Non-fungible tokens – what you need to know

Blockchain technologies offer numerous solutions in the fields of finance, logistics, crime prevention and many more. But how are they put into place? How are they used?

Non-fungible tokens are key to that development. One of the latest buzzwords in the crypto space is non-fungible tokens (NFTs). Indivisible, valuable and unique, non-fungible tokens are cryptocurrency tokens that have an array of applications. They give users infinite possibilities to create and trade digital assets like original artwork, blockchain-integrated collectible game items and much more.

In this article, we will explore what NFTs are, their characteristics and uses.

The evolution of tokens and Ethereum

In the early years of crypto, any new project needed to build a blockchain from scratch. Things changed with the introduction of the Ethereum platform.

Thanks to Ethereum and the ERC-20 token standard, crypto developers could create cryptocurrencies without having to build a new blockchain network. These types of cryptocurrencies, called tokens, differ from coins as they often piggyback on an existing blockchain. One of the most common blockchains powering the token industry is still Ethereum, even though it was one of the first chains to offer such a solution.

However, new blockchains are being created which allow developers to release various tokens.

As of today we can distinguish two types of these: fungible tokens and non-fungible tokens.

What are fungible tokens

“Fungible” refers to resources that can be replaced with something of a similar value or that are interchangeable, like money or other cryptocurrencies. Hence cryptocurrency tokens are fungible, as they are interchangeable and can be replaced with other tokens of identical value.

What are non-fungible tokens

A “non-fungible token” (NFT) cannot be broken down into smaller pieces and typically represents scarce assets, such as digital art, game elements and collectibles. Each non-fungible token contains a code that makes it unique and gives it a specific digital identity. There is no standard value attached to it and you can’t just exchange one token for another as in the case of currencies.

FTs vs NFTs in practice

Let’s say you borrow USD 100 from a friend. You don’t have to return the very same note she gave you. It can be another 100-dollar bill or two 50-dollar bills, as long as the value remains the same.

However, if you lend a friend a very rare stamp and he returns a similar brand-new stamp, you are not going to be happy. The new stamp may look just like the rare one, may be of similar size, but it has no real value. So, the two are not interchangeable.

This is the fundamental difference between a fungible asset and a non-fungible asset.

Money and cryptocurrencies gain value by their fungibility. The more widely recognized and accepted a specific currency is, the more people will use it, hence its perceived value will grow.

Non-fungibility is a desired feature as it indicates valuable and unique assets.

Token standards

In order to create non-fungible tokens, special standards had to be created. Initially, the Ethereum developers proposed the ERC-721 token standard, and later, the new ERC-1155.

The original ERC-721 standard was designed solely to support NFTs. It has some limitations, e.g. it can send only one token at a time. Its younger brother, the ERC-1155 standard, provides a wider range of options to developers. It can create both non-fungible and fungible tokens, as well as send multiple NFTs on a single transfer. Both token standards are popular across the market, depending on the developers’ needs.

NFTs in digital art and collectibles

It is not just financial sector that took advantage of this token. NFTs made it possible to verify the true ownership of digital assets ranging from vintage cars and sports memorabilia, to art and antiques.

Artists are now using NFTs to create digital art and sell it on online crypto marketplaces like superrare.co and opensea.io. This has led to the formation of a whole new industry within the cryptocurrency ecosystem.

NFTs in gaming

Non-fungible assets also play an important role in the online gaming. They allow players to buy, sell and exchange in-game items.

The beauty of NFTs is that they give players the power to change ownership rights. For instance, if they purchase collectibles in non-NFT games like Roblox or League of Legends, these collectibles do not actually belong to them, but are still the game’s property. Therefore, if the game shuts down, players lose all the collectibles. But if they buy an NFT collectible, then it belongs to them, not the game creators. It is stored on a decentralized blockchain network.

Besides gaming collectibles, NFTs became popular in the virtual world in 2017, with the launch of CryptoKitties. This was a playful experiment of the early stage blockchain technology. Users could breed and trade unique digital kittens, upvote and engage with the community. Before long, the craze for these virtual kittens spiraled beyond anyone’s expectations. Within months, CryptoKitties turned into a viral sensation. The prices for some of them reached six figures and the Ethereum network got clogged with a huge number of transactions.

