Along with the growing distinctions between cryptocurrencies such as utility tokens and security tokens, non-fungible tokens (NFTs) are also becoming popular. What is a non-fungible token and what benefits does it offer?
What is Fungibility?
In order to understand what a non-fungible token is, we should understand what it means for something to be fungible. The property of fungibility is the ability of something to be interchangeable with something else of the same type. For example, Bitcoins are an example of a fungible asset. If you were to trade one Bitcoin for another, the Bitcoin you had before and the Bitcoin you had after would have the same utility. You would be able to spend either one in exactly the same way. Each Bitcoin is equal in value and specification.
Fungibility is pretty easy to understand since that’s what fiat currency and most cryptocurrencies are. That’s what we’re used to. So how can we understand what a non-fungible asset is like?
For a simplistic example, consider that you’ve purchased a white mobile phone. When you get home, you discover there’s a problem with it. When you take it back to the shop to replace it, they are out of white mobile phones of that same model. While a phone is a phone and each phone shares a certain level of functionality and utility, a white phone of one model is not interchangeable with a gold phone. For you personally, it may make no difference. But the specification of the two phones is not the same. The gold phone and the white phone may differ in price. Perhaps you are exchanging it for your spouse. He or she may not consider a gold phone an equivalent exchange at all. For an asset to be fungible, assets of the same type must be the same in utility and specification.
Non-fungible tokens contain identification information in their smart contracts. This information distinguishes one NFT from another. Since this information differs for each NFT, the tokens cannot be exchanged one for another in an equivalent way.
How are Non-fungible Tokens Useful?
Because non-fungible tokens have unique properties, they can represent virtual and real-world assets. Digital assets within games can be represented by NFTs and NFTs can be used to represent ownership in these digital assets.
NFTs are also useful for representing intellectual property such as images or digital art. By linking tokens to the images, they can be bought and sold just like physical assets. Smart contracts have the ability to record details linking the token to digital or physical objects. The identity of the owner and a vast amount of metadata can be recorded for the token. This can provide an immutable means of proving ownership of both digital and physical objects.
Ethereum has a non-fungible token standard, ERC-721. Other cryptocurrencies like NEO, TRON and EOS now also boast NFT standards.
If you like this article, check out one of our previous in-house articles, “Can DeFi Replace Your Bank?” by Census Open Finance.
The promise of NFTs with relation to physical objects lies in the fact that the ownership of many physical objects is not easily transferred. You don’t give someone a building or a car. You give them a deed or a title to them, respectively. As the world tries to leave paper behind, representing physical objects through digital means would be a very efficient way to organize and manage the ownership of physical objects, particularly ones that are large enough for their ownership to be represented by documents and those which are vulnerable to loss or being misplaced.
Non-fungible tokens are not sold on standard cryptocurrency exchanges, as they are not like-for-like assets and each token is unique. Digital marketplaces like Openbazaar and Decentraland’s LAND marketplace do allow the buying and selling of NFTs.
Non-fungible Tokens and the Census Note
The Census Note is a cold wallet hardware device with the form factor of a payment card. This compact design makes it extremely portable, allowing it to be carried right alongside all your other payment cards.
The Census Note will soon enable the storage of non-fungible tokens (NFTs). This brings all the simplicity and ease-of-use offered by the Census Note together with the power of NFTs.
Fungibility is the property of an asset to be interchangeable with other assets of the same type. Bitcoin and fiat currency are examples of fungible assets. Non-fungible tokens have unique properties in terms of specification or value. This uniqueness makes them impossible to trade on a one-for-one basis. But they do offer a way to represent digital assets in a way that gives them tangibility and allows them to represent physical objects in a digital form.
The Census Note will soon support non-fungible tokens. This new support expands the capability of the Census Note and brings together a convenient form factor, ease of use and the exciting potential for NFTs.