My 12-year-old niece read an article about the “Charlie bit my finger” video that was converted into an NFT and sold for half a million pound, she was excited to know that memes and videos are worth so much. She came up to me confused yet brimming with inquisitiveness, with gleaming eyes and excited tone asked- What is a Non-Fungible Token? Why are people paying money to buy memes and videos that were available for free on the internet all this time?
Well, as a fan of analogies myself, the following is an explanation I gave to my 12-year-old niece, who, by the way, has a remarkable intellectual prowess on memes, videos and music and very limited knowledge of blockchain, cryptocurrencies and tokens.
At the outset, I would like to apologize to the tech-savvy readers for the over-simplification of certain concepts. In my defense: the explanation was technically intended for a 12-year-old and not for an investment firm planning to invest in cryptocurrencies or Samosas(you will know why).
Imagine, you go to a restaurant that sells Samosas (it’s a traditional Indian fried dish with potato filling and my favorite evening snack). You (Buyer) go to the cashier and ask for 2 samosas, the cashier gives you two blue-colored tokens (Cryptocurrency) in exchange for cash, these tokens may be exchanged for one samosa each at the delivery counter (Crypto exchange).
Now, let’s make it a little crazier, this is a unique shop, instead of having one chef who cooks the samosas (i.e. a Centralized system), the shopkeeper allows anyone who is willing, to cook the Samosas themselves (i.e. a Decentralized system). However to cook the Samosa you have to go through training (pass an exam every time) and follow the cooking procedures (Mining), but the best part is that post the efforts you have spent you get the blue-colored tokens that can be exchanged for Samosas.
An important thing to note here is that while anyone can come and cook Samosas, there is a limited amount of raw material that the restaurant keeps and therefore only a finite amount of Samosas can be made. Considering the finite-ness of the availability of Samosas, there is often a demand increase as the Samosa count ebbs towards its maximum number.
Another important thing to note is, whether you actually participate in cooking the samosa or you bought it directly from the counter it’s the same Samosa. Also, it is highly transferable, I can give my blue tokens to anyone else, and s/he can get the same Samosa from the delivery counter.
(Interestingly, in the crypto world there is no Samosa in physical form, there is a “concept of Samosa” that most people believe is of some value, and sometimes this can be a problem — a highly influential diet consultant may come along and suggest Samosas are deep-fried and are therefore bad for health and soon the value of the concept plummets)
Now, imagine you go to the counter and the shopkeeper offers to sell you a Samosa that is 200 pound and has a world record in its name for being the biggest Samosa in the world (basically, it’s a unique-one-of-a-kind Samosa). This Samosa is obviously not available at the same price as the normal Samosas, (and let’s say you like collecting large Samosas for some reason), maybe you pay 100 times or 150 times the price of the normal Samosa and buy it (The shopkeeper now gives you a maroon-colored token). Now you become the owner of the Samosa (please note you become the owner of the product and not the chef/creator of the Samosa, the creator of the Samosa will always be the restaurant).
The big question, what do you do with this Samosa? Do you eat it? Well, yes you can. Alternatively, you may do something better. You stop the restaurant from publicizing the Samosa anymore, however considering this is a famous Samosa, you are soon approached by top Instagram influencers to click a photo with it. This idea becomes a fad and more and more people want to click a photograph with the famous Samosa. You have all the rights to charge these influencers (monetize the asset) for getting the photographs clicked (and the best part, since you have already paid for the Samosa and you do not owe any money to the restaurant who created it (well, up to a point)) and hopefully, soon enough you would collect more than what you had spent(invested) in buying the Samosa or at the very minimum, you can still become famous and earn lifetime bragging right for owning the huge Samosa which is priceless (to some people at least).
This world famous Samosa is a non-fungible token (NFT), i.e. it is not easily or directly exchangeable (non-fungible), it is a unique product, this maroon colored token for the World’s largest Samosa can’t be taken to the delivery counter and exchanged for the equivalent number of regular Samosas. Unlike the previous example, NFTs represent an asset (usually digital- a photograph, meme, video, audio recordings or any art form), that is perceived as of significant commercial value.
Hope, this story can help some other kids out there too, or serve as an interesting read for all who enjoy over-simplification of concepts with analogies, as far as my niece is concerned, I’m sure we have one more person on our team who is now excited about blockchain and tokens. In fact, next week I’m discussing crypto-trading with her, but for now, I’ve got to order some Samosas for both of us… again!