Are you looking to enter a non-fungible tokens trade? NFTs are one of the unique use cases in cryptocurrencies that allow for digital value to be stored in a smart contract and are unique to their owners.

Anyone who thinks cryptocurrencies are one-dimensional will be surprised to learn of their potential. Non-fungible tokens are among the early yet increasingly growing examples of decentralized applications aiming to remove unnecessary intermediaries while enforcing a trustless system to store things of value autonomously.

This article details what a non-fungible token is and its distinctions from regular coins, what fungibility is, how these tokens work, what they are currently, and what we could use them for going forward.

What is a non-fungible token? 

To understand NFTs, we first need to realize that cryptocurrencies serve different purposes. Traditional digital currencies like Bitcoin are used strictly as a medium of exchange. However, other crypto assets, also referred to as tokens, have unique utilities, and are not made to be a transacting currency.

A non-fungible token represents a piece of ‘digital scarcity’ that is neither mutual nor inherently interchangeable. For example, one of the most popular NFTs is the blockchain game, CryptoKitties, where players can breed, collect, and trade virtual cats. 

Each CryptoKitties token is unique, non-fungible to every owner, and represents different cats. As with any marketplace, holders perceive value according to many quality standards, and everyone trades each token using a native cryptocurrency accordingly amongst collectors and traders. NFTs presently are more prevalent in recreational activities.

However, it’s important to note that a non-fungible token can represent anything of value that may not necessarily be a tradable asset. We should better understand the fungibility aspect of NFTs.

Understanding fungibility 

Fungibility is an economic phenomenon that describes the interchangeability of a good. In simpler terms, something is fungible when you can freely exchange or replace it for another of the same type and still retain the same value.

For example, a common fungible item is a dollar (or any other currency). Assuming there is no counterfeit, two people can exchange different $1 bills with one another and still deem either to be worth the same.

Even though technically each bill has its unique identifier or serial number, condition, etc., the important thing is the value is perceived the same by any holder. If person A borrowed a solid $1 bill, person B could return it in denominations of 20c and two 50c coins, and person A should accept as the value would still be $1.

In contrast, a non-fungible good is:

  • Non-interchangeable
  • Unique
  • Non-divisible
Understanding fungibility

How do NFTs work? 

Ethereum was the first cryptocurrency to successfully implement a non-fungible token, CryptoKitties, in late 2017. They are also the pioneers of smart contracts that fuel the creation of these tokens. 

Smart contracts are self-executing, code-written protocols aimed to implement pre-determined agreement terms established by their creators automatically. A smart contract can add rich and extensive data where all the identifying information of a token can be found and self-executed by the program.

Many of the popular NFTs run on Ethereum using their ERC-721 standard. Other notable cryptocurrencies that have joined the party of NFT standards include NEO, TRON, and EOS.

What are NFTs used for?

The idea of these tokens is still a relatively novel aspect of cryptocurrencies due to their scarcity, existing only for three years so far. NFTs can represent anything of value digitally, ranging from artwork, collectibles, ownership licenses, and gaming, among many other things. 

The next section will observe some of the current NFTs people can buy, although these tokens can extend beyond eventually. Unlike traditional cryptocurrencies that we can buy on an exchange, NFTs exist on marketplaces unique to them. 

Example of well-known NFTs

Let us now look at the couple of leading NFTs that have been around for a while, one type having a lot in common with an online game and another being quite similar on an online art platform.

CryptoKitties

CryptoKitties

Analysts recognized CryptoKitties as the first successful application of an NFT in December 2017. Developed by Canadian innovation studio Axiom Zen, CryptoKitties is a blockchain game allowing for the trade, collection, and breeding of virtual cats. Ownership of each cat comes with its own special token.

Each animal is unique from another through different genetic attributes users can program and validate on the blockchain. One of the most expensive cats sold on the platform cost 600ETH or close to $173,000 in 2017. Despite being the pioneer, CryptoKitties’ volume has dropped and ranks 15th (at the time of writing) on most traded non-fungible tokens on Ethereum.

SuperRare

SuperRare

At the time of writing, SuperRare is the most traded NFT on Ethereum’s blockchain and one of the most popular in crypto overall. As the name suggests, SuperRare is simply a marketplace for collecting, buying, and selling rare single-edition digital artwork. 

The blockchain tokenizes each art piece and assigns a value depending on its quality and perception. A leader in the niche crypto art market, SuperRare has created an efficient platform for digital artists to monetize their work with almost $5 million earned to date (and growing).

The future of NFTs

We have only scratched the surface on the potential of NFTs. Some analysts believe these tokens will bring about the next revolution in blockchain and cryptocurrencies as a whole. The application of non-fungible tokens is fostering a trustless system where a smart contract can assign the value of any asset and its ownership autonomously and decentrally.

Aside from the preceding use cases, we could see the application of NFTs in the following:

  • Identification, or KYC (Know Your Customer) practices 
  • Voting and elections
  • Copyright
  • Warranties
  • Software licenses
  • Educational certificates
  • Badges
  • Physical assets

Conclusion

NFTs are not just going to impact recreation and leisure continuously, but virtually anything that we deem important and valuable. Forward-thinking platforms like Ethereum have continuously pushed their visions of writing code to control digital value autonomously, and NFTs are the prime examples of this reality.