NFTs are one of the most highly discussed topics in the crypto industry. But it is not yet clear to many people what they actually are and how they work. Let’s figure it out what NFT is, why these non-fungible tokens are needed, and how they differ from other tokens.
Overview of Non-Fungible Token (NFT)
What is an NFT? A non-fungible token (NFT) represents a unique digital asset. Unlike cryptocurrencies such as Bitcoin that can be divided into smaller units, each NFT represents just one asset, so it cannot be divided or replaced by another item. Each NFT has its own characteristics that make it unique.
For example, one may represent a particular physical object — a work of art, collectibles, real estate — or an intangible asset such as a game character, voucher or license. NFTs are digital assets that are unique, unlike traditional cryptocurrencies like Bitcoin and Ethereum. The non-fungible part of the name refers to their unique properties. With bitcoin, for example, one coin is interchangeable with another — a bitcoin is fungible because it is interchangeable with any other bitcoin on the market.
With NFTs, this is not the case — each token represents something different or unique. For example, a CryptoKitty NFT represents an actual digital kitten that can be bought and sold through an online marketplace like OpenSea. Each CryptoKitty has its own characteristics and traits that make it different from every other CryptoKitty on the market. And because there are only so many traits that can be assigned to each kitten, there’s a limited supply of them.
Non-fungible is a rarity, compared to the fungibility of currency. For example, a US$20 bill can be exchanged for a $20 bill of any denomination. A non-fungible asset, though, cannot be exchanged for an equal asset; it must be exchanged for its own asset.
They’re tokens to identify ownership
Each NFT represents a digital asset or object, usually stored on the blockchain. The token certifies ownership, just like a physical asset certificate does for real-world objects. This token is unique because it can’t be exchanged for anything else and it is not interchangeable. It is the digital equivalent of a one-of-a-kind item.
They’re used to represent digital art and collectibles
The most popular example of an NFT is a digital image such as a GIF or an artist’s work like Beeple’s collage that sold for $69 million at Christie’s auction house in March 2021. In the future, they could even be used to represent music and video files. However, they can also be used to represent collectibles like virtual trading cards and virtual real estate in video games, too.
In the crypto world, Bitcoin is an example of a fungible token. Each coin has the same value as any other coin of the same type. Ethereum, on the other hand, is not fungible as each Ether coin is unique and cannot be interchanged with another Ether coin.
Ether is also not fungible because it can have different values depending on its origin. For example, Ether coins mined using GPU or ASIC mining hardware will have different values than Ether coins mined using CPU mining hardware.
NFTs were first introduced in 2012 by gaming company Axiom Zen in the form of CryptoKitties. It was the world’s first game based on blockchain technology. The game’s players were able to buy and sell exclusive digital cats using Ethereum cryptocurrency. The game became extremely popular that it caused a massive network congestion on Ethereum in December 2017. How does NFT work?
Each NFT represents a unique asset, which is stored in a smart contract on a blockchain network. An NFT can be compared to a ticket for an event or sports match; it not only allows you to access the event but also proves your ownership of it.