NFT Explained: What Are Non-Fungible Tokens?

NFT Explained: What Are Non-Fungible Tokens?

A non-fungible token or NFT is primarily a unit of data stored on a digital ledger that can be added to a digital file to certify its uniqueness. Note that it is based on the same digital ledger technology called blockchain that forms the foundation of cryptocurrencies such as Bitcoin and Ether of the Ethereum blockchain.

By extension, NFTs also represent a class of digital assets that have been certified to be unique and, therefore, not interchangeable. Examples can include a digital artwork, a text posted on a website or shared on social networking websites such as Twitter, digital music and video files, pop culture artifacts such as memes, other image files such as GIFs, and video games or items within a particular video game, among others.

The unique identity and ownership of a non-fungible token are verifiable via the blockchain ledger. Because NFT data can be ascribed to a particular digital file, the entire NFT asset can be sold and traded on digital markets.

Explaining Fungible and Non-Fungible

What are Non-Fungible Items? How is it Different from Fungible Items and Assets?

In economics and finance, fungibility represents the characteristic or property of particular objects or goods whose individual units are interchangeable. A fungible item can be exchanged in whole or in part with another fungible item of the same type because of its associated and recognized monetary value.

Currencies such as a United States Dollar or the Euro of the European Union are prime examples of fungible items. Other examples include digital currencies such as Bitcoin, commodities including crude oil or farm produce, precious metals such as silver and gold, and other financial assets such as common stocks and futures contracts.

To exemplify further, note that a 1 dollar bill is interchangeable with another 1 dollar bill. The same is true for 100 pieces of 1 dollar bill and a single 100 dollar bill. A 5-kilogram gold bar can be mutually substituted with 5 kilograms of gold coins. Furthermore, a particular grade A corn can be exchanged with a similar grade A corn regardless of where it was grown.

Non-fungible items do not have fungibility. They are not readily interchangeable with one another. Even items with recognized monetary value are not readily interchangeable. Examples include owned cars and houses, as well as works of art such as paintings, rare collectible items such as old coins or baseball cards, and precious gems such as diamonds.

It is important to highlight the fact that diamonds cannot be considered fungible objects because they have different cuts, colors, sizes, and grades. A house cannot be exchanged with another house of a similar lot and floor area because of factors affecting their monetary values, such as location, types of material uses, and age, among others.

Trading a fungible item with a similar fungible item means that the participants will end up having the same thing. Trading similar non-fungible items will result in each participant owning something different. Digital assets with unique identifiers ascribed using blockchain technology are non-fungible for the same reason, thus they are called NFTs.

Remember that NFT assets have unique identifiers. Furthermore, they have different characteristics and formats. An NFT meme of a cat does not have the same attributes as a particular NFT digital artwork. However, despite being non-fungible, they can have monetary value, thereby making them digital assets.

Applications of Non-Fungible Tokens

What are the Uses of Digital Ledger and NFT? Why NFTs Have Become Digital Assets?

Blockchain technology is at the heart of non-fungible tokens. Because the unique identity and ownership of an NFT are verifiable via the blockchain ledger, the entire process of creating NFTs serves as a solution for licensing digital items and turning them into digital assets. Of course, the license to use and own a digital asset does not confer copyrights to the license holder.

Turning digital items into digital assets means assigning them a monetary value. Therefore, monetization is a more specific application of non-fungible tokens. The first early use case of non-fungible tokens is in monetizing digital artworks. Several artists and collectors have made money by selling and trading digital artworks.

In March 2021, the digital artwork “Everydays—The First 5000 Days” by Michael Joseph Winkelmann, also known as Beeple, was sold for USD 69.3 million. His 10-second video entitled “Crossroads” was also sold for USD 6.6 million. Artist Kristy Kim sold the 3D-rendered house model “Mars House” for USD 500,000.

Several internet memes have also been turned into digital assets and become NTFs, which were then sold by their creators or subjects. Examples include the infamous Charlie Bit My Finger viral video, the Disaster Girl meme, the Nyan Cat YouTube video, and the Doge image. Note that the license to own the Dodge meme was sold for USD 4 million in June 2021.

Physical collectibles such as baseball and NBA cards can be turned into digital assets by generating their digital equivalents and representing them with non-fungible tokens. A LeBron James slam dunk NFT card on the NBA Top Shot platform sold for USD 208,000 in February 2021. Several entrepreneurs have launched digital collectible products using NFTs.

Another notable application of NTF is in developing, marketing, and monetizing NFT video games or blockchain games. Several game titles for personal computers and smartphones have been developed in consideration of non-fungible tokenization. NFTs can also represent in-game assets such as digital plots of lands or playable characters and items.

The Vietnam-based Sky Mavis launched the NFT-based trading and battling video game “Axie Infinity” in 2018. Players can collect, breed, raise, trade, and battle playable creatures called axies, which were turned into non-fungible digital assets. AXS and SLP are the primary in-game tokens. The game generated a total sales of USD 42 million in June 2021.

Specific NFT applications or use case examples have expanded further beginning in 2021. These include allowing musicians to tokenize and publish their music as non-fungible tokens, as a means to auction other artistic works such as film and literature, raising funds by tokenizing documents such as a contract and patents, among others.

Non-Fungible Tokens or NFTs in a Nutshell

To summarize, a non-fungible token or NFT is primarily a unit of data ascribed to a particular digital item or a digital representation of a physical object. Examples of digital items include digitized documents and digital files, images and other media files such as audio or music and videos, and digital artworks, among others.

However, “non-fungible tokens” also represent actual digital assets that have been certified unique and tokenized further using blockchain technology. The process of turning a digital item into a unique and verifiable digital asset via NFT data ascription, or NFT minting, can serve a variety of purposes: as a licensing and ownership solution, and for monetization and tokenization.

It is important to also highlight the fact that NFTs are not cryptocurrencies. Cryptocurrencies such as Bitcoin and Ether are fungible assets because they are digital currencies. Furthermore, there are key advantages and disadvantages in using and promoting further the use of non-fungible tokens.