Non-fungible tokens or NFT are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Like cryptocurrencies, NFT cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies
Like physical money, cryptocurrencies are fungible i.e., they can be traded or exchanged. For example, one Bitcoin is always equal in value to another Bitcoin. Similarly, a single unit of Ether is always equal to another unit. This fungibility characteristic makes cryptocurrencies suitable for use as a secure medium of transaction in the digital economy.
NFTs shift the crypto paradigm by making each token unique and irreplaceable, thereby making it impossible for one non-fungible token to be equal to another.
NFT are digital representation of assets and likened to digital passports, each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to “breed” a third, unique NFT.
Why Are Non-Fungible Tokens Important?
Non-fungible tokens are an evolution over the relatively simple concept of cryptocurrencies.
Modern finance systems consist of sophisticated trading and loan systems for different asset types, ranging from real estate to lending contracts to artwork.
By enabling digital representations of physical assets, NFTs are a step forward in the reinvention of this infrastructure.
To be sure, the idea of digital representations of physical assets is not novel nor is the use of unique identification.
Non-fungible tokens are also excellent for identity management.
By converting individual passports into NFTs, each with its own unique identifying characteristics, it is possible to streamline the entry and exit processes for jurisdictions.
NFTs can also democratize investing by fractionalizing physical assets like real estate. It is much easier to divide a digital real estate asset among multiple owners than a physical one. Thus, a painting need not always have a single owner. Its digital equivalent can have multiple owners, each responsible for a fraction of the painting. Such arrangements could increase its worth and revenues.
Decentraland, a virtual reality platform on Ethereum’s blockchain, has already implemented such a concept.