Non-fungible tokens (NFTs) are the latest buzz in the cryptocurrency world. Deals worth millions of US dollars have been completed since March 2021, when the craze began. Just last month, Christie’s auction house sold the first-ever NFT artwork – a collection of artworks by a digital artist Beeple for $69.3 million. A series of other NFT deals have then followed including the sale of Jack Dorsey’s first tweet at $2.9 million. But, what are NFTs? How do they work? What makes them special? And how does the future of these new applications of blockchain look like? In this document, I will answer these questions in plain English. Read to the last sentence.
What are Fungible and Non-Fungible Assets?Before we define what NFTs are, let us first understand the concept of fungibility.
Fungibility is the ability of a good or asset to be easily interchanged with another good or asset.
For example, if I borrow someone a ten-dollar bill and use it, I can later pay them back with another ten-dollar bill and all will be good since the two bills have the same value.
Alternatively, I can pay back the debt using two-five-dollar bills because they have the same value as a ten-dollar bill. Similarly, one can easily swap bitcoin and altcoins. Therefore, fungible goods or assets are both easily exchangeable and divisible.
On the other hand, non-fungibility implies goods or assets that cannot be interchanged by another asset of similar value. For example, every piece of diamond is unique with no exact match for one. Therefore, if you borrow my piece of diamond and losses it, you cannot find a similar diamond to pay me back.Another example is a piece of art such as the Mona Lisa.
Even though we can have other arts that imitate Mona Lisa, we know that there is only one original Mona Lisa and it can be owned by one person at a time. Other examples of non-fungible assets include gaming collectibles, trading cards, and a piece of land. Back to NFTs.
NFTs DefinedNFTs are unique digital tokens that represent ownership of distinct assets (Non-fungible assets) non–physical or physical. Think of an NFT as a title deed for a piece of land that represents the ownership of a unique indivisible piece of land. The ownership of the land can be transferred by transferring the holder of the title deed. However, unlike physical land title deeds that are either stored in a house or a safe in a bank, NFTs are digital tokens that are stored in a blockchain network.
Well, a blockchain is just a database of a decentralized ledger that records and secures transactions performed over peer-to-peer platforms.
What Makes NFTs Special?Although two or more digital artworks could be visually similar, once NFTs are created for each one, they will forever remain distinct. Each NFT is assigned a unique digital signature. Think of a digital asset signature as trading cards, where multiple cards could be printed yet each one gets assigned a distinct serial number.
Here are some unique features of NFTs:
Indivisible: unlike fungible assets such as fiat currencies or bitcoins, NFTs cannot be split into smaller denominations. They exist as a whole and dividing them renders them useless.
Indestructible: NFTs are built on the immutable blockchain technology that ensures that the information about NFT data is 100% secured from destruction, removal, or even duplication.
Verifiable: users of blockchain technology can easily and accurately authenticate NFTs on the network without requiring a third party.
Non-interoperable: NFTs can only be used on their ecosystem. For example, in-game items such as gaming characters can only function on games they are designed for, and not on other games.
Although two or more digital artworks could be visually similar, once NFTs are created for each one, they will forever remain distinct. Each NFT is assigned a unique digital signature.