The recent appearance of non-fungible tokens has left many in the crypto world confused regarding what these tokens are, and what do they do, which is why we will now try to answer those questions.
Every currency, whether it is a crypto or a fiat, needs fungibility if it wishes to be seen and used as a medium of exchange, a unit of account, or a store of value. In fact, when it comes to cryptos, fungibility might be even more important, since it allows them to maintain the legitimacy of interchangeability between different units.
However, recently, a new kind of non-fungible tokens, also known as NFTs, have surfaced. This has caused a lot of confusion, despite the claims that such tokens are a unique and an important asset. So, let's see what these tokens actually are, and what applications can they offer.
What Are Non-Fungible Tokens?
Let's start at the beginning, and try to determine what NFTs are in the first place.
NFTs are basically new and unique representations of goods or assets that take the form of digital tokens. Through the use of cryptography, NFTs can prove the authenticity, as well as ownership of such assets and goods. Let's say that there is a virtual artwork that is tokenized. With that in mind, whoever holds the tokens, acts as the direct owner of the piece of art itself.
Obviously, NFTs are quite unique, and no other item can replace them. Obviously, the possible implications of this are many, and they might even create an entirely new class of digital assets in the future. It is even possible that real-world items and assets might be this closely tied to digital tokens, all with the goal of securing the ownership of such items.
Some cryptos, like Bitcoin itself, for example, already have some level of fungibility within them. Each BTC coin has the same worth as the next one, after all. There can be no two BTC tokens that have different worth.
However, some claim that fungibility in Bitcoin cannot be completely achieved. This is due to the fact that coins that were recorded as means used for illegal purposes can be individually blacklisted. This is where the important question appears – is the blacklisted BTC coin equally valued as the one that is not blacklisted? If the coin is blacklisted, the possibility of its use drops, which technically makes it less useful.
The answer to that has yet to be found, however, what is important right now is that the introduction of NFTs can have some interesting results and consequences.
The concept of NFTs
The NFTs were brought to the mainstream together with CryptoKitties. This is a concept that gained a lot of popularity near the end of the previous year. Some of them were so popular, that they were priced and sold for hundreds of thousands of dollars. Despite the fact that NFT protocols and standards exist apart from Ethereum, the most important standard which allows their creation is the one connected to ERC-721 tokens.
This has become the very base for the making, trading, and similar actions regarding the assets that are classified as non-fungible. However, there was a recent proposal for adopting a new token standard, ERC-1155. If the proposal is accepted, the ERC-1155 would provide improvements on the current standards, as well as many additional benefits. It would also allow token contracts to contain non-fungible tokens together with the fungible ones, which was not possible so far.
Finally, the new standard would also allow implementation of many different NFTs as part of the same transaction. That way, the process of exchange would become more efficient.
Types of NFTs and their use cases
When it comes to NFTs, it is important to note that they create a verifiable scarcity of certain assets. This was a popular idea at first, and has seen a lot of success with CryptoKitties. However, ever since then, the NFTs' possible applications have grown, and has even expanded outside of the digital world.
The gaming industry's continuous acceptance of cryptos has been expanded to also include non-fungible assets as well. For example, the platform called WAX now allows its users to use NFTs for trading within a decentralized marketplace. Not only that, but they can even make their personal digital stores, where they can exchange goods.
Decentraland has a similar offer, where it allows its users to buy entire plots of land and build whatever they want on top of them. This can go from dApps to various unique digital creations.
Obviously, NFTs already have various implementations, with many of them being focused on the trading of ‘skins' for various games. This mostly includes armor and weapons in FPS games. Exchanges like WAX are currently mostly focusing on the trade of this kind of assets within the gaming industry. Still, the development of NFTs continues, and their future applications can include pretty much anything.
There are even discussions of concepts like fractional ownership of various real-world art pieces. The asset can be sold off to an entire group of owners by being split into smaller parts. When the art piece is sold for profit at the later date, these fragment holders will receive a part of the profits, in regards to their fractional stake.
This concept can go even bigger, and can even be applied to the world of real estate. For now, there are several marketplaces dedicated to trading and exchanging NFTs, and they include names like WAX, which we mentioned already, but also Rare Bits, and OpenBazaar.
What awaits the NFTs in the future?
As we have mentioned earlier, the concept of NFTs is still in an early stage, and even now, it has many potential uses. In the future, it might be present in a wide range of different markets. The digitization of the world, adoption of IoT tech, blockchain technology, and cryptos, in general, continue to progress with each passing day. New practical uses for these technologies are emerging on a daily basis at this point, and we can expect that the same will be true for the NFT use as well.
WAX has already given us a lot to go from when it comes to potential uses of this concept. Soon, it might be possible to use them to claim ownership of all kinds of physical collectibles. Exchanges like WAX would be capable of enabling the tokenization of such collectibles, with the only condition being that they are coming from a reputable distributor. This might even include the manufacturer of the collectibles themselves.
By entering partnerships with them, exchanges like WAX might be able to enable the trade of physical goods for virtual items as well. Through the use of NFTs, people might get the opportunity to trade property ownership, or even things like software licenses, or even identification certifications.
There is a lot of progress being made in this field all the time, and while we are certainly not there yet, the rapid rate of tech progress might get us to that point within a few years.
Some of the more traditional assets, like stocks, bonds, precious metals and alike, might also be tokenized. The possibilities might actually be endless, once the systems become more reliable and efficient. The problems that need taking care of currently are high gas costs, as well as scalability.
Still, there are several noteworthy developments in this field that deserve keeping a close eye on. One of them is Blockstream's launch of a program called Liquid Assets, that is based on one of its sidechains backed by Bitcoin. Basically, the program allows the exchange, as well as tokenization, of various assets belonging to the financial industry, most of which are connected to objects from the real world.
Blockcstream's interest in this field has allowed it to be one of the major innovators within the crypto world. Their team is well-known, well-respected, and very talented. They have already made multiple accomplishments when it comes to the development of the NTF sector, and their future projects should not be overlooked.
Non-Fungible Tokens Conclusion
So, to sum it up, NFTs are possibly a new method of tokenizing real-life goods and assets that can then be traded off, sold, or even shared by multiple individual token holders. Those who own the tokens would also act as owners of the asset in question. This is a rather innovative use of this technology, with a lot of possible application in the future.
It will definitely remain as one of the more practical uses of digital currencies, and they might even reach a mainstream adoption, due to the rapid progress within the industry. This is certainly an interesting concept, and quite possibly one of the most practical ways to use digital tokens.