What is a Non-Fungible Token?
Non-fungible tokens are a new class of digital asset. Simply put, they represent unique things from in the real world that can be owned and traded on the internet like other cryptocurrencies, such as Bitcoin or Ethereum.
A simple example of something that is non-fungible is a Cryptokitty. They are cute collectable cats you can buy and sell using Ethereum’s ERC721 token standard . If someone owns one Cryptokitty (or NFT for short) it doesn’t mean they own any other Cryptokitty , so each ownership transfer would be considered a separate transaction and require its own individual record to be updated on an immutable blockchain ledger – exactly like they do at Lucidity.
To get more specific, look at how this applies to the real world. You can’t take a piece of dirt from your backyard and trade it with someone else. Each piece of dirt is unique based on its location, quality, etc., which makes each individual ownership transfer different from every other individual ownership transfer of dirt.
This is where fungibility comes in. Since you can’t differentiate one type or unit of an asset from another using any objective criteria (it’s impossible), they are all considered equal and therefore interchangeable, like US dollars. This means that for any transaction involving 1 dollar there isn’t a record kept for every single time anyone has ever used that dollar previously – just one total amount for the ownership ledger between all owners combined. Inherently then, when you own a share of any fungible asset, what is actually being transferred between the parties are those ownership ledger records and not the actual asset itself.
In contrast, each individual Cryptokitty (each non-fungible token) in existence on the blockchain represents its very own unique record which can be independently verified using open source data sources online . So when someone purchases or trades for a kitten, they actually get that specific kitten’s unique identity and its complete set of attributes and history stored on Ethereum’s blockchain.
This makes each Cryptokitty ownership transfer unique in the same way as physical assets traded with registration numbers at auctions or over-the-counter transactions by individuals. As new information about each kitten occurs over time these updates are recorded on a separate interdependent blockchain. This enables the owner to have full control over how they share their information.
Let’s explain Non-fungible tokens in general, as well as highlight some other key differences between them and fungible protocols like Bitcoin.
Non-fungible Tokens vs Fungible Tokens: The Key Differences
Here are four main ways NFTs differ from fungible assets :
1) NFT’s represent unique real-world things which are essentially impossible to objectively differentiate from one another.
Using objective data points such as location, quantity, quality or history is not enough since no would disagree that even slight differences in these attributes result in vastly different values for their owners, evident by trillions of dollars spent annually on collecting antiques and art.
2) NFTs can be transferred using blockchain technology with one-to-many (i.e., group) ownership like at auctions and over the counter markets.
Fungible tokens can only represent many-to-one (single organism) ownership like a token recording how much money you have in your bank account – just doesn’t make sense to record that information about an individual physical asset
3) Most importantly, each NFT is capable of storing any type of data or metadata.
This means it’s not limited just to transfer ownership records but also things like photos, quotes, videos, or any other data types.
4) NFTs can be created in a decentralized manner using cryptographic functions that are applied to the subject’s unique attributes, which is called hashing.
This prevents forgery of tokens and makes it easy for anyone to verify their authenticity by comparing hashes against open source information online. The reverse function is also true: If someone wants to transfer ownership of an NFT they don’t have the ability to change its attributes (because it would create a different hash). It was built this way on purpose so it cannot serve as a store of value like Bitcoin has become, since storing money over long periods of time without performing transfers with that money leads to inflation — this causes problems when you want fungible currency but only have non-fungible assets.
However, though NFTs are not designed to be stores of value over time, that doesn’t mean it’s impossible to use them as such — there are just some operational issues you’ll need to deal with to do so safely . One big issue is when the tokens are sent back and forth between parties who aren’t the original owners. This will cause confusion (for example: “Who owns this digital asset now? Is it still valid?”) in circulation control systems like preventing double spending or validating ownership at a point in time across multiple parties.
Based on what we’ve seen so far, these four key differences are what make certain types of real world assets more uniquely valuable than others – and that’s what most NFTs are based on.
Why can’t I own the same digital asset as someone else?
This question might seem foolish, but is valid since digital items are essentially just binary code bits which can be duplicated or cloned over and over again. If you think about it, you could potentially create 100 copies of the exact same item (i.e., a video game or song) without any way of telling where each cop originated from.
This is also how bootlegs work , in that if someone creates an illegal copy of something then they might also generate a new ID for themselves so they cannot be tracked down by copyright holders; thus this leaves us with an interesting conundrum: How do we make sure that all these different types of items are not identical to each other?
Well, part of the solution will require a little bit of finesse and infrastructure for tracking their individual histories; this is where things like ERC-721 tokens come into play since they are able to demonstrate information about themselves when requested by users.
These types of digital assets do not represent fully fungible goods since they might have different rules which apply to them depending on where they were previously used (i.e., how you use it could limit its later usability).
For example: If you buy an in-game sword from one gaming vendor then that doesn’t necessarily mean that someone else can just take that same sword and claim it as their own even if there are no physical laws preventing this from occurring.
This is because the game may have rules which dictate how you use an item and then those particular guidelines would need to be enforced by some sort of network rules (e.g., PUBG ‘s new system to prevent users from “stream sniping” others by viewing their in-game live streams).