Fungible Tokens vs. Non-Fungible Tokens

An intro into NFTs and the rise of ERC-721

Cryptographic assets, just like physical assets, can have many properties, on of which is fungibility or non-fungibility. In Economics fungibility refers to the equivalence or interchangeability of each unit of a commodity with other units of the same commodity: one kilogram of rice, one kilogram of gold or other precious metals, one unit of currency like EUR, USD or Yuan, one barrel of crude oil, just to name a few examples. If you were to lend ten EUR to someone, for example, it would not matter if that person returns the exact same 10 EUR bill or another one, or various bills and coins that amount to the value of 10 EUR. The same applies to one barrel of crude oil. It is the same as another barrel and if you mix both barrels and redistribute them, each barrel becomes indistinguishable. Flour is another example for a fungible asset, and is also one of the reasons why it was used as commodity currency in the past. A fungible cryptographic token is therefore not unique and perfectly interchangeable with other tokens of it’s kind and can be easily replaced:

  • Only quantity matters: Units of fungible assets of the same kind are indistinguishable. If two parties have the same amount, they can swap them without losing or gaining anything.
  • Any amount can be merged or divided into a larger or smaller amount of it making it indistinguishable from the rest. There’s one more crucial difference you need to bear in mind.

Fungible tokens work fine for tokens that want to have currency-like properties rather than being something unique and valuable itself. Fungibility is the essential feature of any currency — as a means of exchange, a unit of account, and store of value — Fungibility exists for Bitcoin, ZCash, Ether and any ERC20 tokens. If you send someone a Bitcoin, Ether or Zcash, and get one back, you wouldn’t notice any difference. The value is the same, regardless from its provenance.

However, please note that opposed to common belief, Bitcoin allows only for pseudonymous transaction, not anonymous transaction. This means that you can use the power of big data to correlate other data points that might be publicly available or accessible to certain national security agencies, against the metadata connected to a certain BTC transactions and addresses. Therefore Bitcoin and derived Blockchains using similar cryptography as Bitcoin, are not fungible in all cases. If someone behind a Bitcoin address becomes a person of interest, and the provenance of the coin history becomes tainted, you might have problems trading your tokens. Fungibility may, therefore, be up for debate if coin history can be tracked and the coins are linked to illicit activity that makes them “marked” and therefore increases or decreases their value. Newer blockchains like Monero and Zcash are working with alternative cryptographic tools that could make their tokens more fungible than Bitcoin for example.

Source: BlockchainHub.net

Non-fungible tokens

Non-fungible tokens on the blockchain are unique in nature, everyone knows how many there are, they can be distinguished from each other and have varying properties. They can offer unique characteristics which make them different and thus digitally scarce. While attempts to offer and manage digital scarce assets, like avatars in video games, have existed before blockchain, this type of scarcity was costly to manage and relied on the validation and security of the game creators. In this context, distributed ledgers are significant because they enable a decentralized way to maintain distinct, digitally scarce items. NFTs on the blockchain allow for digital scarcity to be verified without the need for a centralizing organization to confirm authenticity at very low operational costs. This creates publicly verifiable digital scarcity and makes it desirable for its uniqueness, instead of being a placeholder or representation. NFTs are therefore an exciting new type of asset class that started to spur a lot of attention since the success of CryptoKitties in 2017.

NFTs can be used in many applications that require unique digital items like crypto-collectibles and crypto-gaming. Non-fungible tokens can also represent scarce physical property, like unique artwork or houses. NFTs furthermore allow putting IDs, certificates, real estate data and other important information of the real world assets on the blockchain. Non-fungible tokens can be used in “Know Your Customer” (KYC) procedures, for academic degrees and other educational certificates, badges, voting & elections, loyalty programs, copyright, supply chain tracking, medical data, software licenses, warranties, and more.

  • Crypto collectibles & games
     
    One early pioneer of non-fungible tokens was CryptoKitties, a blockchain-driven game where players have the chance to collect and breed digital cats, with each cat’s digital genetic material being stored on the blockchain. They can be bought and sold using ETH, some cats are rarer than others. In 2017 sales of Cryptokitties hit $12 million, with the most expensive CryptoKitty reportedly going for $120,000. Other blockchain games followed quickly (see list below). Major League Baseball in the US is planning to launch a game where baseball cards can be exchanged on the Ethereum blockchain. Crypto-collectibles like CryptoPunks, CryptoAlpacas and CryptoKitties, are basically digitizing the very essence of the sports cards hobby — the joy of owning something unique and the thrill of comparing it to others. Even though card editions are issued in many hundreds of equal pieces, as soon as they land into new owner’s hands, their value cannot be measured as a static feature. Even more so if they undergo a unique personalization act, such as an autograph by a featured athlete. NFTs are can be used to represent any in-game asset, which to be in control of the user instead of the game developer.
  • Security Tokens & Property titles
     
