The Difference Between Fungible and Non-Fungible Tokens (NFTs)
(This article was originally published on Udonis’ blog.)
With the rise of cryptocurrencies and blockchain games, many new technical terms have come under the spotlight. Some of the most interesting ones are fungible and non-fungible tokens.
If you’re playing crypto games or want to purchase tokens, knowing the difference between these two terms is crucial.
Here’s a short guide that will help you understand what exactly are fungible and non-fungible tokens and how they’re different from each other.
What Are Tokens?
Before we get into the difference between fungible and non-fungible tokens, it’s essential to first grasp what tokens actually are.
Here’s a simple explanation.
Tokens are assets that use smart contracts and run on a blockchain of another currency. They can be stored in crypto wallets and used in many different ways. For example, tokens can be used for storing value, supporting decentralized applications (dApps), gaining access to blockchain services, trading, gaining voting rights, etc. Based on its properties and use cases, there are several types of tokens including governance, utility, security, transactional, and platform tokens.
Furthermore, based on their features, tokens can be fungible and non-fungible.
Before we continue, an important thing to note is that tokens are not the same thing as coins, even though people oftentimes use the word token for both.
The Difference Between Coins and Tokens
While crypto coins and tokens have many similarities, they’re not the same thing. One of the main differences is that crypto coins are a native cryptocurrency of its own blockchain, while tokens run on other blockchains.
For example, ETH is technically a coin because it’s native to the Ethereum blockchain. USDT, on the other hand, is a token because it doesn’t have its own blockchain but rather runs on the Ethereum blockchain.
What Is a Fungible Token?
To understand both fungible and non-fungible tokens, it helps to know the meaning of the word “fungible”. Up until a couple of years ago, this word wasn’t really a part of our everyday vocabulary, but it has become essential for grasping the concept behind crypto tokens.
According to Cambridge Dictionary, the meaning of “fungible” is “easy to exchange or trade for something else of the same type and value.” Another definition of fungible is “being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account”. (Merriam-Webster).
That means that the main characteristic of fungible tokens is that they’re divisible, interchangeable, and not unique. Most cryptocurrency and most crypto tokens are fungible.
Traditional currencies like the US dollar are also fungible. That means that a $10 bill you have in your pocket has the same value as your friend’s $10 bill. If you were to exchange them, you wouldn’t lose or gain anything — you’d still have $10. Furthermore, you can divide those $10 into smaller units — two $5 bills have the same value as a $10 bill.
Fungible tokens work similarly. For example, Bitcoin is fungible. One Bitcoin is equal to all other Bitcoins. You might have special feelings toward that first Bitcoin you purchased, but the blockchain isn’t sentimental. You can trade that Bitcoin for another Bitcoin and monetary-wise it’s still worth the same. In other words, 1 Bitcoin is worth 1 Bitcoin, wherever you are and wherever it’s issued.
What Are Fungible Tokens Used for?
Because of its characteristics, fungible tokens can work like physical money. That is why they’re most often used for transactions in the crypto economy. Furthermore, many people decide to purchase fungible tokens as an investment, as there’s a chance they’ll become more valuable over time.
Examples of Fungible Tokens
There are hundreds of different fungible tokens available on many different blockchains. Each blockchain has different standards for fungible tokens. However, Ethereum is leading the way with its ERC-20 standard for fungible tokens, as this is where they were first developed. Many popular tokens use this standard — USDT, USDC, SHIB, BUSD, BNB, HEX, etc.
What Is a Non-Fungible Token (NFT)?
Unlike a fungible token, non-fungible tokens are non-interchangeable, unique, indivisible, and irreplaceable. Each NFT is different from another NFT of the same type. They can’t be exchanged for one another without losing value because each token is unique.
Because they live on a blockchain, there’s verifiable proof that they’re one of a kind. Each NFT has one owner and a unique ID that makes it easy to differentiate from others in smart contracts.
To better understand non-fungible tokens, here are some real-world examples.
If you borrow a car from a friend and you return a different car, the friend would be upset because that’s not the right car, even though all cars are assets of the same type.
