What is a Non-Fungible Token?

What is a Non-Fungible Token?

When Bitcoin arrived on the internet it marked the beginning of an era – the cryptocurrency era. In order to understand NFT’s, short for Non-Fungible Tokens, we first must understand what cryptocurrency is.

Cryptocurrency is a transferable digital asset, that is secured through cryptography. To keep track of balances and transactions, cryptocurrencies use a ledger, just like banks keeping track of your checking account. The difference, however, is that cryptocurrencies utilize a decentralized ledger called the blockchain. The blockchain maintains an updated, real-time account of transactions and account balances, while cryptography ensures accuracy and protects against bad actors.

For cryptocurrencies like Bitcoin, to be successful they had to be fungible – meaning that each unit has to represent the same value. Fiat currencies around the world are fungible; a $20 dollar bill represents the same amount of value regardless of where it is spent and who is spending it.

As blockchain technology evolved and cryptocurrencies found success, enterprising developers realized that everything could be put into the blockchain and a token economy could be created. For example, Real Estate titles could be put into the blockchain, and during a sale ownership could be transferred from one owner to the next.

To do this and make it a success, they had to find a solution to the fungibility problem. Assets like Real Estate, and Artwork, need a way to specify in the token that the value it represents is unique.

Enter Non-Fungible Tokens, commonly referred to as NFT’s.

How do Non-Fungible Tokens work?

The purpose of NFT’s is to create and represent the uniqueness and scarcity of an asset, whether physical or digital. Scarcity is the fact that supply is limited, and is represent on a scale – 1 being very scarce, and 1,000,000 being not scarce. Non-Fungible Tokens work by using cryptography to encode within a token the ownership of, the specificity of, and the authenticity of the asset it represents.

When you wrap your head around the idea of Non-Fungible Tokens, you will realize that it opens up a whole new world to cryptocurrency. Tickets to sporting events and concerts, collectibles, artwork, in-game assets, and much more. NFT’s work by providing a transparent and provable link between real life and the digital sphere.

What are some examples of NFTs?

Today, most NFT’s are issued as tokens on the Ethereum blockchain. Ethereum is unique in that it allows developers to create their own cryptocurrency and deploy it on the Ethereum blockchain. Although other blockchains provide for the ability to create tokens and issue them, such as Polkadot, Binance Chain, and Waves, Ethereum was the first and is still the most popular. Most NFT’s you see today, as of 2020, will be issued on Ethereum.

The NFT market is still very young, and growing fast. The first example of NFT’s was CryptoKitties, a game that allowed players to buy, sell, trade, and breed cats. Using NFT’s the developers were able to provide each cat with its own characteristics and DNA, that would be passed down to the new cat when they would breed. It might sound a bit silly, but it proved the concept of NFT’s on the blockchain and has completed millions of transactions.

Today, the biggest NFT is sorare, which is a global fantasy soccer league. Players collect digital player cards and create their team to compete for prizes. The game uses NFT’s to represent players using the digital player cards. To compete, it is just like normal fantasy sports, earning points based on the real life players performance.

Another big NFT platform is ENS – the Ethereum Name Service. Using ENS, you can purchase a .eth name, like yourname.eth. You can use this as a website, or link it to an Ethereum address. When linking it to an Ethereum address, instead of typing out the address in the wallet users only have to type yourname.eth to send funds to you. ENS uses NFT’s to represent each .eth name created.

Views and opinions expressed are solely those of the author and not of The DeChained or any affiliated party. Views or opinions expressed in this article (or any article on the website) are not financial advice. Articles are for informational purposes only. The author and The DeChained may hold positions in assets discussed in this or other articles.
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