    Art, Collectibles, Memorabilia, Real Estate
     Non-fungible tokens are unique investments when tied to a physical object. NFTs provide an effective way to tokenizing all types of assets, digital or real, and trustless transfers, trading or fractional ownership. A few examples of these objects are real estate, shoes, artwork, wine or other memorabilia. And once those items become tokenized securities, they create new opportunities for investment. Tokenizing physical assets gives investors more liquidity. This can be applied from real estate to but also to art. You could tokenize a building. Some tokens could grant strict ownership of the building and facilities, while others could only grant access, very similar concept to creating different classes of stock. NFTs also find potential use in digital art, by helping prove authenticity and ownership. Making digital copies of some digital creation is trivial, but faking ownership once that ownership has been put on the blockchain becomes impossible. This is what chains like Po.et are trying to achieve for digital content.
  • Certificates
     
    All our IDs, school transcripts or even software licenses can be seen as unique certificates tied to the existence of one single person. NFTs could be used to secure and immutably store birth certificates, academic credentials, warranties, identities, even artwork, and property ownership if and when reliable repository of trusted issuers of such certificates can be established. Imagine having your diploma issued on the blockchain as a digital document that is recognized by all authorities around the world with no need to translate, notarize, verify it. Wallet-like software could manage all personal identity related data as well as certificates of a person. This empowers us to reclaim ownership of our personal data from birth certificate to university certificates and all other important identity information, without the need for centralized institutions storing our data.
  • Identity
    Anything that uniquely represents a person is a non-fungible token. NFTs could, therefore, represent identities on the web, with attached transaction histories, content and reputation. We could attach the reputation of actors in the web. If properly designed, this could solve the “fake news” problem of social media sites like Facebook, Twitter, etc. With non-fungible tokens, we can therefore manage proofs of identity with blockchain based NFTs while keeping the identity information securely stored by themselves, impossible to be forged or stolen.
  • Keys & Passes
     
    Keys or passes usually grant access to some resources. In the physical world, keys to open a house or a safe have been around for thousands of years. They would not consider who is trying to gain access but represented access through ownership of the key. In the same way, the software world manages access rights with passwords, that grant permission to open my mailbox, access a server, access a service I paid for, etc. Blockchain uses public key cryptography to manage access rights to assets and can offer more secure and decentrally verify access right management. My keybase cannot be replaced by anyone else’s keybase, in the same way that a passport cannot be replaced by another one.
  • Fractional ownership of physical goods
     Tokenizing physical objects gives investors a chance to expand their portfolio, and owners more potential liquidity when they need it. This will allow for more flexible classes of securities. The owner of an asset for example may want to liquidate some of an item’s value but still control the physical asset itself. The owner of a painting could sell a minority of the shares in the artwork (fraction of ownership of this artwork) but maintain physical control over it. People with different levels of investment have different levels of control over the object. Minority share owners would see the value of their shares increase as the painting continues to appreciate. A museum or foundation could allow the public to purchase shares in an artwork in order to raise money to buy a new piece. In that case, a museum wouldn’t hand over control of the piece, but they would offer people the opportunity to invest in it. While tokenization and fractional ownership is a possibility for larger, more durable goods.
  • Managing Wills
    When someone passes away today and leaves a singular physical object to be split between multiple people in the will, this produces a lot of bureaucratic overhead and coordination costs to manage the splitting value of these assets. The beneficiaries could sell the item and split the money between themselves. But what if the object is an appreciating asset, such as a rare painting? If it’s left to several siblings, they may want to hold onto it. Instead of storing it away, they can tokenize the artwork. This allows them to all own equal “shares” of the painting and benefit as it grows in value over the years.

History of NFTs

The concept of non-fungible crypto tokens is not new. In 2013 Colored coins was one of the first attempts to tie unique properties to a digital asset. Colored coins used Bitcoin to represent real-world assets (color them) like for example stocks, bonds, commodities, or a deed for a house. Counterparty built on this idea, but went one step further and enabled users to create their own virtual assets on top of the Bitcoin blockchain. Both projects struggled to gain wide adoption when Ethereum emerged and introduced the ERC20 token standard, and spurred P2P tokens sales as a new way of fundraising vehicle. The majority of the attention of the last few years was about projects issuing fungible tokens. Most tokens today are Ethereum smart contracts and represent fungible tokens built on ERC-20 standard.

The rising popularity of NFTs is fuelled by the emergence of ERC 721, a token standard that was specified specifically for non-fungible tokens, and has made it easier to deploy NFTs on top of Ethereum. ERC 721 seem to fulfill the initial promise of colored coins for tying unique properties and in certain cases real-world assets to crypto assets, which was rapidly adopted by many of the projects. This probably also triggered other blockchain projects such as the NEO Blockchain to begin development of their own non-fungible token standards.

