As the real world has been gradually going global, so has been the medium to trade it, aka various products and service being offered on blockchain technology. Well known for a while amongst them include, Cryptocurrencies, utility tokens, security tokens, privacy tokens. These are popularly called digital assets and their classifications are multiplying and evolving right alongside cryptographic and blockchain technology.
And Non-fungible tokens (NFTs) are the latest example of the fast-paced change in the industry. In this guide, we explore what they are, how they work, and how they’re being used.
Let’s start with its definition and unique properties
Most of what is enabled as financial transactions happen through various form of assets, as this is done through a digital contract. Every digital contract is unique and with increasingly more advanced technologies get more secure.
Non-fungible tokens are digital assets that contain identifying information recorded in smart contracts. They are indivisible and provably unique and can be used to represent both tangible and intangible items.
Their key property is that they are unique, creating digital scarcity. They can’t be duplicated or divided. What makes them unique, non-replicable, and safe is the information contained in the NFTs. NFTs cannot be directly replaced by another token or swapped like for like, as no two NFTs are alike. Unlike fiat currency, which is issued in the form of Banknotes, can be simply exchanged one for another, and only when they hold equal value, there is no difference to the holder between, say, a one-dollar bill and another. That is also why they are so prone to duplication. But the NFT’s uniqueness doesn’t end there.
Bitcoin is the fungible token and not an NFT.
A single Bitcoin can be sent to someone and received back, while the overall value remains that of one Bitcoin, serving the role of currency. The value of the coin also changes during the time of exchange. Bitcoin can even be exchanged in traded in units less than one called satoshis, satoshis are like cents of a Bitcoin since fungible tokens are divisible. This means that bitcoin is divisible.
NFT differs from Bitcoin and similar assets, as NFT are non-divisible. It is more like a train ticket or meal, you can buy half of it, it’s one single unit full unique. A part of the train ticket is of no use until is given as a whole.
Cryptokitties were the first popular form of NFT
Non-fungible tokens were first released as the now popular CryptoKitties collectibles. Every blockchain-based digital kitten is unique. So what happens here is that when a sends someone a CryptoKitty and receives a CryptoKitty from someone else, the one that the sender receives will be a completely different CryptoKitty from the one sender sent. In fact, in that game, it was the Collecting of different digital kittens which was the point of the game.
A CryptoKitty’s uniquely identifiable information that makes it a non-fungible token, is stored in its smart contract and immutably recorded on that token’s blockchain. Originally launched on the Ethereum blockchain as ERC-721, they have since migrated to their blockchain, Flow, to be easier for crypto newcomers to access.
What makes NFTs so special?
What makes Non-fungible tokens special is their unique attributes. For example, one of the ways we discussed above was through a single value entity but complete, that is linked to a specific asset. One of the most common applications of this uniqueness is that they can be used to prove the ownership of digital items like game skins right through to the ownership of physical assets.
And this is unlike fungible tokens, which that be exchanged like for like, same value.
How are NFTs used?
NFTs are applicable in the case of crypto-collectables like CryptoKitties. These can then be used as digital assets that need to be differentiated from each other to prove their value or scarcity. They can represent everything from virtual land parcels to artworks, to ownership licenses.
One last thing in the introduction, before we part, is that Non-fungible tokens cannot be traded on standard cryptocurrency exchanges. They are being bought or sold on digital marketplaces like Openbazaar or Decentraland’s LAND marketplace.