Non-fungible tokens (NFTs) came to prominence globally in 2021 with the hype surrounding leading digital art collections such as the Bored Ape Yacht Club (BAYC) collection. The prices of these digital assets skyrocketed and soon the acronym NFT became synonymous with monkeys, punks, and even a jpeg of a crudely animated rock! In reality, NFTs are a type of crypto token that are often misunderstood. To gain a better understanding of what NFTs are, let us first look at the differences between fungible and non-fungible tokens.
Fungible v. Non-Fungible Tokens
A fungible asset refers to any asset, physical and now digital, that is interchangeable with any other like unit of that asset. One Bitcoin ($BTC) is the same as any other $BTC in circulation; one dollar bill is worth the same as any other dollar; one Euro has the same value as any other Euro - they are all fungible assets. These assets are also divisible into smaller units with the same properties. These units, for example, would be satoshis or sats (one millionth of a Bitcoin) for Bitcoin and cents (one hundredth of a dollar) for the U.S. dollar. Fungible assets are essentially indistinguishable from one another making them viable as payment mechanisms.
On the other hand, non-fungible tokens are crypto tokens that are indivisible and unique. Similar to fungible tokens such as $BTC, $ETH, and $CHER, NFTs are built on smart contracts on the blockchain. However, NFT contracts contain specific information - unique identification codes/metadata that make each NFT different from one another. In this way, one NFT cannot be interchanged with another NFT, and whole NFTs cannot be broken down into smaller units and used. These traits denote non-fungibility hence the name NFT.
One key characteristic of NFTs is that they are provably scarce assets. Each non-fungible token contains computerized code that verifies it is the only asset with its specific digital identity. This is critical for creating unique digital goods and can even be used to represent rare physical assets. Think of provable, fractionalized digital ownership of a piece of real estate, physical art, or sports memorabilia as a few examples. The possibilities for exclusive and rare assets that can be traded — such as digital art, collectibles, or in-game video game items — are endless.
One particular sector that NFTs are disrupting is the video game industry. Click here to take a deeper-dive on NFTs with our dedicated NFT course (coming soon) or carry on to the next lesson to learn about blockchain-based video games in our GameFi lesson.