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February 18, 2021

What Is a Non-Fungible Token? A Beginner's Guide

What Is a Non-Fungible Token? A Beginner's Guide
Non-fungible tokens (NFTs) are changing the way we own things digitally. Here's an introduction to what they are, and why they matter.

The non-fungible token has garnered significant attention as one of the most exciting, transformative innovations blockchain has to offer developers and businesses.

But what exactly is an NFT?

What makes them special, what gives them value, and how can they be used?

Let's explore.

The Beginner's Guide to NFTs

Fungibility: Identical & Interchangeable

In order to determine what an NFT really is, we need to understand the concept of "fungibility." The term might sound complicated, but it's a simple idea that we can relate to our everyday lives.

At its core, a fungible item is something that can be exchanged 1:1 with another item of the same classification/description.

Each fungible unit is essentially identical, and therefore interchangeable.

Currency is a perfect example of a fungible asset. Whether it's your dollar bill, a dollar bill you found on the ground, or a dollar bill your crazy uncle keeps in his boot–each is worth 1 USD.

In addition to being interchangeable, fungible goods/assets are divisible. This means they can be added or divided without changing the fundamental nature of the item. A dollar can always be divided into any combination of coins totaling 100 cents and represent the same value.

Another key feature of fungibility is that slight physical differences between fungible assets have no real impact on their perceived or agreed value:

  • A serial number on a banknote plays no role in impacting the face value when you try to use it to pay for anything, and has no intended effect on their utility.
  • A crisp new $20 bill from the ATM will purchase just as much in a shop as one that's crumpled, tattered, and passed through countless hands for a decade.
  • Whether a €2 coin has the French, Dutch, or Austrian design on the reverse side has no bearing on their legal value in any countries within the European Union.

Ultimately, in the case of fungible goods, each unit is created equal. One $10 bill is the same as any other $10 bill. You can't go into a supermarket and try to buy $50 worth of groceries with it (well you can, but it probably won't work).

Non-Fungibility: Unique & Identifiable

Things that are not directly interchangeable or replaceable are known as non-fungible.

Unlike fungible assets like Bitcoin, non-fungible items are characterized by:

  • Unique, verifiable identity
  • Provable scarcity
  • Indivisibility

In many ways, non-fungibility is tied closely to identity, be it the identity of the asset itself, its owner, or its creator.

Imagine you're dog-sitting for a friend and their poodle runs away. After tirelessly searching for days with no success, you decide to replace it with another poodle and hope they don't notice.

They notice.

Of course they notice! Although all dogs are good boys, you can't just swap them and have the same experience. A multitude of blatant and subtle differences mark them all out as individuals, with no two being exactly the same.

Dogs aren't identical or interchangeable; they're non-fungible.

When things are non-fungible, each unit has its own unique identity that impacts its core valuation.

Differences in appearance, rarity, utility, and many other properties directly affect the identity of a unit, and in turn, its value.

Provable identity is everything:

  • You can't make a 77x53cm oil painting of a subtly smiling lady with no eyebrows, take it to the Louvre in Paris, and swap it for the Mona Lisa, despite shared dimensions, subject, and materials.
  • A pair of Adidas Predators worn by Lionel Messi of FC Barcelona have more appeal than a pair worn by your local librarian.
  • When a random teenager sprays graffiti on a wall, it gets painted over after people complain. When Banksy does it, it gets actively preserved and protected.

original art is a great example of a non-fungible asset

That's the power of identity; the source, story, and history behind something all lend themselves to the creation of a unique, irreplaceable asset. Even the best forgeries and replicas are valued at a fraction of an original, in part because a famous creator lends a credible, fascinating history to the item in question.

Similarly, if something is directly tied to your individual identity, it's unique and holds more value for you than anyone else. Passports from the same country look the same on the outside, but only you can (legally) use yours because of the information inside.

Condition, rarity, issuance, and personal bias can also play a role in the value of non-fungible assets:

  • A mint-condition Michael Jordan trading card is worth more than another copy of the same card that someone stuck between their bicycle spokes as a kid.
  • A Charizard holographic card is more prized than its vanilla equivalent. Remember the thrill of opening a pack to find a super-rare, shiny foil card?
  • Even though the story inside is the same, a first edition of The Fellowship of the Ring will be more sought-after than a modern reprint.
  • Humans just like some things more. Print #001 of a limited run seems cooler than print #329 of the same run. Some "lucky" numbers (e.g., 7 in many Western countries, 8 in China) can also carry a price premium.

Non-fungible assets aren't interchangeable.

