Fungible Tokens vs. Non-Fungible Tokens

The rise of ERC-721

The content of this page was updated in July 2019, with an excerpt from the book Token Economy by Shermin Voshmgir.

Fungible tokens dominated in the early years of blockchain networks. However, ńon-fungible tokens (NFTs) are a more diverse asset class that could have much more impactful use cases than native blockchain tokens or other fungible tokens.

Non-fungible tokens are the digital representation of scarce assets. NFTs are unique in nature, with varying properties that can be distinguished from each other. CryptoKitties in 2017 is an example of NFT use-cases. It is a game on the Ethereum blockchain where players can collect and breed digital cats, which they pay for in ETH, and where each cat’s digital “genetic material” is stored on the Ethereum blockchain. Offering and managing digital, unique, and thus scarce assets like collectibles is not a new thing, but before the emergence of blockchain and other distributed ledgers, this type of scarcity was costly to manage. It relied on the validation and security of the centralized issuing entities. Distributed ledgers, on the other hand, enable a decentralized and publicly verifiable substrate to issue and manage these assets at very low operational costs.

Non-fungible tokens can be used in decentralized applications like crypto-collectibles or crypto-games. They can also represent certificates of any kind (drivers license, academic degrees, and other educational certificates), as well as keys, passes, identities, wills, voting rights, tickets, and any type of access right, loyalty programs, copyright, supply chain tracking, medical data, so ware licenses, warranties, and many more. Non-fungible tokens furthermore enable the tokenization of all types of assets, whether digital or real. They allow unique investments tied to a physical object, like unique artwork, real estate, or any other real-world assets and securities. They also allow fractional ownership of goods that were not easily divisible before, like real estate, artwork, or other memorabilia. Tokenizing physical assets gives investors more liquidity. One could tokenize a building, where some tokens could grant simple ownership titles of a fraction of the real estate, while other tokens could grant special privileges like access rights. Non-fungible tokens also nd potential use in digital art, by helping prove provenance, authenticity, and ownership.

The concept of non-fungible crypto tokens is not new. In 2013, Colored Coins was one of the first projects that attempted to tie unique properties to a digital asset. The idea was to use Bitcoin tokens to represent real-world assets like stocks, bonds, commodities, or the deed for a house. Counterparty was another project that built on this idea, but went one step further. It enabled users to create their own virtual assets on top of the Bitcoin blockchain. Both projects struggled to gain wide adoption when Ethereum emerged, allowing more simple token issuance and sales with a few lines of code. This spurred token sales as a new way of fundraising vehicles.

As opposed to ERC-20, which only covers a few asset attributes like name, symbol, total supply, and balance, ERC-721 allows for more detailed attributes that make an asset special, beyond the name, balance, total supply, and symbol. It allows the inclusion of metadata about an asset and information about ownership. When validated, such additional information can add value, guaranteeing the provenance of the assets. The ability to trace the provenance of assets can be very valuable in the case of art and collectables, but also along the supply chain of other goods and services. The success of ERC-721 probably also triggered other blockchain projects, such as the NEO blockchain, to begin the development of their own non-fungible token standards. Here some use cases for NFTs:

• Crypto-collectibles & Crypto-games:
• Asset Tokens
• Identity Tokens & Certificates
• Access Tokens
• Transfer Tokens

Full text and high-resolution graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2019

Further Reading

• Fungible vs non-fungible tokens on the blockchain, 0xcert, Apr 26 2018
• How Non-Fungible Tokens From Physical Collectibles Are Strengthening Asset-Backed Securities, Samantha Radocchia, Jul 5, 2018.
• ERC-721 Hitting a Home Run, 0xcert, May 31 2018
• An Overview of Non-fungible Tokens, Phil Glazer Crypto Research @BitwiseInvest Apr 2 2018
• Designing Non-Fungible Tokens as Open Ecosystems, Brian Flynn, Aug 7 2018
• Non Fungible Tokens, Hackernoon, Julien Genestoux, Mar 5 2018
• A Blockchain Token Taxonomy, Florian Glatz, Sep 10, 2016
• Mapping the Emerging Non-Fungible Token Landscape, Pawel Chudzinski, Jun 15 2018
• ERC-721 Hitting a Home Run, 0xcert, May 31201

Originally published at BlockchainHub.

About the Author

Shermin Voshmgir is the Author of the Book “Token Economy“. She is the director of the Research Institute for Cryptoconomics at the Vienna University of Economics, and the founder of BlockchainHub Berlin. In the past, she was a curator of TheDAO, and advisor to various startups like Jolocom, Wunder and the Estonian E-residency program. In addition to her studies at the Vienna University of Economics, she studied film and drama in Madrid. Her past work experience ranges from Internet startups, research & art. She is Austrian, with Iranian roots, and lives between Vienna and Berlin.