A non-fungible token (NFT) is a specialized type of cryptographic token that depicts something distinctive.
NFT's really aren't compatible with each other. That's in contrast to cryptocurrencies like bitcoin, which are exchangeable in nature. It is worth taking a look at the distinction between "fungible" and "non-fungible" to fully understand what makes these tokens unique.
If anything is fungible, a token, in this case, means that it can be replaced easily by anything similar, and it is easily interchangeable. Examples of anything fungible in the real world might include rice grains or the dollar bill in your pocket. This wouldn't matter then you'd have to lend them $1 to another if they didn't return the very same one.
If something is not fungible, all these shifts. While at a glance, two objects can look similar, all will have unique data or qualities that make themselves irreplaceable or unlikely to be replaced. A plane ticket may be a physical instance of a non-fungible asset. They look like most other tickets, of course, because they each have multiple names of passengers, destinations, time of departure, and even seat numbers, but you can not interchange your ticket with some other person. It may have serious repercussions to share yours with someone. Not only could you probably wind up hundreds of kilometers away from where you planned to be, but also border control may not be too pleased either.
The potential of a product or commodity to be traded with the other specific products or assets of the same kind is fungibility. As fungibility means equivalent worth among the assets, fungible assets improve the trade and exchange procedures. Fungibility means that in the specification, where individual components can be collectively substituted, two portions are equivalent. Specific grades of goods and services, such as No. 2 yellow maize, for instance, are fungible since it does not make any difference where maize has been grown, the same amount is worth all maize designated as No. 2 yellow maize.
Often called fungible are cross-listed stocks, which are similar shares of stocks listed on domestic exchanges and various global exchanges. The shares reflect the very same holding interest in the firm, whether bought on the New York Stock Exchange or on the Tokyo Stock Exchange. It is also present in other sciences, such as quantum physics, while fungibility is usually associated with finance.
Difference between Non Fungible tokens & between other tokens
Several tokens are fungible, and indeed cryptocurrencies. You will not find the difference if you were to give someone a Bitcoin and get one back. Fungible tokens are constructed, in the ethereum network, using a norm called ERC-20.
Let's say each one of these tokens is a $10 bill for the sake of clarity. It'd be the same if you gave the token to somebody and got another one back a month later. That being said, the value could fluctuate somewhat. All these changes with NFTs, most of which comply with ERC-721. These could be comparable to baseball cards, as each of them has unique data and varying rarity levels. They can deliver unique features that render them distinct and are digitally rare.
You would be very upset then you'd have to mistakenly give someone one of these tokens and get a different ERC-721 token back. You have to keep in mind one more important distinction. Fungible tokens are divisible, which means a fraction of one ERC20 token can be traded.
Here are three aspects that render NFT's distinct from your standard cryptocurrency:
Metadata is deep inside within an NFT, which makes each resource distinct from all the others. It is a unique, unchangeable record, almost like the date stamp that you would get for a rare painting, describing what this NFT represents.
Scarcity is a significant ingredient that makes NFTs so desirable. Although developers can create an unlimited supply of such properties, they always have the power to restrict the life of the amount of unique, desirable objects.
For even the most part, it is not possible to break NFTs into smaller parts. They can only be purchased, sold, and kept in full. Consider the laws of non-fungibility: 10% of a plane ticket can not be bought in half, or a baseball card can be collected in smaller pieces.
So why would I invest in NFTs?
Due to some of the following factors, NFTs has shown to become a financially viable type of investment:
They create value for the Tokenized Asset: NFTs provide a medium where it is possible to tokenize tangible items such as artworks, thereby preventing the reproduction of such artwork and restricting the artist's ownership. This, in turn, generates scarcity and, thus, value for the artwork.
Offers shareholders more leverage: whenever they need it, tokenizing assets offers investors more liquidity over their assets. An instance when a virtual landowner agrees to lease his or her virtual space for a fee to advertisers, while still maintaining ownership of the land. In this situation, the virtual property still belongs to the proprietor, but part of it is liquified as rent.
For fungible tokens, your legitimate ownership would be written into a smart contract when you purchase ERC20 tokens. There are also details in the smart contract about how many tokens each address would have after any transaction. Since they are fungible, these contracts do not need to think about the uniqueness of the tokens, because they all have the same properties and value.
For the non-fungibility counterpart, however, the value of one ERC-721 token is not the same as another ERC-721 token. It would not be enough to add an address and balance to the contract; the specific ownership information of a token must also be included.
Nonfungible tokens' pros and cons
1. The norm of ERC-721 is a way to tokenize any unique asset with full immutability and protection on a public or hybrid blockchain.
2. NFT's can be built with far more money than most can access. This can be accomplished by users, adding extra context and information to the metadata of the asset.
1. It is still relatively new to the ERC-721 token standard. It has to be tested over time.
2. Fungible tokens are divisible. It is obviously not possible to break an ERC-721 token, and it must be purchased or sold in full.
3. A few projects have begun to issue NFT tokens, as stated before. RSK happens to be one of those.
How are NFT's inner workings?
ERC-20 tokens, centered on cryptocurrencies, are fungible. As used by Crypto Kitties and Decentraland, Ethereum 's NFT standard is ERC-721. On some other smart contract activated blockchains, like Cardano with tools and support, NFT's can also be developed.
NEO, EOS, TRON, and Ethereum, the most commonly used, all have NFT specifications. NFT's tokens with the smart contracts make it possible to incorporate comprehensive features, such as the owner's name, rich metadata, or protected links to files.
They can promise fully decentralized protection by blockchain, extended with the possession or exchange of virtually any commodity. NFT's, their specifications, and intelligent contract technologies are still being built.
How are non-fungible tokens created?
Non-fungible tokens have exclusive requirements and qualification levels. This can be a difficult and expensive task at this point, as we discussed earlier. It could take months to build a DApp, and this may cost an enterprise his competitive edge in the fast-moving blockchain environment.
The goal is to build a technical layer that harmonizes and standardizes the creation of these tokens. Without a standard, any entity or organization that has an interest in NFT's can create a structure for its own interests (which leads to a breed of inconsistencies). One of these tentative mechanisms is 0xcert, which provides a "plug-and-play" system that makes it easy to create and validate a non-fungible token faster – and using only a few days.
What is the future of Non-Fungible Tokens?
In gaming and crypto collectibles, non-fungible tokens are often used. NFT's can be used for gaming to reflect in-game assets, such as skins, that could be carried or exchanged with other players. However, their capacity is even better with copyright and intellectual property rights, ticketing, as well as sales and trade of video games. NFT's add the ability to build safety tokens and tokenize both physical and digital properties. Physical properties, such as land, can be tokenized as fractional ownership of shares. If these protection tokens are non-fungible, owning property is identifiable and evident, even though only part ownership tokens are sold. Accreditations such as credentials, software licenses, assurances, and birth and death certificates may also be a further application of non-fungible tokens.