Since its introduction, Blockchain technology has always been associated with cryptocurrencies. However, this revolutionary technology has massive potential that extends beyond cryptocurrencies. Recently, blockchain is again making headlines due to the sudden popularity of NFTs. If you stay up-to-date with all the tech developments, you might know that NFTs have become a fad with buying and selling digital art and other media. The news of Beeple selling his NFT for millions is all over the internet. If you want to know more about these crypto-assets, let’s begin with understanding the concept of fungible and non-fungible tokens.
Fungible Tokens
In the crypto world, tokens are a type of cryptocurrency or an asset that holds any value. Also known as crypto tokens, these digital assets can be fungible or non-fungible. Bitcoin and other cryptocurrencies are a type of fungible tokens because these can be exchanged for another asset of like kind. The principle of fungibility implies that any commodity or asset can be interchanged with another asset for the same value. It means that fiat currency, stocks, or gold- all are fungible assets.
Fungible tokens are not unique and each fraction of a token is equivalent to another. For instance, one Bitcoin is equal to one Bitcoin. Also, it is possible to exchange a $100 bill for two bills of $50. It means that fungible tokens are interchangeable and divisible.
Non-Fungible Tokens
Non-fungible tokens (NFTs) are a type of digital token that exists on the blockchain, the same decentralized digital ledger technology that underlies cryptocurrencies. NFTs have some characteristics such as uniqueness and indivisibility that distinguished them from cryptocurrency. NFT is a part of the Ethereum blockchain and represents one-of-a-kind things. It is noteworthy here that both cryptocurrency and NFTs are based on blockchain technology but unlike cryptos that can be exchanged, NFTs have unique encryption codes and cannot be exchanged. An NFT can be anything- an audio clip, painting, or video game, as long as it’s unique. These are collectibles that can’t interchange with another token. It means that one NFT isn’t equal to another in terms of a property or value.
For example, the original painting of the Mona Lisa is one-of-a-kind, rare which means only one authentic, the original painting exists in the world. Anyone can click a picture of the painting or copy the artwork, but there will always be only one original painting. So, unlike Bitcoin or any other currency that can be exchanged, NFTs are unique and not interchangeable. So, whether it’s Beeple’s digital artwork, Jack Dorsey’s tweet, or William Shatner’s headshot, these NFTs are one-of-a-kind token.
How NFTs Work?
Any commodity is considered fungible if it can be interchangeable with another asset for the same value. But, anything unique such as your house or car is non-fungible. NFTs are rare because of their scarcity, unique because these are one-of-a-kind, and indivisible because these digital items cannot be divided into smaller units. NFTs are part of the Ethereum blockchain and NFTs are minted (created), listed (sold), and purchased on specialized platforms known as NFT marketplace. Crypto kitties were the first use case of non-fungible tokens. Other use cases for NFTs include crypto-collectibles, games, identity tokens & certificates, access transfer tokens, and more.
The common standard for fungible tokens is ERC-20 which is based on Ethereum. However, ERC721 is a non-fungible token (NFT) standard based on Ethereum. The ERC-721 token standard is used for creating non-fungible tokens. The latest upgrade of the non-fungible standard is ERC-1155. So, NFTs are unique cryptographic tokens that exist on a blockchain and are bought and sold online through the NFT marketplace. Besides digital artwork, NFTs also include a digital copy of our unique identity, plane or movie tickets, as well as real estate ownership.