Or take a famous piece of art like The Starry Night by Vincent Van Gogh. This is a unique item that’s very valuable. If it gets stolen or damaged, you can’t replace it — there’s only one in the whole world. Furthermore, Van Gogh’s painting is not the same as the Mona Lisa, even though they are both famous and valuable works of art. In other words, they’re non-interchangeable and have only one owner.
This is how we can view non-fungible tokens. If you own an NFT, you’re the sole owner of an asset that has its unique value.
While you can take a photo of a famous piece of art, the same way you can save an image of an NFT to your computer, that doesn’t mean you’re the owner of it.
What Are Non-Fungible Tokens Used for?
Non-fungible tokens have existed for about ten years. However, they came to the mainstream a couple of years ago, when NFT art became popular.
Because of that many people think NFTs refer only to digital artworks. However, they have many different use cases, especially in blockchain gaming.
They can represent various assets and ownership of these unique items. In gaming, for example, an NFT can be a land parcel, weapon, avatar, skin, etc. What makes this concept perfect for gaming is that players can own in-game items. Because these items are unique and scarce, they have real-world value.
This is where the play-to-earn model comes in. In P2E games, players can earn money by acquiring and trading NFTs.
Examples of Non-Fungible Tokens
Just like fungible tokens, there are many different non-fungible tokens, as anyone can create them, ranging from artwork to game items. They evolved from Ethereum’s ERC721 standard, which was developed by the same team that created the ERC-20 smart contract. However, as I mentioned earlier, each network has its own standard for non-fungible tokens.
Some of the most popular NFT collections are Crypto Punks, Bored Yacht Club, Doodles, Meebits, Azuki, and others. When it comes to gaming and the metaverse, games like Decentraland, Axie Infinity, and The Sandbox are leading the way when it comes to NFTs.
How to Create and Sell Non-Fungible Tokens?
NFTs are created by the process called minting, which creates a new block on the blockchain and allows you to put it up for sale.
You can mint NFTs on many different platforms like OpenSea, Binance, NiftyGateway, Solanart, etc. You’ll notice that most platforms that allow you to mint NFTs are also marketplaces for trading them. That’s why this method is the simplest one.
Here’s how you can mint NFTs in a few easy steps:
- Set up a crypto wallet
- Determine which blockchain technology you want to use
- Add cryptocurrency to your wallet
- Select the desired platform for minting
- Connect your wallet to the platform
- Choose how you want to sell your NFT and set your price
- Upload your file and convert it to a non-fungible token
Where to Buy NFTs?
You can buy and sell non-fungible tokens on various NFT marketplaces. Some of the most popular ones are OpenSea, Rarible, and LooksRare.
Most marketplaces function the same way — users can put up their NFTs for sale as well as browse through various NFT offerings and purchase the ones they like. To buy an NFT, you need to create an account on the desired NFT marketplace and connect your crypto wallet. This will enable you to purchase any NFT for your collection.
What Are Semi-Fungible Tokens?
Did you know that there are also semi-fungible tokens?
They are tokens that possess properties of both non-fungible and fungible tokens and are often referred to as SFTs.
For example, a concert ticket could be considered a semi-fungible token. Here’s why. The fungible component comes from the fact that if you were to exchange your ticket with somebody else, it would technically bring the same value — both of you would attend the concert. The non-fungible component would be that your seats may be different. For example, one of you would be closer to the stage.
In blockchain gaming, semi-fungible tokens serve the purpose of owning a bundle of items. If your character has a collection of items, then instead of minting a non-fungible token for each item, you can bundle them together. That would be represented as a single SFT that could be fractioned if needed.
Fungible and Non-Fungible Tokens: Summary
Fungible tokens are not unique, they’re identical and dividable and can work like currency. Non-fungible tokens, on the other hand, are 100% unique and have only one owner. They can represent assets ranging from collectible items to real estate in blockchain games.
Both can be valuable investments in the right hands.
For more content on the topics of NFTs, blockchain games, and crypto, follow our blog!