If you lend someone your Samsung Galaxy S21 to make a call, you want your same exact Samsung Galaxy S21 returned to you. It's been made non-fungible through use, habit, data, network, apps, and experiences. Its history is incredibly valuable to you and cannot be replaced by another of the same item.

With some exceptions (such as fractionalized NFT real estate titles), non-fungible assets also aren't divisible. They are made to exist, function, and trade as a whole. We don't purchase 1/10th of a painting or half of a vehicle and expect them to serve or function according to their original intended purpose.

To recap:

  • Fungible: Items or assets that are considered identical. They are directly interchangeable like-for-like, and generally divisible at least to some degree.
  • Non-fungible: Items or assets with unique identities. They cannot be interchanged equally or divided. Value and ownership experience of different non-fungible items can vary greatly depending on individual properties.

The Token Standards

In the early days, blockchain was all about cryptocurrency.  

Eventually, some forward-thinking builders realized that this technology could be used to create and store unique, identifiable digital items, digital representations of real-world objects such as diplomas and marriage certificates, and so much more.

Thus, the NFT was born.

In 2017, Enjin CTO Witek Radomski created the code for one of the first non-fungible tokens.

ERC-721, and subsequently the more efficient ERC-1155 token standard, were developed to streamline NFT creation and distribution. These standards include important technological practices, like the use of metadata to expand upon a token's identifying characteristics.

Metadata can be utilized in some incredible ways, such as fetching token images from an off-chain source, lessening the strain on the blockchain.

Countless properties can be tracked via metadata, from the wingspan of your digital dragon to the color of your high-fashion sneakers. It's truly only limited by the imagination of asset creators and game/platform developers.

ERC-1155 packs the innovative punch of metadata with a focus on streamlining everything, resulting in lower network fees.

A major technological leap, ERC-1155 enables:

  • The issuance of multiple different tokens within one smart contract
  • The transfer of up to 100 unique tokens in a single transaction
  • The creation of both fungible and non-fungible tokens

Thanks to the evolution of token standards and easy-to-use minting platforms, the creation, deployment, and trading of NFTs is blossoming into an exciting new realm filled with innovation and value.

Unlocking Real-World Value in Virtual Worlds

As a digital medium, video games have always presented assets to players in virtual form. Grind for 100 hours, defeat the evil warlock, and obtain a legendary sword–congrats!

The only drawback is that this legendary sword you quested tirelessly for is a line of code trapped within the game. If you get bored of playing, or if the game shuts down, your sword (and progress) is gone.

NFTs allow video game assets to transcend the limits of the game they were created for. When you truly own your legendary sword of warlock slaying, and it is verifiably scarce with an identity all its own, it brings actual real-world value to the digital space.

CryptoKitties was an early example of the massive appeal digital collectibles can have. Although gameplay was very limited (collect cats with different stats, breed them together and get offspring, repeat), the idea of actually owning a verifiably unique cybercat made the game a massive hit.

It was such a hit, in fact, that it notoriously clogged the Ethereum network with transactions, slowing activity to a crawl.

A more recent, advanced example, The Six Dragons RPG brings deeper gameplay and unique mechanics to the NFT proposition, allowing players to craft and enchant their NFTs in real time.

NFTs have become more sophisticated than ever, evolving from static pictures into actual assets with real functionality in and across games.

Beyond their basic appeal as unique digital items that you actually own, the potential of NFTs can be seen in these 3 key characteristics: 

  • Ownership: NFTs are held on your own personal blockchain address, which you control with your private key. Server outages, lack of support, or account bans cannot take NFTs away, because they aren't held in a centralized server. You are free to do as you like with your NFTs, including trading, selling, or giving them away.
  • Transparency: A blockchain is essentially a decentralized database, so records of token creation and transfers are publicly visible with blockchain explorers like EnjinX. This makes rarity and scarcity easy to verify, allowing people to be certain an NFT is authentic.
  • Interoperability: When a token standard is shared by multiple different entities (such as the games making up the Enjin Multiverse), they will all be able to utilize the NFTs created by each other in ways that make sense within their game worlds.

An NFT provides a solution essentially anywhere uniqueness or identity plays an important role, whether it's for art, gaming items, commemorative collectibles, digital rewards, or anything in between.

Now that you know all about the innovative world of NFTs, why not make your own?

We've created a platform that allows anyone, regardless of technical skill, to design, create, distribute, and utilize NFTs.

Join us in a space filled with boundless creativity and potential.

What Is a Non-Fungible Token? A Beginner's Guide
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