NFTs are the hottest new topic in the Crypto scene, blowing up enough to even garner a good bit of public attention outside of the usual crypto fanatic outlets. The only problem with this is that beyond the surface level idea, no one knows what they are or how they actually work.

It's time to shine a little light on NFTs, and take a proper, deep dive into how they work, and how many people are getting scammed via NFTs.

Now then. Let's begin.

1. What are NFTs, really?

Everyone knows the analogy of them being collectibles. Unfortunately this analogy is woefully inadequate at best, and actively malicious at worst.

NFTs (Non Fungible Tokens) as an umbrella term just means that each digital token on the network is unique. Each token contains some small bit of data that is unique to the token in question. That's it. They're just little data containers being shipped around the blockchain between addresses.

Now, NFTs on specifically Ethereum have a few data points that are unique to why anyone cares about them. (It's also likely other networks will implement some or all of these features, if they have not already.)

1. NFTs have their creator's address saved as part of the NFT. Likewise, the current owner of the NFT is public information as well.

2. A Royalty % may be set in the NFT token. When the NFT is then traded at any point in time, between any two addresses for ETH/currency, the royalty cut of that 'sale' will be redirected to the Creator's ETH address.

Now, before we go any further, it's important to understand one more aspect of NFTs. NFTs are very, very small. It is exorbitantly expensive to store real data on a blockchain, even something as small as a 64×64 jpg. Most NFTs are only going to have a few bytes of data stored in them. Like, for example, a serial number or URL.

In short an NFT is basically a unique scrap of paper with a serial number, password, or web address on it. That's it.

2. What NFTs -are NOT-

NFTs are not digital media. They do not store the digital media on the blockchain. If you buy an NFT for some image or song, what you're really getting is a Token with a URL to a song or image, hosted on some random webserver.

NFTs do not prevent copying, alteration, deletion, or any other actions regarding any digital or physical thing they link to.

NFTs do not inherently confer ownership over any assets they link to.

Again, before we continue, let's take a brief moment to review: NFTs are just unique tradable 'scraps ' with a small amount of information scribbled on it.

3. So how do these scraps of paper get value?

NFTs have a few potential ways to actually mean something.

1 – The NFT may unlock some functionality, feature, etc. when connected to some external system.

NBA Topshot implements this, for example. Your NBA Topshot token effectively has value via interacting with their systems to display the 'moment' it represents on their website. It's important to understand here, that if NBA TopShot went under, the TopShot tokens would immediately become 'worthless', as you would no longer be able to access the 'NBA Moments' they represent.

The same is true, for example, for CryptoKitties. If their site/etc. goes down, your CryptoKitty tokens are now meaningless/function-less.

In both these cases, your NFT is basically just a trade-able serial number that represents a 'Moment' or 'CryptoKitty' on their servers, and allows you to interact with said 'Moment' or 'Kitty' via their application.

Another more off the wall example in this space is you could have NFTs which may be submitted to an application that then burns(destroys) them in exchange for sending you some physical good or service, such as a t-shirt.

2 – The creator of some media (or physical thing) may sell legal rights to the media along with the sale of an NFT.

Now, this one gets problematic, fast, and is where many people are getting scammed.

1. There is no guarantee the user you are buying the NFT from actually owns rights to the thing represented/linked to by the NFT.

2. In order to legally transfer rights/ownership/etc. you must put it on paper paper/document it. (And for larger items like a house or business, this requires significant legal information in the documentation).

What this means, is that if you want to buy 'ownership' of some linked asset via its NFT, you have to do your own diligence to ensure:

1. They are the current copyright owner.

2. They are consenting, in writing, to selling the rights to you with/via the NFT, and included whatever legal documentation is necessary, if any additional is required.

At that point you can guarantee you've at least bought ownership rights of the thing. However, there's no reason you can't simply sell those ownership rights independent of the NFT in the future.

In short, there is nothing legally tying NFTs to digital rights ownership at present.

3 – Unique/secret data

In this case, an NFT would contain some variety of unique data, only visible to the address it is owned by, such as a unique URL, or password to a secret clubhouse. If the buyer has a reasonable belief that this information is still secret, buying/trading the NFT becomes the primary way to obtain it. Some Rarible sales attempt to go this route, however, the issue here is obvious. It's the internet, nothing stays secret for long, and you have no guarantee that the creator or previous owners have not shared the secret information into the wild.

4. How you are going to get scammed.

1. Buying an NFT for 'ownership' of a thing when the seller doesn't own the thing to start with.

2. Buying an NFT for 'ownership' of the thing without ever actually getting it in writing/legally enforceable.

3. Buying an NFT for 'ownership' of the thing and getting non-exclusive rights (instead of exclusive rights to the thing), meaning the author can continue to mint infinite more NFTs of exactly the same thing.

4. Buying a 'collectible' NFT and the collectible site/host/system goes under/pulls the rug.

5. Buying an NFT for 'investment', only for that NFT to have an exorbitant (50-100%) royalty fee. Meaning most or all of the proceeds of your investment go to the creator, instead of you, when you re-sell the NFT.

6. Buying NFT art/etc. and having the url host of the digital media go down, (or they maliciously change it) so your NFT no longer shows what you bought. ( But at least you still have ownership rights if you didn't get burned on #1/#2 … )

Okay, enough doom and gloom.

5. What are NFTs good for then?

The biggest real success story for NFTs right now are systems like TopShot, CryptoKitties, CryptoPunks, etc. Cases where a website/app/game can interact with the NFTs directly to show you your content, as a proof of ownership of that content, enforced by the app/game. Likewise, NFTs have big potential for game item marketplaces as the company can issue their items with some royalty rate (ex. 1%), and always get a cut of sales if their game (and trade of its items) takes off.

NFTs can also make for good 'proof of attendance'/historical proof type tokens, which is to say, you could be given one for attending a concert as proof you were there.

In the same vein, NFTs are perfect for digital ticket sales. They can't directly be copied/cloned, and even if they're resold on a secondary market, you will get a cut of it. (At least, as long as the scalpers play within the system, and don't, say, just sell the ETH address that owns the token, or take cash as payment then transfer the token for 'free'.)

As far as ownership of real unbound digital assets, or physical objects, there is certainly interesting potential there, but right now, they're legally useless.

It's also worth noting there's a little more nuance into interesting things NFTs can do in terms of smart-contract-esque stuff that's a little too technical for this post, but might show up in future use cases for them.

Oh, yeah, they're also great for money laundering, since if you're buying some nonsense collectable picture of a hat on the internet, it's impossible to say you 'overpayed', so that's a thing.

Closing Thoughts

I think that about covers NFTs, and hopefully this post keeps at least one person from getting scammed. NFTs are a really cool technology with a lot of potential, but when I see people asking crazy questions in the daily about them, it's become clear that they're really selling on hype and a total lack of understanding so far, sadly.

Regardless, thanks for reading, and take it easy.