Blockchain Cryptocurrency NFT Chapter 3 – What Are Non-Fungible Tokens

Blockchain Cryptocurrency NFT Chapter 3 covers the definition of Non-Fungible Tokens

Blockchain Cryptocurrency NFT Chapter 3 - What Are Non-Fungible Tokens
Blockchain Cryptocurrency NFT Chapter 3 – What Are Non-Fungible Tokens

What are non-fungible tokens? Non-fungible tokens (“NFTs”) are unique digital tokens backed by blockchain technology, the same distributed ledger technology that supports popular cryptocurrencies such as Ethereum and Bitcoin. Although NFTs have been around for some time, they have recently become very fashionable, largely due to the popularity of cryptocurrencies and the infrastructure that supports cryptocurrencies, namely the blockchain. Unlike traditional fiat currencies, cryptocurrencies, and other digital payment instruments where fungibility is a key feature, an NFT, due to its non-fungible nature, creates value that is intended to create scarcity.

A brief explanation of what “fungible” means might be helpful. A fungible item is one that has no unique characteristics and can be replaced by another identical item and is interchangeable. A good example of a fungible item is a fiat currency such as the U.S. dollar. Each dollar bill is considered to be of equal value. Similarly, fungible tokens are fully interchangeable. Unlike “fungible tokens,” NFTs have a unique value proposition.

NFTs are unique instances, and each token has a unique ID for easy differentiation from other tokens in the same smart contract for that token. The non-fungible token will have a specific owner, and the value of each NFT may differ due to the separate treatment of each token. Certain NFTs may represent unique tributes with demonstrable rarity. Traditional artworks such as paintings and sculptures are valued for their uniqueness, which in turn leads to scarcity. In contrast, digital files (i.e., digital art) can be easily and infinitely reproduced.

An NFT can therefore be used to “tokenize” a digital file to create a digital certificate of ownership that is stored in the distributed ledger and can subsequently be bought and sold. This allows the creator to make the digital file unique and add an element of scarcity to it, creating value.