Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Understanding non-fungible tokens
Understanding non-fungible tokens mean first defining the concept of fungibility.
Fungibility sounds complicated, but it is a rather simple concept relating to the things people own and use every day. Physical cash is one example of a fungible asset because it can easily be replaced by something identical. For example, a $20 bill with one serial number can be replaced by another $20 bill with a different serial number. Both bills also hold equal value.
Conversely, non-fungible assets are those that are not mutually interchangeable. A rare baseball card is not interchangeable with a more common card. A first-class plane ticket is not interchangeable with an economy class ticket.
Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Non-fungible tokens also address the problem of a lack of unity in traditional digital assets. For example, an in-game collectible is likely to be very different from an event ticketing system. Using Blockchain, NFT unifies these assets and provides a simple way to transfer ownership and manage access.
The three characteristics of non-fungible tokens
Here are three characteristics that differentiate NFTs from traditional cryptocurrencies:
- Unique – each NFT is defined by metadata that describes how it is different from the rest. Metadata is rich in the sense that owners can describe many of the attributes that make the NFT special and identifiable. This record is permanent and unalterable and as a result, can be used to validate authenticity.
- Rare – non-fungible tokens are attractive in part because of scarcity. In theory, developers have the freedom to generate an endless supply of certain assets. But they can also limit the number of certain assets, increasing rareness and desirability.
- Indivisible – in much the same way that 40% of a rare baseball card is worthless, NFTs cannot be split into smaller denominations. They can only be held, bought, and sold as whole entities.
Applications of non-fungible tokens
Although non-fungible digital assets have existed for many years, the tokenization of these assets has the potential to deliver significant benefits.
- Providing ownership. While an Instagram page can be deleted in a matter of seconds, a non-fungible token paired with Blockchain technology helps solidify ownership rights.
- Transferable. NFT ownership rights can be easily traded on specialist markets. In a gaming scenario, non-fungible tokens help avoid the problem of “walled gardens”. Here, desirable assets in one game can be used or exchanged for assets in another game – even between titles with different publishers.
- Authentic – fraud is synonymous with high-value non-fungible assets in art, gaming, collectibles, and other virtual or real-world assets. Blockchain helps negate counterfeiting and deceptive behavior, reassuring buyers that their purchase is authentic and original.
- Non-fungible tokens are digital tokens that represent something unique. They use Blockchain technology to simplify the managing of access and ownership of traditional digital assets.
- Non-fungible tokens are rare, unique, and indivisible. These three characteristics help distinguish them from cryptocurrencies such as Bitcoin.
- Non-fungible tokens solidify ownership of digital assets that have existed for many years. Importantly, they make such ownership transferable and help reduce the chances of fraudulent transactions.
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