Non-Fungible Tokens, Explained
Most cryptocurrency enthusiasts and traders are may be familiar with security and utility tokens. Taking it a step further, they may be familiar with ERC20 tokens because they have participated in an ICO or airdrop program. But that is as far as it gets. I bet you have absolutely no idea what non-fungible tokens mean (that’s why you are reading this article, after all). This article is a comprehensive, yet simple explanation of what non-fungible tokens are.
Let’s dive straight in…
In other to fully understand what non-fungible tokens are, let’s start with the known – fungible tokens. The word “fungible” means something that can be replaced by a similar or identical item. In terms of cryptocurrencies, a fungible token is totally replaceable with another identical token; it is not unique. Most cryptocurrency tokens come under this category of fungibility because they function as a medium of exchange or store of value within the same class of other digital assets, instead of being entirely unique.
Think about fungibility like grains of rice in a bowl. One grain can be used to replace another and you may not even notice. Similarly, if you lend $1 or 1 BTC to someone, it is literally impossible for that person to return the exact dollar note that was given because it has been spent. However, it doesn’t matter because a dollar note remains the same. This is what fungibility is all about.
As earlier stated, most cryptocurrency tokens are fungible; Bitcoin, Ethereum, and a host of other large projects.
As you already guessed, a non-fungible token is the opposite of a fungible one. It is unique, meaning it can be distinguished from another token, even though they look identical at a glance. Each token will have unique attributes and information that makes them irreplaceable and impossible to swap.
Putting it in context, you can think of a non-fungible token like a limited edition of a baseball card or a plane ticket. On the surface, every plane ticket looks the same. But then, each one has a different attribute – a different passenger name, different seat numbers, destinations, and departure time. Trying to exchange a plane ticket may not work because if you end up beating airport security, you may still find yourself in a different location, depending on the ticket used.
This property of non-fungible tokens (their uniqueness and irreplaceability) is what makes them desirable and digitally scarce, rather than being just placeholders.
What is Different About Non-Fungible Tokens?
Beyond the fact that non-fungible tokens are unique, there are also a few interesting features that distinguish them from other tokens.
First, most fungible tokens are built using the popular ERC20 standard. Just like the $1 bill in the example above, this makes them interchangeable. Non-fungible tokens, on the other hand, are most ERC721 compliant.
Another feature of non-fungible tokens is that they cannot be divided, unlike their fungible counterparts which are divisible. There are very few people I know that have up to 1 BTC. However, I have seen individuals (and I do it myself), that regularly buy bits cryptocurrencies. You can also send a fraction of a fungible token. Non-fungible tokens, on the other hand, must be bought or sold whole. It is impossible to sell half of your plane ticket or half of a baseball cap.
How Do They Work?
We’ve already noted that most non-fungible tokens are ERC721 compliant. This points to the fact that they are built on top of the Ethereum blockchain as ERC-721 tokens.
I also need to buttress the point that although we have only mentioned two standards – ERC20 and ERC721, there are other standards on other protocols that can be used. However, both standards are the most commonly used. In general, they are used to create and assign a set of functions and attributes in the form of a smart contract that must be met, in order for an individual to own, manage, or trade an asset.
Before we get ahead of ourselves and become too technical, let’s take a break on this one. More details on how these standards function can be found at the Ethereum official documentation page, here.
Blockchain is helping in the decentralization of several industries. If you’ve ever been a fan of baseball, arts, or collectibles, then you will agree that the concept of scarcity is not entirely new. People would pay a fortune for certain art pieces. However, traditional systems rely on the validation and security from creators (in the case of video game collectibles) or experts. In line with this, it is possible for someone to sell a duplicate copy to a novice. Blockchain-backed non-fungible tokens create digital scarcity that can be verified on a distributed ledger without a centralized body to confirm the authenticity of the token. It helps to create a decentralized way to maintain, monitor, and organize distinct and digitally scarce items.
Blockchain is still a nascent technology, and the possible applications of this tech to unique items are yet unimagined. One of the niches that have already gained significant traction in the world of digital collectibles. There are also possible use cases in scarce properties like artwork, ancient items, and even houses.
Advantages and Disadvantages
As with most things in life, there are some positive and negative highlights.
Non-fungible ERC7211 tokens are an improvement on ERC20 tokens. They allow the creation of more detailed and unique tokens that can be assigned unique attributes which goes beyond a name, symbol, token supply, and balance. Taking it a step further, developers can include rich metadata on an asset, as well as information about ownership. This authentication adds more value and gives an investor confidence about the origin of an asset.
At the other end of the spectrum, despite the advantages and possible applications of non-fungible tokens, they have not gained widespread adoption within the blockchain community. This is partly due to the fact that ERC20 tokens are being used for ICO and airdrop programs which occur virtually every day. Also, the ERC721 protocol is still relatively new. It can become quite tricky and cumbersome developing decentralized applications that are based on the protocol.
Projects Utilizing Non-Fungible Tokens
Like I always say, it doesn’t matter how novel an idea may sound or appear on paper. If there are no real-life uses or possible applications, then it is as good as useless. In line with this, even though non-fungible tokens are still a relatively new development, there are some promising projects adopting the concept. Let’s have a look at some of them.
CryptoKitties: CryptoKitties became infamous for slowing down the Ethereum network in late 2017. I had absolutely no idea what this was until I had to wait for hours before my ETH transactions were confirmed (transactions that normally took less than a minute). On further reading, I found the culprits – CryptoKitties. Now, let’s clear the air, I have absolutely nothing against the concept, actually I do love it.
CryptoKitties is a digital collectible game based on breed-able and tradeable cats. Here’s what their website says, “CryptoKitties is a game centered around breedable, collectible, and oh-so-adorable creatures we call CryptoKitties! Each cat is one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed.”
This is not an entirely new concept since collectibles had always captured the interest of people; from card games like Pokémon to sports cards, and Beanie Babies, amongst others. CryptoKitties only proved that it was possible to decentralize the collectible market.
Decentraland: How would you feel buying a unique land and virtually developing it? This blockchain project enables the buying and development of digitally scarce land on Decentraland. According to their website, “there are plenty of opportunities to explore or even create your own piece of the universe. Here, you can purchase land through the Ethereum blockchain, creating an immutable record of ownership. No one can limit what you build. With full control over your land, you can create unique experiences unlike anything in existence. Your imagination is the limit: go to a casino, watch live music, attend a workshop, shop with friends, start a business, test drive a car, visit an underwater resort, and much, much more — all within a 360-degree, virtual world.”
On the surface, this looks silly. Why should anyone spend time and money buying a digital land? However, think about the bigger picture. This idea may grow to capture the world of virtual reality and gaming offering users the ability to own, create and modify a virtual reality pair that is unique to them.
Non-fungible tokens are an exciting category to look out for. I believe that the best is yet to come with this technology. This does not in any way mean that non-fungible tokens are better or would replace their fungible counterparts.
As the blockchain industry continues to grow and more uses cases are discovered, non-fungible tokens will definitely remain one of the intriguing aspects in the field with big ideas and potentials.