For now, most non-fungible tokens are implemented on top of Ethereum as ERC-721 tokens. Like ERC-20, ERC-721 sets forth a standard set of attributes and functions in the form of a smart contract that must be met to be managed, owned, and traded. But the classic Ethereum standard ERC-20 covers only a few of asset attributes: its name, symbol, total supply, and balance. As opposed to ERC-20, ERC-721 allows for more detailed attributes that make an NFT special, beyond the name, balance, token supply and symbol. We can now include rich metadata about an asset and include information about ownership, and these authenticated details can ultimately add value because investors can be confident about its provenance. The ERC-721 standard’s functions document asset’s ownership, approval, transfer, and of course the card’s metadata, enabling you to record all of your assets valuable and conclusive information. A collector community could value the ownership credentials of a collectible, and provenance or transaction history. The more information you have about your crypto collectible, the more valuable it is. And the ability to trace it back to its production date is the definite deal-maker, especially in the case of classic and vintage cards.

List of Existing NFTs

This list is by far not complete but intends to give an overview of various projects across industries and services to make the concept of NFTs more tangible.

Collectibles & Games
Non-fungible tokens are an exciting category to watch and the best applications likely still haven’t been imagined. Collectibles have a well-documented history of capturing human interest, and also create a lot of economic value. From soccers cards to baseball cards and Pokémon to Beanie Babies. In particular, it will be fascinating to see how non-fungible tokens are used in gaming contexts to create new experiences for massively multi-player games.

  • CryptoKitties is a digital collectible game based around cats that are breedable and tradeable. The game has attracted significant attention to the crypto collectible space. Cryptocollectible that raised a $12.5 million investment. my cat is not your cat, and, even if you can merge two herds of cats, you can certainly split the group again after that. Collectibles are one of the early categories of non-fungible tokens. virtual cats that one can breed, and trade. Each of these cats is represented by a non-fungible token on the
  • Decentraland an open source virtual world platform with ownership of items on it being tracked as Ethereum based collectibles, pieces of land. You can buy MANA, the native currency of the platform and pieces of digitally scarce land that allows for the purchase and development of “land” similar to second life. This blockchain-based virtual world raised $26 million, with a $20 million internal economy as of September 2018. The ability to modify and create in virtual reality paired with ownership and open use is a powerful combination and may capture the attention of the gaming community.
  • Cryptofighters is a game which allows you to collect, battle and level up your fighters to win new fighters.
  • Etherbots is agame where you can put together a robot from various (NFT) parts and have them fight against each other.
  • Ethermon is like pokemon on the blockchain.
  • Rare peppes one of the earliest crypto collectible implementations based on Counterparty.
  • Spells of Genesis, a digital card game with some elements of trade-ability of cards enabled through Counterparty.

Other

  • Crafty is a platform which allows users to combine fungible and non-fungible tokens to create an entirely new non-fungibles or to assign attributes to non-fungible tokens.
  • Superrare, create and collect unique digital art.
  • Terra0— an initial attempt at combining a crypto collectible and physical asset. Users will be able to buy, trade and speculate on tokenized sunflowers via an online marketplace.
  • Unico turns videos, images, 3D models and even VR/AR experiences into collectibles.
  • Chronicled Collectibles, for tokenizing and investing in physical art, sports memorabilia and wine.
  • Blockchain Art Collective, a team that provides art provenance and authentication through blockchain and IoT technology.

Infrastructural Services & Marketplaces
NFTs are tradeable in a different way than fungible crypto-tokens thus it is natural to have dedicated trading platforms emerge.

  • 0xcert.org is a developer tools for issuing and managing NFTs. It claims to build a “plug and play” framework which means that a non-fungible token can be developed and verified quicker, eliminating the need for in-depth blockchain knowledge, while stopping precious data from being siloed and preventing developers from having a lengthy, expensive and insecure process.
  • Bitcrystals aims at creating a platform for games to leverage crypto features.
  • Codex Protocol is a decentralized registry for unique assets like art, fine wine, watches and more.
  • Counterparty enables Bitcoin based NFTs.
  • Ethereum main network on which tokens and in particular NFTs are issued
  • Fanbits allows creators to turn their content into unique crypto collectibles that their fans can purchase and resell.
  • Metamask is an Ethereum wallet in a browser plug-in and is commonly used to access ETF apps.
  • Mokens lets you design and create your own crypto-collectibles with a simple web interface.
  • Wax claims to be a decentralised platform that enables anyone to operate a fully functioning virtual marketplace with zero investment in security, infrastructure, or payment processing.
  • ZeppelinOS is a developer tool for tokens in general and also published an implementation of the ERC721 standard.
  • Openbazaar is one of the first blockchain-based distributed marketplaces. Crypto collectibles have recently started being listed on the platform.
  • Opensea is one of the first marketplaces dedicated to non-fungible tokens.
  • OpSkins is a marketplace for video game skins and other digital items, and have launched their own cryptocurrency to use on their platform.
  • Rarebits is an auction-based marketplace and exchange for crypto collectibles.

Further Reading


Originally published at BlockchainHub.