What You Should Know About Non-Fungible Tokens

Oct 18, 2021 08:00 AM ET
What You Should Know About Non-Fungible Tokens

Blockchain is the revolutionary technology powering cryptocurrencies at the epicenter of decentralized finance. However, cryptocurrencies are not the only by-products supported by the digital ledger technology. Non Fungible Tokens (NFT) are becoming increasingly popular.

Image introducing NFTs guide

A Non Fungible Token is a digital asset that lives in a blockchain but represents real-world objects. Such assets represented on the ledger technology could include things like art, music, or videos. Encoded by some underlying software, the items can be sold online with virtual currencies. Additionally, they can be envisioned as a digital asset that leverages revolutionary technology to prove the authenticity of a unique asset.

Given that they live on a distributed ledger such as Ethereum, NFTs are easy to track and secure. The tracking aspect also makes it easy to verify their authenticity. Data on digital ledger also makes it possible to track owners as well as history.

Such assets accrue their value from the underlying assets they are used to track. Their value also comes from the amount of money they are likely to generate when sold in future. Consequently, they can be sold and traded. 

While NFT’s have been in existence since 2014, it’s only now that they are starting to become popular. This is partly because they have presented a unique opportunity for buying and selling digital artwork online without the need of a middleman. Since 2017 more than $170 million has been spent on the new asset class.

Understanding fungibility

Fungibility is a term commonly used to describe assets on cryptographic technology that are not unique in any way i.e., fiat currencies. In contrast, items such as paintings can never be the same. No two paintings can be alike; thus non-fungible.

Image introducing fungibility guide

Fungible assets make it easy to exchange and trade items with other individual goods and assets, given the equal value between existing assets. The fact that the items are identical in specification makes it easy to substitute one for another. For instance, one can substitute one dollar note for another one dollar note, given that both are identical and of the same value.

Non-Fungible, on the other hand, are items that cannot be exchanged for one another. For instance, one cannot interchange furniture for furniture or a song for another song, given that both items have unique properties.

How they work

Each token minted to represent an NFT must come with a unique mark. The unique identifier makes it impossible to exchange one item for another. In addition, each has an owner, and the information is easily verifiable.

Image depicting NFTs workings

The blockchain powered tokens work by simply tokenizing an item resulting in the creation of a digital certificate of ownership. The certificate can be bought and sold. However, the unique features in place mean it cannot be duplicated.

Additionally, a record of who owns the certificate is stored and shared on a digital ledger. The records cannot in any way be forged as they are maintained by thousands of computers around the world. Some come with smart contacts that make it easy for owners to get a piece of any future sale  

NFT vs. cryptocurrency

Non-Fungible tokens and cryptocurrencies are both by-products of the cryptographic technology; however, they differ a great deal. The main difference emanates from the fact that virtual currencies are fungible. In these cases, one can exchange one altcoin for another, given the lack of a unique mark or feature.

In contrast, NFTs come with unique identifiers that make interchanging impossible. In addition, they are unique to particular asset classes thus cannot be replaced.

NFT use cases

Tickets

Instead of people having to walk around with paper tickets for events or shows, the same can be integrated into the blockchain. In this case, tickets are created using an NFT so that whenever a person makes an exchange, a record of exchange is left behind. Consequently, it averts the risk of someone scalping tickets, let alone stealing or trying to counterfeit, as there is no chance of exchanging one ticket for another.

Fashion

The blockchain powered tokens are also being used to fight counterfeit in the fashion industry. Having a digital record of all the items up for sale makes it impossible to counterfeit goods. In this case, luxury items are attached with NFT to affirm they are genuine.

Additionally, their use in the fashion industry makes it possible to prove the origins of an item, such as the material used to make them and how far the item has traveled.

Collectibles

While people cherish collecting memorabilia and other valuable items, the tokens can provide a unique way of ensuring their authenticity. In this case, NFTs act as a signature or stamp of approval.

Gaming

Additionally, NFTs provide a unique way for people to own unique in-game items.

NFTs prospects 

In recent years the market cap for NFTs has grown to over $300 million, begging the question of whether they are here to stay or just fads. Just like virtual currencies, they are shrouded in mystery given the lack of regulatory framework around them.

Image signaling NFT future

However, their growing popularity and adoption in mainstream sectors all but affirm they are here to stay. Formula 1 has already affirmed they have a role to play in the digital world by developing games around them and allowing people to hold collections. 

The fact that the new tokens are finding use cases around identity management also affirms their long-term prospects in the digital world. That said, there is an opportunity for their use in  streamlining the process of carrying passports or digital identities being verified.

Bottom line

Non-fungible tokens are taking the world by storm as an important aspect of blockchain technology. The innovation is having a moment, and many people are using them to protect and certify their valuables, let alone generate money from them.


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