Recently “NFTs” have made headlines as digital art NFTs have skyrocketed in value. Non-fungible tokens, or “NFTs“, are cryptocurrency tokens that represent an asset which is not divisible and not necessarily equal to other tokens of the same type. This is in contrast to Bitcoin, Ethereum and most cryptocurrencies you are likely to encounter which are fungible tokens.
Fungible & Non-fungible Tokens
Fungible tokens have two key characteristics: they are interchangeable and divisible. Because they are interchangeable, any one token has the same value and characteristics as any other token within a type. For example, any given bitcoin has the same value and characteristics as any other Bitcoin. A bitcoin is also divisible and can be traded in increments or multiples with a consistent value. Fungible tokens can be traded easily on exchanges because all the tokens in circulation hold the same value.
Non-fungible tokens are the opposite Non-fungible tokens are not interchangeable and not divisible; instead, they are specific and represent a singular whole asset. Non-fungible tokens of the same type are not necessarily equal in value and may have different characteristics.
Example: Plane tickets.
My favourite way to think about non-fungible tokens is by comparing them to airline tickets. An airline may issue hundreds of tickets on a single flight but each ticket represents one unique and specific seat. You cannot divide your ticket into half tickets, and because the value of one ticket may not be equal to that of another.
NFTs and Blockchain
Non-fungible tokens are the keystone to tokenization of assets, the process of representing ownership of physical items on the blockchain. In a smart contract, fungible tokens are important as they act as a currency to execute the contract. However, if your contract is intended to prove ownership, or change in ownership, of a car, for example, a fungible token is not appropriate as it can not represent your unique car. In contrast, a non-fungible token can represent one singular and specific asset whether it be a will, proof of ownership such as a deed, or a digital collectible like a sword in a video game. Therefore in order to prove ownership of a car on a blockchain, you first need to represent your car as a non-fungible token, unique to your vehicle. While the most obvious benefit of tokenization is the security inherent to the blockchain, it could in the future provide new opportunities for liquidity by facilitating the exchange of assets or using physical assets as collateral for loans.
While tokenization of physical assets is still largely a concept and is unlikely to become commonplace in the near future; non-fungible tokens that represent digital assets are already gaining popularity on blockchains. Cryptokitties is a blockchain-based game that uses non-fungible tokens to represent unique, one-of-a-kind, digital cats. These digital cats cat be collected, traded, and even bred to create new NFT cats. While this may sound silly, the value of Cryptokitties has exploded because rare and desirable cats exist only once, and although they may even look alike no two share the same digital imprint. This is similar to our airline ticket example, where each ticket represents a seat and though many of these seats may look the same, each seat is unique with its own value.
Digital ART NFTs
Non-fungible Tokens are currently undergoing a surge in popularity as they are being used to represent digital artwork on blockchains. Digital artwork is being codified and stored in the blockchain with the value of digital artwork reaching unprecedented highs. You can read about this in-depth in our article “Why do digital art NFTs have value”