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10 September 2021, Friday

What are Non-Fungible Tokens (NFTs)?

Here is a guide to understanding Non-Fungible Tokens.


Fungible, an adjective, refers to the quality of an asset that can be exchanged with another asset of the same type. For example, the notes and coins of currency are fungible assets and if you have five ten-dollar notes, you may exchange them with another person who provides you with one fifty-dollar note as they have identical value and can be substituted for each other. Therefore, they are said to have fungibility. Other fungible items include precious metals like gold and silver, commodities like oil, and financial instruments such as bonds and cryptocurrencies.


Non-Fungible assets may be similar items but hold different values and can’t be substituted. This includes identical diamonds, houses, land, art and other collectables as they have many qualities that will affect their value either positively or negatively. The value of an item or subject may be influenced by its scarcity, quality, feeling, cultural trends as well as purpose and utility. The value is an amount that an open market is prepared to pay for something and what is valuable to one person, maybe worthless to another.


In 2008, a proposal for digital money laid the groundwork for how digital assets could be managed. The introduction of Bitcoin, a cryptocurrency and its core technology would later go on to be a digital asset game changer and cryptocurrency is its own asset class. Crypto tokens with specialized utility and security tokens that run on top of existing cryptocurrencies have also become popular as a digital asset class, just like collectable Pokémon and baseball cards. A new marketplace now includes digital assets such as audio, art, music, movies, photos and others.


The underline technology that the Bitcoin paper proposed that the distributed ledger and its innovations have unleashed an entirely new ecosystem solution known as the blockchain technology that enables and power NFTs. Blockchain solves more problems than just cryptocurrency, and it runs on participating devices and networks with specific goals. For example, Bitcoin uses blockchain to enable it to be a cryptocurrency and other blockchain support solutions and supply chain, financial services, media and other industries.


Here is how it works. Each individual must join a specific blockchain network, and this network differs from traditional networks as it is decentralized with no central server or governing authority. Blockchain software, a type of database, is distributed among all the participating parties. Each transaction that takes place will be recorded in this database. Blockchain databases don’t permit editing or deletion of the transactions, and simply add them chronologically. This architecture makes the environment unique as each party is assigned a digital public key and a private key through the process called the Proof of Work, a process by participants who take the effort to process the transactions and deter malicious activities. Those that choose to legitimately conduct proof or work will earn some cryptocurrency as their reward for the effort, and any attempt to modify a transaction would fail and invalidate all transactions ahead of it.

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