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Wednesday, June 29, 2022

NFT: what is it, and what is it for? – Definition and examples

What does “fungible” mean?

An NFT, what is it exactly? Before getting into the definition of a non-fungible token , it is worth explaining what fungibility is. Fungibility is used to qualify a currency. An asset is said to be fungible if:

  • It is not unique;
  • It is interchangeable with an asset of the same type.

The most telling example is of course the currencies we use on a daily basis. Euros are therefore fungible assets. A one euro coin is not unique and it is indeed exchangeable for another one euro coin, which has the same value. If Alice lends a one-euro coin to Bob, Bob can later return any other one-euro coin to Alice. Similarly, most cryptocurrencies are fungible or partially fungible assets. Each coin or token is thus worth the same as its neighbours.

That said, it is important to note the partial fungibility of some cryptocurrencies. Bitcoin (BTC), for example, is a partially fungible cryptocurrency because its entire transaction history is freely available. This means that the coins can be considered unique: some have been used for illicit exchanges, which distinguishes them from “virgin” coins. This can potentially create a market where “clean” parts are favored over parts that are already in use.

Anonymity, a sine qua non of fungibility

Absolute fungibility therefore implies a notion of anonymity . In this case, each piece is strictly identical and not identifiable. We can cite the example of privacy altcoins such as Monero (XMR) or Zcash (ZEC). Since we don’t know what the coins were used for, they really all have the same status.

Truly fungible tokens such as Monero often find themselves in the crosshairs of regulators. The latter view with suspicion the layer of anonymity which they believe would favor money laundering.

What is a non-fungible token (NFT)?

We can come back to the heart of our subject: what is an NFT? Non -Fungible Tokens are unique and identifiable. Thus, two tokens created will not be exactly identical and interchangeable, each one will have specific characteristics to define it.

NFTs are tokens similar to those used by cryptocurrencies, but their values ​​and characteristics are varied, which means that they cannot be considered a currency. They can be used to digitize a variety of information and are stored on the blockchain. It’s as if each bitcoin had its own characteristics and aspects that made it unique compared to other bitcoins.

The origin of NFTs (Non Fungible Token)

Historically, non- fungible tokens were created on Ethereum. They were introduced through the ERC 721 proposal, which is a standard for this type of token.

The official ERC-721 overview site describes non-fungible tokens as follows:

Think of these [non-fungible tokens] as rare and unique collectibles. “

Non-fungible tokens are not limited to Ethereum, but in fact, this blockchain is almost exclusively used for their creation. In addition, many services now allow you to create NFTs for free and without requiring too much knowledge, for example OpenSea.

Applications and uses of non-fungible tokens

As we briefly mentioned, non-fungible tokens or NFTs can support a multitude of uses. They’ve really exploded in 2021 as collectibles, but of course they’re not limited to that. Here are some major areas where they are used:

blockchain video games

NFTs first gained attention in gaming , particularly collectible games. The “historic” game remains of course CryptoKitties. Launched in 2017, the decentralized Ethereum application allows you to collect virtual cats, much like collecting Pokémon cards. Each cat is actually an ERC-721 token, which is stored on the blockchain, freely exchangeable, and has its own value.

Other collectible card games then followed, with in particular games inspired by Magic: The Gathering or Hearthstone. They allow you to fight your cards and earn cryptocurrency rewards. One of the best known currently is Gods Unchained.

NFTs are also used in more varied games. They are sometimes created to represent key items, such as armor or weapons, to be stored and traded freely by players.

Digital art and collectibles

The field for which non-fungible tokens have become known is of course art and collections. An NFT makes it possible to store any digital object on the blockchain : an image, a GIF, a video, etc. This allowed artists to offer their production in the form of a non-fungible token.

In March 2021, the Kings of Leon released the first NFT album in history. Other musicians have offered career highlights as non-fungible tokens, for example Eminem. This type of token is also of course particularly used by digital artists. We can cite Beeple, whose works regularly reach exorbitant prices.

Memes and Internet Culture

Unsurprisingly, NFTs too have been caught up in the meme culture on the internet. To the point that some meme cults have themselves been tokenized, and ripped off at a price of gold. The non-fungible “Disaster Girl” token thus sold for $473,000 during the month of April 2021. And Doge – which led to the creation of Dogecoin (DOGE) – was of course not spared . His original meme was purchased for $4 million .

Digital real estate and decentralized worlds

Halfway between video games and amusement parks, there is also the digital real estate sector . Projects like Decentraland or The Sandbox offer users 3D universes, with plots. Everyone is free to buy a plot and then build what they want on it.

Each plot is represented by a non-fungible token, which can be purchased with a cryptocurrency – Ether (ETH) or MANA for example. Plots vary in price depending on their attractiveness and location , just like “real” real estate.

Digital worlds attract: the legendary brand Atari has thus particularly bet on the world of Decentraland, buying many plots in order to launch – among other things – a cryptocurrency casino. The giant Binance has also smelled the vein, since it has appropriated a good part of the land of The Sandbox . The best placed lands are the most visited, and thus make it possible to generate rewards.

The “tokenization” of objects and assets

In a less fun way, non-fungible tokens can also be used for traceability. Thanks to its inviolable aspect and its great security, the blockchain can certify the origin and authenticity of an object or a commodity. This is why it is increasingly used in this type of case. As early as 2019, the LVMH group had started experimenting with non-fungible tokens of the ERC-721 type, in order to certify luxury products and fight against counterfeiting.

Blockchain also makes it possible to “tokenize” a wider variety of assets. One of the most telling examples is real estate – real this time. NFTs can be used to digitize particularly illiquid assets (like a house or land). When they arrive on the blockchain, they become much more liquid. This is a use that is very limited for the moment, but which should come to the fore in the years to come.

Digitize contracts and agreements

Elements of contracts and formal agreements may also make use of non-fungible tokens. In April 2021, a couple got married on the blockchain, exchanging rings in the form of NFTs.

NFTs can also be used to digitize official documents like IDs, certificates, etc. Currently, there is a legislative vacuum surrounding these practices, but they too should become more democratic in the future.

What are NFTs: conclusion

Beyond headlines, NFTs do have applications that go beyond memes or trading cards. Their integration into broader sectors, including that of decentralized finance (DeFi), therefore seems to be on the right track.

Like other aspects of blockchain technology, non-fungible tokens allow for great security, reduction of intermediaries, and decentralization of processes. They should therefore continue to be favored for various use cases.

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