What Are Non-Fungible Tokens (NFTs)?
Non-fungible tokens (NFTs) are cryptographic assets on a blockchain distinguished from each other via unique identification codes and metadata. Unlike cryptocurrencies or FIAT currencies (also known as fungible tokens) that can serve as a medium for commercial transactions, NFTs cannot be traded or exchanged at equivalency as each NFT is unique and has its own value.
NFTs are used to represent ownership of assets (mostly digital) and this concept of ownership can be applied to almost anything, from digital art to collectibles, game items, event tickets, domain names, virtual real estate, and even contract ownership records for physical assets. The introduction of NFTs made demonstrating ownership safer and easier in the digital asset space.
Like FIAT currencies, cryptocurrencies are fungible too, which means they can be traded or exchanged, one for another. One Bitcoin is always equal in value to another Bitcoin, one Ethereum is always equal in value to another Ethereum, and so on. NFTs, instead, are Non-Fungible, which means each token is unique and irreplaceable.
NFTs contain ownership details for easy identification and transfer between holders and it's also possible to add metadata or attributes pertaining to the asset, like the artist's signature in the NFT's metadata.
Though the artistic use cases may sound trivial, others have more serious business implications. For example, NFTs have been used in real estate deals as well as private equity transactions, and many of them can come with more useful utilities such as discounts on services offered by the issuers, extra rewards, airdrops, and much more.
The Importance of NFTs
NFTs are an evolution of cryptocurrencies. Modern finance systems work on sophisticated loan and trading systems for different types of assets, such as real estate or lending contracts or artworks. By enabling digital representations of physical assets, NFTs are a step forward to reinvent this infrastructure with the benefits of a tamper-resistant blockchain of smart contracts.
NFTs are market-efficient because the conversion of a physical asset into a digital one removes intermediaries and streamlines processes. NFTs representing artworks on a blockchain, for example, remove the need for agents and allow artists to connect directly with their audiences and receive royalties when their NFTs are traded on smart contract marketplaces. They can also improve business processes, letting different actors in a supply chain to track the provenance, production, and sale of goods through the entire process. Consulting firm Ernst & Young has already developed such a solution for some of its clients.
NFTs are also excellent to manage identities and to democratize investing by fractionalizing physical assets like real estate or other assets, such as artworks, possibly increasing their worth and revenues, creating new markets and forms of investment.