thing on the Internet. There will be. It's the Internet.

Still, NFT enthusiasts say owning a piece of code in a blockchain has shown itself to be an incredibly valuable thing.

"You're not buying the picture," said Jake Brukhman, founder of cryptocurrency investment company CoinFund. "You're buying the property rights to the picture."

Why don't people just right-click on an image instead and save it to their desktop? That's free.

True.

But like with other collectables, whether it's baseball cards, rare books or fine art, having an original is special.

Take CryptoPunks, pixelated avatars that have fetched millions of dollars. Sure, you could download one of the alien avatars, but collectors would not consider it authentic. A real alien CryptoPunk costs, on average, $900,000.

To be clear, there's no visual difference between an original and a copied version.

And to make it even more confusing, not all NFTs are originals. Many are the digital equivalent of a reprint. But in this case, the reprint has what is essentially a unique bar code, or "token," on the blockchain, which is a type of decentralized record-keeping system. In other words, instead of one institution, like a bank, having a ledger of transactions, a blockchain uses a vast network of computers that all hold each other accountable on a shared public record.

That makes it hard to remove an NFT from the Web entirely. It also means there's a way to trace an NFT's origin and transaction history.

How do you buy or sell an NFT?

It takes some steps.

First, you usually have to buy a cryptocurrency, like Ethereum. That's a process in and of itself. But once you do, you can go to an NFT marketplace. Some of the popular ones include KnownOrigin, Rarible and OpenSea.

There, you can bid on an NFT and wait for the auction to end. If no one outbids you, you get the bragging rights.

How do you make an NFT?

Log on to one of the NFT marketplaces and upload a file. This process is called "minting" an NFT.

You'll usually be asked if it's a one of a kind, if there are multiple copies or if it's part of a collection. (A quick glance at an NFT marketplace shows just how easy the process is — maybe too easy. Some people are trying to sell tweets and even colors as NFTs.)

Once you're done, collectors can start bidding.

Digital artists can build a royalty into their NFTs, even for future sales, which is why many artists see promise in NFTs: It can cut out the middleman and open up a new way to make money.

If you're not interested in buying or selling them, why should you care?

As tens of millions of dollars in transactions pour in for NFTs, enthusiasts say, NFTs will soon expand beyond trading art, music, video clips and memes. One startup lets people use their NFTs as collateral for loans.

Silicon Valley investors say the moneymaking possibilities in the NFT world are limitless.

"At the time the iPhone was created, nobody would've thought that one of the killer apps was going to be hailing a ride," said Haun of Andreessen Horowitz.

What are the risks?

There's always a chance that a tech frenzy is a passing fad or is stoking a speculative bubble. If you spend a pretty penny on an NFT and then enthusiasm and values suddenly plummet, you could be in for a big loss. But NFT backers say the system's built-in scarcity should keep values up, as long as the surge of interest persists.

Be cautious about works that appear to be created by famous artists. NFTs resembling pieces by the artist Banksy have netted $900,000, but they have turned out to be fakes.

Then there is the environmental impact of NFTs, which has attracted real scrutiny. The computing power required to operate the underlying blockchain system of NFTs is immense. By some estimates, one crypto transaction could gobble up more power than the average U.S. household uses in a single day. One artist estimated that generating six NFT pieces consumed more electricity than his entire physical studio did in two years.

"The energy production infrastructure is out of our sight," wrote Brussels-based artist Joanie Lemercier.

"And we often have the feeling that electricity is abundant, limitless and we disregard its impact."

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