A guide to Non-Fungible Tokens (NFTs), 2023 - Flipbook - Page 6
Technology of NFTs
Constituent parts of an NFT
The concept of an NFT as a non-interchangeable unit on the blockchain
does not have obvious value, so why do people want to create, sell and
buy them?
An NFT holds value when it is used as a digital representation of ownership
of underlying rights or assets. It is possible to create an NFT that is simply a
unit on the blockchain and does not link to anything further. However, it is this
ability of an NFT to be linked to a variety of rights and assets which gives them
their significance. Therefore, in the remainder of this note when referring to an
NFT, we do so on the presumption of its connection to certain external rights
or assets.
An NFT therefore consists of the underlying asset, data and metadata.
To understand why NFTs have value, it is important to understand the difference
between these three elements:
•
The underlying asset holds the value. This asset could take any number of
physical or digital forms, see further discussion in this paragraph below.
•
The data is the piece of information itself, in this case the “token” or
code on the blockchain. By analogy, a file on a computer is “data”.
In an NFT, this is the representation or certification of ownership.
•
Metadata is the description of this data. To follow the analogy that a file
on a computer is data, if you right-click on any computer file, you can see a
description of the file type, location, size and content: this is the metadata
of the computer file. In an NFT, this describes and links to the underlying
asset.
The data is the representation of ownership, but the metadata describes the
underlying asset, and therefore it is through the metadata that the value of the
underlying asset is attributed to the data, giving the NFT, as a whole, value.
