I know the title is a bit cryptic (pun intended, as it relates to a crypto-currencies related product) but nevertheless is interesting. And not that complicated. Bear with me, it will be fun.
If you read my bog for a while, then you know what NFT stand for: Non-Fungible Tokens. And NFT is a representation of value which is unique, and cannot be exchanged for a similar one. Currencies are fungible, meaning a dollar can always be exchanged for a dollar (or, to put it in maximalist terms: a Bitcoin will always be equal a Bitcoin). An NFT has unique characteristics which are making it suitable for representing art. Or event tickets (you can’t exchange a ticket in the front row with the one in the last row, although both tickets can be for the same show).
NFTs took the crypto world by surprise, although the concept in itself is quite old, at least 4-5 years. But lately we’ve seen a wave of NFT interest, fueled by people who want to invest into digital collectibles.
On this field, a specific area, namely “Generative NFTs” is interesting.
How Does A Generative NFT Works?
In order to have that unique representation on the blockchain, you have to buy it, to spend some money, which goes either to the creator, or to the current owner (pretty much like it happens with real art). What you buy, though is a collection of cryptographic keys and transaction hashes. You buy the actual representation of the file (usually on a separate, decentralized file system, like IPFS), you send some money to the owner or creator of the file (the transaction itself) and you keep track of all of this with a transaction (or a few transaction grouped together).
This process is usually called “minting an NFT”.
And here comes the interesting part related to the generative NFTs. These types of art collections are limited to a certain number, let’s say 10,000. That means there will always be only 10,000 NFTs created and minted with that specific set of characteristics. But, to make things a bit more interesting, these characteristics are randomized.
Let’s say the art collection is comprised of heavily pixellated faces, called “crypto punks”. This is a real example, by the way, as you can see in the featured photo of this article. Each punk has some characteristics: gender, profession, hair type, etc. The script that generates the files (that’s why it’s called “generative”, by the way) has a little bit of tweaks so it creates some randomness around there characteristics. We don’t know in advance how many combinations of profession, gender and hairline, for instance, we may have, although we can roughly know there will be x engineers, and y professors.
So, once the process of minting begins, every transaction triggers the script, and every file is generated in a different way. That means what you own is completely unique – although it’s still part of the bigger collection, in our case, you own a specific “crypto punk”, which is guaranteed to be part of the bigger collection of “crypto punks”. Some of the characteristics will be scarcer than others, which creates a thing called “rarity”. The bigger this factor, the more valuable the NFT.
And that’s how a “generative NFT” works.
To get back to our example, the “crypto punks” NFT were quite big on the Ethereum blockchain – and still are – with some of them selling for jaw-dropping prices like $1.75 million.
At the moment of writing, there is a “crypto punk” distribution going on on another blockchain, one that I closely watch for some years now, the Hive blockchain. If you’re interested, you can read more details here.