Non-fungible tokens for dummies

The Register has a report on Bill Gate’s views on Non-fungible tokens (NFTs) and the related cryptocurrencies. The short version is that both are “100 percent based on the greater fool theory.”

Nothing surprising there: they are. But the article also includes a handy explainer as to what Non-fungible tokens actually are. It is such a superb piece of writing that I am posting it here so that I can refer back to it as and when necessary.

Want to buy nothing? You’d probably say no. That’s because people don’t like nothing, they like scarcity and status. In the digital world, scarcity doesn’t work because data can be infinitely replicated.

But what if I faked digital scarcity? A database with limited spaces, each identified by a unique number. Think a line of people queuing for nothing. There’s no value inherent in one spot over another, but I sell you a position in the queue. I’m not selling you the queue, or its destination (there isn’t one), just the right to stand in this particular position.

You give me a dollar, and I give you some paper work, signed by yours truly, that says you have the right to stand there. Your position in the queue combined with my paper is a token that can’t be recreated. There is only one of each position. It is, therefore, “non-fungible.” The blockchain checks every single sale of a queue position and once you’ve bought your spot, it’s listed on the blockchain. Want to sell your position to someone else? You can, and that transaction will be listed on the blockchain too.

Why would anyone want a spot in my queue? Well, what if I put up a poster next to your position? Every spot now has a unique poster, and buying a place in the queue means you can now stand next to that poster. You don’t own the poster, you don’t own the image on the poster, you can’t reproduce the image, or sell copies, or claim any other type of ownership. What you’ve bought is the right to stand next to that poster – that’s it. You can show your friends the receipt that says you can stand there. They might even think it’s cool.

Congratulations, you now understand NFTs. Yes, it really is that stupid.