NFT: what are non-fungible tokens and how do they work?

Non-Fungible Tokens or NFTs non-fungible tokens) are a type of unique and indivisible digital assets.

Although some of them have crypto functions, in general NFTs work as collector’s pieces: they are tokens with unique characteristics that cannot be replaced by others.

This type of token protocol allows you to create rare and valuable digital goods, whose value tends to increase precisely because of this scarcity.

NFTs opened up a universe of possibilities that allowed expand blockchain technology beyond cryptocurrencies; towards video games, collectible art, music. And also a new universe of investments.

Differences with fungible tokens

Fungible tokens are the best known in the crypto world: Cryptocurrencies like Bitcoin are. There are millions of bitcoins in circulation, they are all equivalent to each other and they all have the same value and identical characteristics.

In that sense, fungible tokens could be compared to banknotes: all of the 1000 pesos are equivalent to each other. If today you lend a 500 peso bill to a friend, you don’t need them to return the same bill to you next week. And like most fungible tokens they are divisible, this friend could give you back five 100-peso bills and it would be the same.

Instead, the non-fungible tokens They work in a completely different way. They are not divisible and are unique pieces, like when we talk about works of art: there is only one Mona Lisa, no matter how many people want to paint such a picture.

The vast majority of blockchain crypto assets that we know of are fungible and use the protocol CKD-20. However, non-expendables mostly use the ERC-721, also typical of the Ethereum network, which provides all the necessary resources for the creation and management of NFTs.

Creation and sale of digital assets

The rarity and extreme scarcity of NFTs generates unprecedented trading and investment possibilities for the crypto world. NFTs are, in short, unique and complete digital goods (indivisible), of which there is only one unit or specimen. Each non-fungible token actually has a special code, an identity».

If with works of art specialists can analyze a painting and define if it is original; with blockchain technology validation is contained in the code itself of each token, in “its DNA”.

The great utility of this functionality is that it allows you to create unique and complete digital goods or to generate tokens representing goods and physical assets determined. This results in a solution for historical traceability of properties, for example, by avoiding scams and forgeries.

Non-fungible tokens in video games

The most popular NFT case in gaming today is CryptoKitties, a game based on the Ethereum network that allows the creation, breeding, crossing and buying and selling of virtual feline pets.

The game appeared in November 2017 and in just two weeks it had already gathered 150 thousand users, with millions of transactions. Some of them with values ​​of up to 600 ETH paid for a non-fungible kitten, which at the current price (March 2021) is equivalent to more than one million dollars.

Every CryptoKitty is unique, unrepeatable and complete, cannot be duplicated, withdrawn or destroyed, but can be traded.

Also, as Ethereum protocols are interoperable, with NFTs it is possible move digital assets from one crypto platform to another.

The great event of CryptoKitties brought attention to the non-expendable market in a moderate way, but recently we saw a boom in personal and business interest in obtaining and trading NFTs all types.

The future of NFTs

The popularity of ERC-721 tokens has grown enormously in the last few months, in parallel to the evolution of the digital collectible and video game industry.

In recent times there have been many projects of parcels of digital worlds (Decentraland, Uplands), NFT collectible art markets (from digital marketplaces like super rare to traditional galleries like Sotheby’s) and even galleries of great collectible sporting moments (NBA TopShot).

But NFTs have great applications outside of those sectors, with a large potential as an economic, commercial and even financial tool.

Currently, most common cases of NFT use are:

  • Creation and sale of digital assets
  • Digital Asset Possession Management
  • Guarantees of authenticity for digital goods and works of art
  • Division of high-value assets, such as real estate (for example, with the creation of two NFTs to each represent 50% of a property)