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What Are Non-Fungible Tokens?
Non-fungible tokens are not interchangeable. Instead they are unique to the owner of the token and additionally, they are digitally scarce. For instance, Bitcoin is fungible, if you send someone a Bitcoin and receive a Bitcoin, there is no difference between the two.
Non-fungible tokens may sound like a weird type of fungus if you’ve never heard of it before. Perhaps unsurprisingly, there is a lot of confusion around the, somewhat counter-intuitive, term. Before we dive into the concept of non-fungible tokens, let’s first discuss what fungibility is.
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Something that is fungible is usually a type of good that is interchangeable with another identical item – for example, a $20 bill. You can go to your bank and exchange it for another $20 bill, twenty $1 bills or eighty quarters. Regardless of the physical form of the $20, the value is still the same.
This is also true of most Cryptocurrencies, Ethereum for example. If Alice gives Bob her ETH, and Bob sends Alice the identical amount of ETH in exchange, there is no meaningful difference between the two. All ETH has the same properties and monetary value.
Therefore, a non-fungible token cannot be interchanged for another. One example of this would be a university degree. It is specific to the person who attended the university and their degree. It’s not possible for someone to exchange their degree for another one – the degree is non-fungible. In the video below you can hear Carlos Bruguera from the SelfKey R&D team explain it in more detail.
In the Cryptocurrency-space the concept of a non-fungible token is particularly interesting, because it opens up the possibility of individual coins having unique characteristics.
On the more trivial side of the spectrum, CryptoKitties is a good example of this. Here people can breed and buy digital cats represented by non-fungible digital tokens. Each Kitty is unique and therefore requires the non-fungible aspect of the token.
On the more serious side of the spectrum, non-fungible tokens can also be used to facilitate more sophisticated Security Token Offerings. Here tokens can represent ownership and entitle the holder to unique rights and privileges. You can imagine a tokenized real estate project in which each token holder is entitled to a return corresponding with his or her initial investment.
In order to achieve this, issuers typically forego ERC-20 tokens and instead use ones which are ERC-721 compliant. This is a free, open-standard built for the Ethereum blockchain, which allows for the creation of unique and non-fungible tokens.
Another important characteristic of non-fungible tokens is that they are not divisible. Fungible tokens, like Bitcoin for example, can be split into many bits, allowing holders to send or receive a fraction of the token – 0.001 BTC for example. This is not possible with non-fungible tokens, and instead they need to be exchanged as a whole.