What Is a Non-Fungible Token (NFT)?

Non-Fungible Token (NFT): What It Means and How It Works.

Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other.

Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions.

KEY TAKEAWAYS

• NFTs (non-fungible tokens) are unique cryptographic tokens that exist on a blockchain and cannot be replicated.

• NFTs can represent real-world items like artwork and real estate.

• "Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.

• NFTs can also function to represent individuals' identities, property rights, and more.

• Collectors have sought NFTs as their value initially soared, but has since moderated.

Little Understanding Non-Fungible Tokens (NFTs)

NFTs evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract, ERC-721 defines the minimum interface—ownership details, security, and metadata—required for the exchange and distribution of gaming tokens. The ERC-1155 standard takes the concept further by reducing the transaction and storage costs required for NFTs and batching multiple types of non-fungible tokens into a single contract.

Examples of NFTs

Perhaps the most famous use case for NFTs is that of crypto kitties. Launched in November 2017, crypto kitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique and has a price in ether. They reproduce among themselves and produce new offspring, which have different attributes and valuations compared to their parents.

Within a few short weeks of their launch, crypto kitties racked up a fan base that spent $20 million worth of ether to purchase, feed, and nurture them. Some enthusiasts even spent upward of $100,000 on the effort.

More recently, the Bored Ape Yacht Club has garnered controversial attention for its high prices, celebrity following, and high-profile thefts of some of its 10,000 NFTs.

Why NFTs Are Important

Non-fungible tokens are an evolution of the relatively simple concept of cryptocurrencies. Modern finance systems consist of sophisticated trading and loan systems for different asset types, ranging from real estate to lending contracts to artwork. By enabling digital representations of physical assets, NFTs are a step forward in the reinvention of this infrastructure.

How Can I Buy NFTs?

Many NFTs can only be purchased with Ether, so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can then purchase NFTs via any of the online NFT marketplaces, including OpenSea, Raible, and super rare.

Are NFTs Safe?

Non-fungible tokens, which use blockchain technology just like cryptocurrency, are generally secure. The distributed nature of blockchains makes NFTs difficult (although not impossible) to hack. One security risk for NFTs is that you could lose access to your non-fungible token if the platform hosting the NFT goes out of business.

What Does Non-Fungible Mean?

Fungibility is an economic term that describes the interchangeability of certain goods. For example, a barrel of oil is fungible (interchangeable/indistinguishable) from any other barrel of oil. A dollar bill, likewise, is equal to any other dollar bill (or 4 quarters, etc.). Non-fungible is to render such items unique or distinguishable. For instance, if you were to take a dollar bill and have it drawn on and signed by a famous artist, it become unique - unlike all other dollar bills, and perhaps worth more than its face value.