Let’s try to iron this out once and for all. We’ll start with the basics. NFT stands for non-fungible token. The expression ‘non-fungible’ refers to something that cannot be interchanged with another item, because it is unique. For instance, one piece of art is not equal to another. Both have unique properties. That’s non-fungible.
Something that is ‘fungible’ on the other hand, can be interchanged with another item. For instance, $1 or Bitcoin is always equal to another and can be exchanged as they bear the same qualities. That is one Bitcoin against another or a dollar bill against another dollar bill.
How NFTs have shifted the paradigm
NFTs alter the crypto paradigm by making each token distinct and irreplaceable, making it impossible for one non-fungible token to be equal to another. They are digital representations of assets that have been compared to digital passports because each token contains a unique, non-transferable identity that allows it to be distinguished from other tokens. They are also extensible, which means you can “breed” a third, distinct NFT by combining two NFTs.
NFTs, like Bitcoin, include ownership information for easy identification and transfer between token holders. Owners can also include metadata or asset attributes in NFTs. Tokens resembling coffee beans, for example, can be classified as fair trade. Artists can also sign their digital artwork in the metadata with their own signature.
The ERC-721 standard gave rise to NFTs. ERC-721, which was created by some of the same people who created the ERC-20 smart contract, defines the minimum interface – ownership details, security, and metadata – required for the exchange and distribution of gaming tokens. The ERC-1155 standard expands on the concept by lowering the transaction and storage costs associated with NFTs and combining multiple types of non-fungible tokens into a single contract.
So how come NFTs matter?
Non-fungible tokens are a step up from the relatively simple concept of cryptocurrencies. Modern finance systems are made up of sophisticated trading and loan systems for various asset types, such as real estate, lending contracts, and artwork. NFTs are a step forward in the reinvention of this infrastructure because they enable digital representations of physical assets.
To be sure, neither the concept of digital representations of physical assets nor the use of unique identification is novel. When these ideas are combined with the advantages of a tamper-resistant blockchain of smart contracts, they become a powerful force for change.
The most obvious advantage of NFTs is market efficiency. Converting a physical asset to a digital asset streamlines processes and eliminates intermediaries. The use of NFTs on a blockchain to represent digital or physical artwork eliminates the need for agents and allows artists to connect directly with their audiences. They can also be used to improve business processes. An NFT for a wine bottle, for example, will make it easier for different actors in a supply chain to interact with it and will aid in tracking its provenance, production, and sale throughout the entire process. Ernst & Young, a consulting firm, has already developed such a solution for one of its clients.