NFT represents an item that is set apart from others. It can be an item in the same medium or format, but be much more special at the same time. It can refer to tangible and intangible products or works of art, collectibles, virtual real estate or other items obtained digitally.
The NFT token is like a unique one-and-only ID of an item - that identification is what makes it unique. But by itself NFT isn't what makes an item special. Rarity plays a major role in determining value of a one-of-a-kind item. It's like supply and demand: commonplace items usually cost less. Hard to obtain items are expensive.
The word token implies that item will bear distinct identity. For example, when you log in to your Twitter account, a token is created on Twitter's servers in order to represent your user session. No other Twitter user can possibly have the same session token.
In contrast, bitcoin is fungible because it's not unique. You can buy, sell or share fungible items. Bitcoin value remains the same based on amount and market price at the time of exchange.
A one of a kind baseball card is non-fungible. It doesn't make sense to simply exchange it with any another card. It's meaning makes its perceived value special because it is associated with some historical sporting event or a popular baseball player. Or perhaps it was signed by one.
What Is Fungibility?
Money is a fungible asset. When you borrow $100 from a friend they expect you to return it, regardless of whether you use five $20 dollar bills, ten $10 bills or one hundred of $1 dollar bills. The amount is still $100.
In economics fungibility refers to the idea that the same amount of certain type of goods, like gold for example, is interchangeable in its value. Crude oil, stocks and commoddities are also fungible assets.
What makes material assets like gold, crude oil and money fungible is that they are interchaneable. 10 gallons of gasoline in your car fuel tank is essentially the same as 10 gallons in anyone else's car. There is no unique factor assigned to its worth.
What Is NFT?
A non-fungible asset does not follow the same rules of fungibility in value assessment. The creator, inventor or maker of an item can associate their work with a completely unique non-fungible token.
You can create a digital work of art and price it anything you want. That's because you created a unique item. This idea is present in physical world as well. A famous painting can cost millions.
Mona Lisa by Leonardo Da Vinci was assessed for $100 million in 1962 in insurance cost. That amount today in 2021 is equivalent to more than $860 million after adjusting for inflation. Some believe it's priceless.
The Mona Lisa cannot be bought or sold. It's on display at Louvre and belongs to the public. However, you can say that Mona Lisa is a non-fungible asset. It's a unique work of art whose value is determined by many factors including originality and uniqueness.
What Does Ethereum Have To Do With NFT?
Most NFT tokens are created using the same standards used for Ethereum cryptocurrency called ERC-721 and ERC-1155.
But unlike regular cryptocurrencies NFT does not constitute for the same exact item like money, gold or bitcoin do. No NFT item is alike. They are all unique even if they are being used on the same platform.
Like a lottery ticket, each NFT can be represented by the unique name of the person who purchased the item, date of transaction and other unique factors, even though generally it's the same type of an item.
Gaming NFT
Gaming industry generates its revenue from PC, mobile and console platforms. Generally, these platforms lock players into using special items in game, without a way of sharing assets across multiple platforms.
Some game developers are adopting the NFT paradigm, assigning a token to any special in-game items which can be then bought and sold to other players. This can create new experimental markets where instead of using items for the purpose of gameplay, gamers can now focus on trading items in a decentralized economy.
"Blockchain Games" is becoming a common niche term among gamers. NFT has given birth to decentralized applications (also called dApps.) Crypto Kitties, My Crypto Heroes, Sorare (crypto soccer game,) Crypto Dynasty and Axie Infinity are some of the very first games that follow this new trend.
It is yet to be seen how popular blockchain games will become. One of the major roadblocks is that at this time not everyone understands cryptocurrency in general. There is learning curve and it is probably not really in the best interest of many game developers to decentralize value distribution.
Meanwhile, new games created by independent game developers who are based on cryptocurrency by design from the get go have a lot of potential, and we'll possibly see a major break through as the field continues to evolve sometime in near future.
Examples of NFTs
Non-fungible assets follow supply and demand logic like any other product, asset or content.
People are ready to pay a lot for non-fungible items because it means owning the one and only piece of something no one else has. Their value is determined by unique circumstance. For example something created by a well known singer or an artist.
- Buy and sell cats in official CryptoKitties community. Start your digital collection!
- Kings of Leon is the first band ever to release a music album ("When You See Yourself") using NFT on YellowHeart, a blockchain-based music platform.
- The creator of Nyan Cat, the famous meme with a flying cat and a rainbow trail, sold the unique version of his gif animation for 300 ethereum which amounts to about $600,000 USD.
