NFT 101 - Non Fungible Tokens

Non-fungible tokens (NFTs) are digital assets that are provably unique, creating digital scarcity. They can't be duplicated or divided. They have many use cases, including digital collectibles, music, artwork, and in-game tokens.

‘Non-fungible assets’ are just normal stuff. On the other hand ‘Fungible assets’ are the odd ones out! Non-fungible tokens are digital assets that contain identifying information recorded in smart contracts. It’s this information that makes each NFT unique, and as such, they cannot be directly replaced by another token. They cannot be swapped like for like, as no two NFTs are alike. Banknotes, in contrast, can be simply exchanged one for another; if they hold the same value, there is no difference to the holder between, say, one dollar bill and another. Non-fungible tokens (NFT) are digital assets that represent a wide range of unique tangible and intangible items, from collectible sports cards to virtual real estate and even digital sneakers.

One of the main benefits of owning a digital collectible versus a physical collectible like a Pokemon card or rare minted coin is that each NFT contains distinguishing information that makes it both distinct from any other NFT and easily verifiable. This makes the creation and circulation of fake collectibles pointless because each item can be traced back to the original issuer. A non-fungible token (NFT) is a cryptocurrency token that is indivisible and unique. NFTs, offer myriad options for creating and trading digital assets — such as original artwork and blockchain-integrated collectible games like CryptoKitties. Unlike regular cryptocurrencies, NFTs cannot be directly exchanged with one another. This is because no two NFTs are identical – even those that exist on the same platform, game or in the same collection.

Think of them as festival tickets. Each ticket contains specific information including the purchaser’s name, the date of the event, and the venue. This data makes it impossible for festival tickets to be traded with one another. The vast majority of NFT tokens were built using one of two Ethereum token standards (ERC-721 and ERC-1155) – blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem, including exchanges and wallet services like MetaMask and MyEtherWallet. Eos, Neo, and Tron have also released their own NFT token standards to encourage developers to build and host NFTs on their blockchain networks. Other key characteristics of NFTs include:

Rare: The value of NFTs comes from their scarcity. Although NFT developers can create any amount of non-fungible tokens, they often limit the tokens to increase rarity.

Non-interoperable: A CryptoPunk cannot be used as a character on the CryptoKitties game or vice versa. This goes for collectibles such as trading cards, too; a Blockchain Heroes card cannot be played in the Gods Unchained trading-card game.

Indivisible: NFTs cannot be divided into smaller denominations like bitcoin satoshis. They exist exclusively as a whole item.

Indestructible: Because all NFT data is stored on the blockchain via smart contracts, each token cannot be destroyed, removed, or replicated. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them. This contrasts with buying things like music from the iTunes store where users don't actually own what they’re buying, they just purchase the license to listen to the music.

Verifiable: Another benefit of storing historical ownership data on the blockchain is that items such as digital artwork can be traced back to the original creator, which allows pieces to be authenticated without the need for third-party verification.

Unique: This is perhaps the most significant characteristic of them all. NFTs have a permanent information tab that records their uniqueness. Think of this information as a certificate of authenticity.

Bitcoin is a fungible token. You can send someone one Bitcoin and they can send one back, and you still have one Bitcoin. (Of course, the value of Bitcoin might change during the time of exchange.) You can also send or receive smaller amounts of one Bitcoin, measured in satoshis (think of satoshis as cents of a Bitcoin) since fungible tokens are divisible. Non-fungible tokens are not divisible, in the same way, that you cannot send someone part of a concert ticket. Part of a concert ticket wouldn’t be worth anything on its own and would not be redeemable.

WHAT MAKES NFTS SO SPECIAL?

Non-fungible tokens have unique attributes; they are usually linked to a specific asset. They can be used to prove the ownership of digital items like game skins right through to the ownership of physical assets. Other tokens are fungible, in the same way as coins or banknotes. Fungible tokens are identical, they have the same attributes and value when exchanged.

HOW ARE NON-FUNGIBLE TOKENS USED?

As well as for crypto-collectibles like CryptoKitties, non-fungible tokens can be used for digital assets that need to be differentiated from each other in order to prove their value or scarcity. They can represent everything from virtual land parcels to artworks, to ownership licenses. Non-fungible tokens are not traded on standard cryptocurrency exchanges, instead, they are bought or sold on digital marketplaces like Openbazaar or Decentraland’s LAND marketplace.