How do NFTS WORK?
Blockchain for Noobs
The real truth is, to trade successfully in Non Fungible Tokens you don’t need to fully understand the ins and outs of blockchain technology! But if you do want to learn about it, read on…
NFTs use blockchain technology. The blockchain is a kind of database. Like all databases, the blockchain stores data (shocking I know). More specifically, it stores the transactions made when you buy and sell an NFT. Sort of like a bank statement!
The blockchain stores the data in such a way that it…
- Proves the accuracy of the data.
- Verifies that the data being stored has not and cannot be altered.
Stay with us…
Rather than storing the data (NFT purchases) in rows and columns, like a normal database, the blockchain stores its data in “blocks”. Each “block” contains a set of NFT transactions all bunched together. These blocks are then connected together forming a chain (blockchain, get it?).
The data stored on the blockchain is entirely public and decentralised – meaning that it is not controlled by any single organisation, like the money in a bank is.
When you purchase something with your bank card, that transaction is stored in the bank’s database, which is centralised and not public. You, the purchaser, have to trust in the bank and its systems, which is liable to be corrupted (fuck the system, right?).
The blockchain, on the other hand, is completely public and decentralised (only transactions though, not your personal details). All transactions stored on the blockchain are shared with all blockchain users. So if a hacker is successful at changing the blockchain, their new dodgy version will not match the version everyone else has and will therefore be proved invalid. This adds further security to blockchain technology.
The blockchain’s two defining features are security and provability. It is these qualities that make it an essential aspect of NFTs.
Its security means that an NFT cannot be replicated or altered, maintaining its uniqueness.
Its provability allows the purchaser to become the sole and unquestionable owner of the NFT.
Get it? If you want a tad more detail on blockchain technology, why not read: “Blockchain for Nerds”?
Blockchain for Nerds
A block is a set of transactions grouped together. When a block is finished or a certain time has expired, the block is processed, and all its data is run through an algorithm known as a “hash function” (not the smokable kind). The hash function will then produce an enciphered text called a “hash value”- which ends up looking like a jumble of numbers and letters.
Once the block has been processed, it is added to the blockchain. The hash value is then stored in the next block, creating a link between the new block and the one that came before. The cycle repeats, creating a long chain of blocks.
This is a one-way system, meaning that once the block has been processed and added to the chain, it is incredibly hard to alter transaction data now stored in the blockchain. If you change even a small amount of the previous block it will result in a significant change to the resulting hash value (known as “diffusion”).
All of this makes blockchain hard to hack because:
- It is very hard to turn a hash value back to its original form.
- If you did manage to edit the original block, the resulting hash value will be entirely different to the hash value stored in the following block, showing that the altered block is false.