NFTs (easily explained)

February 5, 2022

Through an example of a video game I played as a kid, I’ll explain the fundamental purpose of an NFT and how the concept of NFTs have been around for centuries. I will first spend time explaining how the game worked because understanding its depth is important in recognizing the impact it had for players  -  and seeing just how far some players were willing to go for “just a game”.

As a child and into my early teenage years, I played an online multiplayer video game. With various skills to hone, the game allowed you to create a character, interact and play with others in real time. The game took place in a massive, fictional online world where you could choose how you want to play and spend your time.

When I say it was a “massive” game - I mean it: assuming you played 6 hours per day, it would still take a minimum of 5 years to “beat” the game. 

Players advertising to buy & sell items on Runescape in 2007 (Google Images)

Here’s an example of something you could do in the game:

  • With one skill “Woodcutting”, you could cut trees with an axe and obtain logs. 
  • You could sell the logs for gold; or, with another skill “Fletching”, you could turn those logs into a bow to be used as a weapon. 
  • With another skill “Mining”, you could mine iron ore.
  • You could sell the iron ore for gold; or, with another skill “Smithing”, you could use that ore to smelt iron bars. You could sell the iron bars; or, with that same skill, you turn those bars into iron arrowtips.
  • You now have a bow with arrows. You could fight monsters with various Combat skills such as Ranging, Magic, or Melee, to get sweet loot. Win in combat, and you get their hard-earned items; or die, and you lose all your items that took you hours to gather & create.

There are two concepts you can grasp from the game:

  1. It takes time & effort to get and create something
  2. There are other players involved and you do not play in a vacuum: there is hierarchy and progression

But…what’s the point?

Why spend 1 hour cutting trees to get 100 virtual logs? And who cares what you do with them; at the end of the day, it’s all just pixels on a screen, right?

The short answer is just like how most people want to see high numbers in their bank accounts and accumulate nice items for their homes, so did players want to accumulate millions of gold & nice items for their game bank account.

We’re social beings and we want to accumulate wealth because that brings us social status & power; and social status & power matters because beautiful things happen to your life when you have a high social status & power. When people regard you with respect, you feel good. You want to fit in & be liked. It is human nature.

And if you think there is no social status within a gaming community, I recall there being in-game celebrities that people worshiped because of their in-game skills & in-game wealth. In fact, there are many “losers” in the real world who are worshipped as ”gods” in these fictional games. Imagine being a 37-year-old minimum wage worker, where society mostly disregards you as “bottom of the pyramid”; but hop on a virtual game and people flock you with welcoming messages when you log in. You walk around the world and people admire your high levels and high-level gear which you spent a lot of time working to get. For once, you feel welcomed & loved. You feel accomplished - you actually have something.

Virtual stuff is not confined to video games. Another example of virtual “stuff” is Instagram likes. Facebook likes. LinkedIn likes. These likes are entirely virtual, no? Just pixels & numbers on a screen. Do people feel accomplished and validated from social media likes? Did you know people pay real money for fake likes and fake followers?

Virtual stuff is not only confined to a screen either. Think about a title in your career. Where does that thing, a “title”, really exist? Where can I find and pick it up? It doesn’t tangibly exist. It’s a concept that we’ve agreed to understand as a society and place value on it. But it certainly has tangible consequences  - how would most people treat someone with the the title of “Janitor” versus someone with the title of “President”?

By now, you can see that non-tangible goods might have some value.

You might say, “Sure, but there’s no connection with them in the ‘real world’. There is a separation between a virtual world and real life.”

Allow me to convince you otherwise.

In the aforementioned video game, a group of friends & I discovered ways to amass large quantities of gold (the in-game currency). Acquiring wealth in-game the “normal” way took lots of time and hours of your life, so we came up with unconventional ways to get wealthy. Mathematically, it was impossible for any player to acquire as much gold as we did by actually playing the game & acquiring resources organically -  a degree of market manipulation and social engineering was required to reach the top 1%.

This is where things got interesting.

It did not take us long to realize that real people were willing to pay real-life dollars for our in-game gold. Thus, we launched a website for a marketplace exchange where you could buy our in-game gold with your real life money (and since they were children & teenagers, it meant they used their parent’s credit card). Simply pay on the website we built, and we would arrange a meet-up with you in-game at a hidden location to trade over the gold. You got the in-game gold and we got the real-life gold - in a fair exchange.

In summary, here is what has just taken place:

  • A virtual world is created with virtual items
  • People like this virtual world, and value is placed within virtual items
  • People are willing to pay non-virtual money for virtual money

By now, you can see the parallel to NFTs: people paying real money for virtual items.

At its core, the fundamental purpose of an NFT is to own something that acts as a symbol of your wealth → social status & power → being liked & being happy. Like an original Picasso painting hanging on your wall, it boosts your social status to a particular community — a like-minded community that sees value in your belonging. In turn, it makes you happy. Whether it's virtual or not doesn't make a difference for some people.

Will it boost your social status in all communities? Of course not, but go back to the Instagram example. If I had 1,000,000 followers on Instagram (virtual pixels), there would be some people who treat me like a Greek god. Some people, on the other hand, wouldn’t see the value in me being social media famous and wouldn’t care. You can’t win them all.

What about sustainability and longevity? This is the unknown variable and why there's an inherent risk in NFTs (and any virtual space, including the metaverse).

Consider this: if the video game had no players, then the gold would not be worth paying for. It is the collective agreement of value that makes something valuable. Naturally, you might be asking, “What about the gold that people purchased? What happened when the game died?” Well, it’s been a very long time since I’ve played this game - but it looks like the game continues to thrive & grow to this day. Looking back on it years later, it's amusing to see how many people I made happy by selling them virtual items.