The recent introduction of non-fungible tokens in the market has left many questions than answers, with many investors expressing their interests to know more about them. As we all know, the most exciting blockchain opportunities came up after the introduction of tokens in the crypto world. So, what exactly are non- fungible tokens?
Every currency, whether it’s fiat or crypto, needs Fungibility for it to be accepted and used as a unit of account, a medium of exchange, or even as a store of value. Fungibility is even more important to crypto’s; as it allows them maintain their interchangeability legitimacy between different units.
We will have a deep dive into the Fungibility world to understand more on these tokens, as well as understand what forms unique digital assets on the blockchain.
A Primer In Fungibility
Let’s start by addressing the elephant in the room before we get to the Non-fungible tokens. In a nutshell, fungible means interchangeable.
Here is an example:
Assume that you have a bill of $20. That bill has an identical value to another $20 bill. Should your bill get damaged, you will take it to a financial institution and replace it with another one of the same value. This implies that there is no way you can use the $20 to get $15 worth bread or $25 worth of beer. The $20 will remain to be $20 and that’s it. Regardless of the holder of the bill, it will still continue to be the same.
When something is non-fungible, its elements are interchangeable. Fungibility is the ability of a currency to maintain its value, and uniform acceptance. As shown in the above illustration, the same $20 you have in your pockets is the same as $20 in my pockets. If we take them to the store and pick them after ten years, their value will still be the same. Should we plan to take them to the store; the shop owner will accept them equally, regardless of their history. That’s the power of Fungibility.
Any currency without Fungibility is considered to be unstable, and it can collapse any time. Imagine if you were to investigate the history of all currencies that you get? Or even have a world where the same $20 bills have different values? That would be economically unfeasible.
Why use the non-fungible tokens?
Basically, NTFs are blockchain assets which are designed to be unequal. That wouldn’t make sense when talking about currencies, considering that all currencies are uniform. It is however okay with the blockchain tokens since they are more than a currency.
Each NTF is created to be unique, and the perfect example of these tokens is Cryptokitties. There are millions of Cryptokitties, and each one of them is designed with a unique name, fur color, eye color, facial expression, fur pattern, and many more unique features. Some kitties have a higher value than others, and so when you purchase them, you gain the ownership of a non-fungible token which corresponds to the kitty.
It’s helpful to go through a few examples of how the NFTs work to help you understand them better.
The crypto kitties mentioned above are a perfect example of collectibles. The collectibles market, however, extends to different directions. The main avenue is through paintings, art collecting, and sculptures which need proper authentification and verification. When the owner intends to sell the specific pieces of art, they can merely take NTFs on auctions to prove that their assets are real and true to the owner as well. This digital certification prevents fraud and forgery, and guarantees transactions legitimacy.
- Online gaming
NTFs are quickly revolutionizing on the gaming world. Occasionally, the game characters acquire tradable items such as clothing, weapons and even property. Coming up with a non-fungible token for these assets could, therefore, facilitate the trading even the real world cash or in the game tokens. Almost all the video games are now slowly getting into the NTFs craze. This makes both the games and the NTFs markets expand.
- Identity and certification
NTFs are becoming more and more interesting when we consider the role they play in verifying identifications. You can get a non-tradable token as your passport, birth certificate, or even your driving license. You can also use them as a warranty or patent. Once the proper authorities have proved them, you can voluntarily share them with your doctors, employers or all the people who need your personal information.
If you have an entry ticket to your local primary school basketball game and I also have a ticket to a Manchester United versus Arsenal game, we would both be granted the entries, but their values have a vast difference. They would allow us to get into the different areas, but their value is obviously interchangeable. Now, this is the essence of the non-fungible tokens. They standardize ownership mood assets, although the assets have different market values.
- Managing wills
When a breadwinner passes away and leaves one object to be physically split among the beneficiaries, a lot of coordination costs and bureaucratic overheads arise in regards to the split. The beneficiaries can also sell the item and share the money. But what if the assets had an appreciating value such as an artwork, or a painting? It can be used by many siblings, who instead of selling it; can tokenize the artwork and get equal shares for many years.
- Fractional Ownership Of Goods
Tokenizing the physical objects allows investors to expand their portfolios; it also gives owners more liquidity when they need it. For instance, the owner of assets may decide may decide to liquidate their assets value but still maintain the physical control of the asset.
How NFTs are implemented
Currently, most Non-fungible Tokens are implemented with Etherium as the ERC-721 tokens. There are multiple standards used on other protocols, but ERC-721 is the commonly used profile standard. The profile sets standard functions and attributes in the form of a smart contract which must be owned, owned and traded.
How the non-fungible tokens are different from the other symbols
NFTs have unique characteristics which make them digitally rare and also different from the other tokens. Each of them is designed with a specific characteristic which makes them different from each other. On the contrast, fungible tokens of the same value are identical.
Most fungible tokens are made using the standard ERC-20 to enhance simplicity. For instance, if you have a $10 bill of the fungible tokens and you send it to person to keep for a week, it will still be the same during the collection time. However, there may be a fluctuation in their price.
Interchangeability: – fungible tokens can easily be changed with other tokens. On the other hand, you cannot interchange the NFTs. Let’s compare them with the baseball tokens; you will be upset if you accidentally send someone to get you the tokens and get a different ERC-721
The last difference is based on divisibility. The fungible tokens are divisible into smaller units or amounts. It, therefore, does not matter the specific unit you get of the token since they have the same value. Their divisibility feature makes it possible to send a part of their fraction and send it to someone.
On the other hand, NFTs are non-divisible. For instance, you cannot trade your college certificate to use that of another person. Similarly, you cannot divide it into smaller parts, and the entire token will lose its meaning.
What awaits NTFs in the future?
As mentioned earlier, NTFs are still in the early stages, despite having many uses. Generally, the digitizations of the world, the adoption of IoT tech, Cryptos, and blockchain technology have continued to grow with more practical applications emerging every day. We can, therefore, expect the same for the future of the NTFs.
WAX, for instance, has already given a lot in coming up with potential uses of these tokens. It will soon be possible to claim ownership of almost all physical collectibles using them.
By entering more partnerships with them, WAX and other exchanges might also start trading physical items for virtual goods as well. NFTs may also give investors the opportunity of exchanging more goods and services. The virtual currencies world is making a lot of progress, and although we are indeed not where we would like to be, the rapid tech progress rate might get us to that point in the near future.
Non-fungible tokens represent the newest method of tokenizing assets and goods which can be sold, shared by multiple token traders or even traded off. Those who own these tokens would also become the real-life owners of the assets and goods in question. NTFs will undoubtedly remain to be the most practical use of digital currencies. With time, they may even reach the mainstream adoption in regards to the rapidly increasing demand in the industry today. NFTs are certainly one of the most practical methods of using digital currencies.