Similarly, the NFT-based games like Axie Infinity allow people to make money by playing games. This has saved many households during the Covid-19 lockdown as more people turned to this source of income thanks to the growing popularity of the play-to-earn model.

NFTs prevent impersonation

In the digital age we now live in, impersonating someone or assuming a fake identity has become quite common. It is almost impossible to track down the numerous fake social media profiles that could be used for a number of crimes, from financial fraud to identity theft.

NFTs can be used as means of identification. When it comes to uniqueness, there is only one you. To prevent imposters from taking over your money or property, it is important to authenticate your online identity. So, tokenizing yourself with an NFT can be the perfect solution when it comes to the digital identity issues.

It has some additional benefits. As the users’ data is on the blockchain and their digital identities are stored on the wallet, they are in full control over it and can decide which data is to be released to whom. So, there is no need to release all personal information when it is not required.

NFTs in music and media industry

NFTs can also be used to fight piracy, which is a major problem the entertainment industry faces today. According to studies, online media piracy is expected to reach over USD 50 billion by 2022.

By attaching NFTs to the legal copies of music, films and other content, piracy can be reduced. This way the original materials on the blockchain can be identified and differentiated from illegal copies.

Thanks to NFTs, platforms like audius.co are being developed, allowing artists to publish their music in the form of immutable, timestamped non-fungible tokens. By that, streaming platforms can enhance the level of the copy rights protection and reward artists for their efforts.

NFTs in virtual world

NFTs have found their place in the virtual worlds. The global lockdown due to the Covid-19 pandemic gave NFTs a boost as people looked for ways to entertain themselves online.

Virtual worlds like Decentraland, The SandBox and Crypto Voxels gained popularity. These platforms allow users to buy virtual real estate in the form of NFTs and host various activities.

NFTs have also found a new breath of life in virtual art galleries, museums, gaming platforms and diverse 3D world experiences.

NFTs fight online censorship

The internet is supposed to be free from censorship. However, there are still many people who have no access to search engines. The use of decentralized domains on the blockchain is a great way to build a censorship-free internet, where everyone has access to information and is not deprived of his freedom of expression. NFTs can be used to identify and track decentralized websites or domains on the blockchain.

Platforms like Unstoppable Domains facilitate the creation of websites without any central server, thus making censorship and shutdowns impossible.

Decentralized insurance

NFTs have also been used to create risk-free insurance platforms on the blockchain. Decentralized insurance is one of the safety tools for the DeFi ecosystem. From wallet insurance to smart contract insurance, it gives users the peace of mind that their assets are protected from bugs and hacks.

Supply chain management

NFTs are flourishing in the supply-chain-management sector as well. In 2019 they were even adopted by the high-end fashion brand, Louis Vuitton. It uses the blockchain to allow individual authentication within its supply chain. The entire journey of the company’s products, from raw materials to the retail points, can be traced.

Products like vaccines, pharmaceuticals and wines have also been tokenized and tracked on blockchains to identify and reduce fraud. This was made possible as more dynamic data like location, temperature and size were added to NFTs along with unique serial numbers. These tokens can combine with other tokens to represent an assembled product with multiple parts in the case of inventory/stock management.

There are four primary benefits of using NFTs for supply chain management:

• Detecting and eliminating counterfeits: Due to the transparent and unchangeable nature of the blockchain, NFTs can be tracked, allowing detection of counterfeit products
• Ensuring uniqueness: NFTs allow to create rare and unique digital assets that cannot be replicated, replaced, forged or destroyed
• Maintaining provenance: NFTs can be traded on a secure peer-to-peer platform thanks to the blockchain technology they operate on, while still maintaining their source
• Tracing: NFTs are easy to track down as they are on the blockchain. And the blockchain allows to closely follow and trace the movement of NFTs

Judging by the current trends, NFTs have a future in a wide range of industries. As digitalization booms across the world and the Internet of Things (IoT) solutions accelerate, developers come up with more practical uses of the blockchain technology. It seems that the physical and more traditional assets can be tokenized and linked too, just like on the blockchain.

Certifications for identification, software licenses and property ownership all have the potential to function as NFTs.

While there will always be demand for fungible assets like cryptocurrencies, NFTs present numerous possibilities of the blockchain use. As the cryptocurrency industry grows and evolves, NFTs remain the most fascinating development in this field, full of big ideas and innovative technologies.