Non-fungible Tokens (NFTs)
What are Non-fungible Tokens (NFTs)?
Given its name, NFTs represents the non-fungible assets in the blockchain by creating a token for the asset. Firstly, we need to understand what does the word “fungible” means. According to the Cambridge Dictionary, fungible is defined as “easy to exchange or trade for something else of the same type and value”. An example of something fungible is the piece of $10 note in your wallet. That $10 of yours can be easily exchanged or traded for something of similar value. Many cryptocurrencies and tokens are fungible as they can be easily exchanged or traded for something of the same value. Hence, if something is non-fungible, it is special and unique.
An example of something non-fungible is an airplane ticket. The airplane ticket has your name, destination, and seat number. It is not easy to exchange or trade for something of the same value. Furthermore, non-fungible is non-divisible. Like a plane ticket, you cannot buy half a plane ticket.
Another example of non-fungible assets is collectible cards. Even though two cards might have the same person/character, the price of each of the cards may differ. Some factors could be the condition of the card, the rarity of the card, the year the card was produced, etc. All these factors play a part in determining the value of the card. Hence, you cannot exchange one card for another even though they might appear to be the same. Moreover, you will not be able to buy half a collectible card.
Below is the summary between fungible and non-fungible:
Why NFTs?
Imagine you want to buy the actual Mona Lisa painting. Many counterfeits claim to be authentic. How can you confidently know that the painting that will cost you a fortune is the real deal?
With the help of NFTs, the actual Mona Lisa painting can be authenticated by the consensus of the nodes in the blockchain. Once it has been authenticated to be the actual painting, the NFT will be created by tagging the actual painting. The owner of the private key to the NFT will be the owner of the actual painting. Buyers who are interested to buy the painting can be sure that the painting that they are buying is the actual painting and not a counterfeit.
NFTs can be applied beyond artworks. It could be used for unique gaming skins or special effects. As gaming gains in popularity, there are more demands in NFTs in the gaming industry. Popular games, such as Minecraft, are working to introduce NFTs into their game. More applications of NFTs will be discussed in-depth in our subsequent NFTs’ articles.
Benefits of NFTs
Below are some of the benefits of NFTs:
Ownership: It can help to provide ownership of the non-fungible asset in the digital world. For example, using NFTs, an airplane ticket can be tagged to you on the specific time, date, and location digitally. Even if you lost your physical ticket or forget to bring, the airplane ticket NFT could be useful in such a scenario.
Liquidity: This token helps to provide liquidity to the asset. Currently, famous artworks are auctioned by auction houses, such as Christie’s and Sotheby’s. The downsides to these auction houses are the owner has to pay a huge commission to the auction house, potential buyers have to personally and have a representative to fly to the auction house to bid for the artwork and the frequency of the auction is set by the auction house. With the help of NFTs, buyers can just go to the NFT market and purchase the token for the asset and the owner does not need to go through the auction house if he/she wants to sell the artwork.
Reduce in Fraud: When dealing with non-fungible assets such as artworks, fraud, and counterfeit products are very common. With NFTs, buyers of the artwork can be sure that the artwork is real and authentic because it has to be verified by the nodes in the blockchain. Furthermore, the authenticating process for NFTs only needs to happen once rather than multiple times for traditional artwork purchases. Buyers and auction houses are afraid that it might not be the real artwork and experts are called to inspect the artwork before every auction.
ERC-721 & ERC-1155
One of the pioneers of non-fungible tokens is the CryptoKitties. Each CryptoKitty is unique, based on their features and genetic code. Users can use their kitties to breed and unlock rare traits. In 2018, a CryptoKitty was sold for $170,000. CryptoKitties is built on ERC-721. Unlike ERC-20, which is for fungible tokens, ERC-721 is the token standard that describes how to build unique or non-fungible tokens on the Ethereum blockchain.
To make a holistic ecosystem, ERC-1155 is created. Unlike ERC-721, which only allows non-fungible tokens, ERC-1155 makes it possible for both fungible and non-fungible tokens to coexist in the same smart contract. Both ERC-20 and ERC-721 only aim to serve their respective community, and ERC-1155 helps to bridge the two communities together.
