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What are Non-Fungible Tokens?

Updated: Feb 21, 2022

What are Non-Fungible Tokens? What are NFTs?

Innovation of NFT’s

NFTs are the buzzword of 2021 and people often ask what are non-fungible tokens. The acronym NFT stands for “Non-Fungible Token” and it is quickly gaining attention throughout the cryptocurrency industry. To begin with, it is first necessary for the reader to understand the word “Fungible”.

Fungible Asset:

The word “Fungible” has the same terminology like the word “Asset”, this can be a real-world asset such as a car, a house, or a digital asset such as a cryptocurrency.

When items are fungible it means they are interchangeable with other items of equal value, however, they are not identical. For example, if two people swapped $10 notes with each other then they would have both swapped the notes for exactly the same amount of value. However, the two $10 notes that were just swapped would not be exactly the same. Meaning that they would not have the same security codes written on their backs and they would have different identification watermarks. So the $10 notes are both “fungible” assets, in the sense that they are interchangeable for the same value or fungible with each other.

Non-fungible Asset:

A “Non-fungible” asset is the complete opposite of a “fungible” asset. It is something that is unique and rare, is not divisible into smaller denominations, and it is not interchangeable with anything else because it has its own unique value.

An example of a real-world non-fungible asset would be the Mona Lisa painting currently held within the Louvre museum in Paris. This was designed and painted by the one and only artist “Leonardo Da Vinci”, it is a masterpiece of artwork giving it a priceless value and its own uniqueness. It could never be swapped or interchanged with another painting of its kind because there is only ever going to be one Mona Lisa painting. It is true that copies could be made of the Mona Lisa such as a photograph, but those copies would never hold the same priceless value of the true original painting, it is, therefore, a Non-fungible asset.

Digital NFT’s in the cryptocurrency world:

Within the cryptocurrency industry digital NFT’s can be:

  • Collectible cards

  • Virtual real estate

  • Digital Photographs

  • Digital Images

  • Digital Videos

  • Digital characters

  • Digital artwork

  • Digital Music

NFTs utilise blockchain technology to record ownership and validate their authenticity just like cryptocurrencies do such as ETH and BTC. Whenever a Bitcoin is sent from one wallet to another there will always be transactional data written to the Blockchain. Unlike cryptocurrencies each NFT is unique, it would therefore be better to think of an NFT as a digital collectible item or a cryptocurrency as a picture.

One of the first examples of an NFT was called “Crypto kitties” released in 2017 it was a game that featured pictures of cartoon cats whereby people were able to buy, sell and breed the cats with other cats to make new cats. The game was such a success that it caused major congestion problems on the Ethereum blockchain in which it was running on and the highest amount paid by a person for one of these Cryptokittens was $170k USD in 2018.

Copying NFT’s:

A commonly asked question regarding NFT’s is can they be copied? And why spend any money buying an NFT when it can just be copied. The answer is yes, with a simple right-click of a mouse button or a screenshot the digital picture (NFT) can be copied/downloaded and stored as a JPEG file. However, in doing this we immediately run into the same problem as trying to copy the Mona Lisa painting. Buyers and collectors would instantly know that this is just a copy from an original NFT because there would be no evidence of transactional data occurring on the blockchain.

Once a person has ownership of an NFT no other person can withdraw that NFT from them because they are the owner of the private key (the digital receipt). Much the same way a person owns a bitcoin no one can take the bitcoin from that person because they are the owner of the private key.

Digital NFT’s in the gaming world:

At the end of 2020, the video gaming industry was worth an estimated $90 billion USD with one of the most popular online games being Fortnite. This figure is set to grow well into a $100 billion USD industry with continued advancements in technology such as faster internet infrastructure and virtual reality.

Once a gamer has progressed to a new level within their game or they are able to complete the game they are often rewarded with a digital item such as a sword, a shield, a certificate, their name on the hall of fame, etc.

Currently, these digital rewards are always kept within the game itself, the gamer is unable to take their rewards out of the game and store them in their own personal digital wallet of achievements and they are unable to take the rewards out of the game and into other unrelated games as the two are not compatible.

NFT’s in the gaming industry is set to change all of this. In the not too distant future gamers will have the ability to remove their digital rewards such as a sword and place those rewards into their own personal wallet. This new method will give the gamer sole ownership of the digital item (NFT) and not be at the mercy control of the games developers should there ever want to implement new rules or if the game crashes so that the gamer lost all of their rewards and their given time.

Selling and buying NFTs:

At the time of writing the biggest online exchange where a person is able to buy and sell their NFTs is called “Opensea”. Currently, only digital artwork can be traded on this exchange, however, NFT’s within gaming is coming where the gamer would be able to go to the exchange and sell their digital rewards to other gamers.

Future of NFT’s

NFT’s are still a new concept and there is still much confusion among the general population as to exactly what they are. As with all blockchain technology it is constantly evolving and changing over time with much more room within the industry to grow and improve. Cryptocurrencies are simply digital transactions represented on a screen as numbers. Whereas NFT’s can be in the form of a visual picture, to some people this picture may hold increased value because the NFT represents a picture of something that the person admires and wants to keep. From a psychological point of view, a person can become personally or emotionally attached to a picture, thus making them want to keep the picture over a period of time or unwillingly needing to sell their picture (NFT) for a high asking price. This year (2021) Jack Dorsey the CEO of Twitter was able to sell the first-ever “Tweet” from 21st of March, 2006 for an estimated $2.9 million this proving that there is still huge potential for money to be generated within the industry and concluding that anything digital can become an NFT.

The gaming industry appears to have much to gain from the introduction of NFT’s, also the owner of a website’s URL could become extremely lucrative. However the NFT market is given its value by speculation, all NFTs are only valued by whatever a person is prepared to pay for it. With this in mind from an investment point of view, it would make sense to buy an NFT that represents a very rare moment in history or invest in the next digital Crypto kitties craze.

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