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Understanding the concept of Non-fungible tokens

Understanding the concept of Non-fungible tokens

NFT is one of the most popular topics in the cryptocurrency world today. Before we delve into NFTs, let's start by briefly describing what the word "Fungible" means and, by extension, "Non-fungible.” The Merriam-Webster dictionary defines Fungibility as "being of such a nature that another equal part or quantity may replace one part or quantity in the satisfaction of an obligation.” In essence, this means that something is said to be fungible when an owner can exchange it for a similar quantity of equal value. By extension, Non-fungible means the exact opposite. That is, said commodities are unexchangeable even though they seem to be alike.

Imagine you borrow a £100 note from a friend. You don't have to return the same note when it's time to pay back the money because currency notes are usually fungible. You can easily pay back with another £100 note or two £50 notes, as long as the total value adds up to £100. However, if you borrow a bicycle from your friend, you have to return the same bicycle and not in parts like you did with the currency notes, else there will be issues. This is because the bicycle is non-fungible because of its unique value. Essentially, the whole concept of fungibility revolves around the value that's placed on items by those involved in the exchange.

A token is a representation of something in a particular system. It fulfills many functions within any described; examples are a value exchange, currency, ownership rights, toll, etc. A non-fungible token is a blockchain-based digital item whose value is due to its uniqueness. It represents a unique digital or real-world asset that isn't mutually interchangeable, making them digitally rare or scarce. 

Applications of NFT

One of the most popular applications of NFT is Collectibles. An example is seen on platforms like CryptoKitties, where players can collect and breed digital cats. These cats have unique appearances and personalities and are not easy to exchange, just like real-life cats. Other gaming platforms where players can create and get unique items also exist.

Various frameworks facilitate the issuance and trading of NFTs such as ERC-721 (used on the Ethereum Blockchain) and the more recent ERC-1155, which allows a combination of fungible and non-fungible tokens in a single contract. This standardization enables these unique assets to be transferred between applications with relative ease ( a term known as Interoperability).

Some drawbacks aside, such as the relative newness of the ERC-721 platform and the indivisibility of the NFT( unlike fungible tokens, NFT have to be sold whole because they can't be fractionated or divided), future applications look really promising as NFTs can be used to store digitized versions of real-world assets such as certificates, credentials, warranties, identities, property ownerships among others. These will ensure that they are not easily counterfeited.

Conclusion

Let's have a brief recap of the characteristics that set NFT apart from your typical cryptocurrency.

  1. Unique: each NFT has metadata, a permanent, unalterable record that describes what makes it unique.
  2.  Rarity: The more scarce an item is, the more attractive it becomes, and the greater its value.
  3.  Indivisible: NFT can't be divided into smaller denominations, unlike Bitcoin and Ethereum. They can only be sold, bought, or held whole. The same way you can't sell or buy 60% of a car or bicycle.

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