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What are NFTs, and why are people paying millions of dollars for them?

A couple of days ago, the musician Grimes sold some animations she made with her brother Mac on a website called Nifty Gateway. Some were one-offs, while others were limited editions of a few hundred – and all were snapped up in about 20 minutes, with total takings of more than US$6 million.

Despite the steep price tag, anybody can watch or (with a simple right-click) save a copy of the videos, which show a cherub ascending over Mars, Earth, and imaginary landscapes. Rather than a copy of the files themselves, the eager buyers received a special kind of tradable certificate called a “non-fungible token” or NFT. But what they were really paying for was an aura of authenticity – and the ability to one day sell that aura of authenticity to somebody else.

NFTs are a cultural answer to creating technical scarcity on the internet, and they allow new types of digital goods. They are making inroads into the realms of high art, rock music, and even new mass-markets of virtual NBA trading cards. In the process, they are also making certain people rich.

How NFTs work

NFTs are digital certificates that authenticate a claim of ownership to an asset, and allow it to be transferred or sold. The certificates are secured with blockchain technology similar to what underpins Bitcoin and other cryptocurrencies.

A blockchain is a decentralized alternative to a central database. Blockchains usually store information in encrypted form across a peer-to-peer network, which makes them very difficult to hack or tamper with. This in turn makes them useful for keeping important records.

The key difference between NFTs and cryptocurrencies is that currencies allow fungible trade, which means anyone can create Bitcoins that can be exchanged for other Bitcoins. NFTs are by definition non-fungible, and are deployed as individual chains of ownership to track a specific asset. NFTs are designed to uniquely restrict and represent a unique claim on an asset.

And here’s where things get weird. Often, NFTs are used to claim “ownership” of a digital asset that is otherwise completely copiable, pastable, and shareable – such as a movie, JPEG, or other digital files.

So what is an authentic original digital copy?

Online, it’s hard to say what authenticity and ownership really mean. Internet culture and the internet itself have been driven by copying, pasting, and remixing to engender new forms of authentic creative work.

At a technical level, the internet is precisely a system for efficiently and openly taking a string of ones and zeroes from this computer and making them accessible on that computer, somewhere else. Content available online is typically what economists call “non-rivalrous goods,” which means that one person watching or sharing, or remixing a file doesn’t in any way impede other people from doing the same.