Non-Fungible Token NFT: What It Means and How It Works

Goods that are fungible are treated as commodities, and markets in commodities are active and liquid because of their fungibility. For example, gold is generally fungible because its value does not depend on any specific form, whether of coins, ingots, or other states. However, a unique item such as a gold statuette would not be considered fungible with the same weight of gold in some other form. Other fungible commodities include other precious metals and grades of crude oil. The legal recognition of fungibility is limited, and even very similar items, such as new cars of the same model and specifications, are not considered fungible with each other in law. Non-fungible tokens are an evolution of the cryptocurrency concept.

  1. Non-fungible tokens, which use blockchain technology like cryptocurrency, are generally impossible to hack.
  2. The ERC-1155 standard, approved six months after ERC-721, improves upon ERC-721 by batching multiple non-fungible tokens into a single contract, reducing transaction costs.
  3. NFTs can also democratize investing by fractionalizing physical assets.
  4. Many NFTs can only be purchased with cryptocurrency supported by the exchange you’re using.

Whoever has the private keys to that token owns whatever rights you have assigned to the token. A blockchain is a distributed and secured ledger, so issuing NFTs to represent shares serves the same purpose as issuing stocks. The main advantage to using NFTs and blockchain instead of a stock ledger is that smart contracts can automate ownership transferral—once an NFT share is sold, the blockchain can take care of everything else.

The difference is Ethereum creates tokens for the asset, while Ordinals have serial numbers (called identifiers) assigned to satoshis—the smallest bitcoin denomination. NFTs can also democratize investing by fractionalizing physical assets. Fractionalized ownership through tokenization can extend to many assets. For instance, a painting need not always have a single owner—tokenization allows multiple people to purchase a share of it, transferring ownership of a fraction of the physical painting to them. Cryptocurrencies are tokens as well; however, the key difference is that two cryptocurrencies from the same blockchain are interchangeable—they are fungible.

They „reproduce“ among themselves and create new offspring with other attributes and valuations compared to their „parents.“ NFTs were created long before they became popular in the five bitcoin predictions in 2021 mainstream. Reportedly, the first NFT sold was „Quantum,“ designed and tokenized by Kevin McKoy in 2014 on one blockchain (Namecoin), then minted on Ethereum and sold in 2021.

Her expertise is in personal finance and investing, and real estate. Many financial instruments, such as shares, bonds and currencies, are also fungible. Fungibility refers only to the equivalence and indistinguishability of each unit of a commodity or other thing with other units of the same thing, and not to the ability to easily trade it for something else. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. As of the date this article was written, the author owns BTC and LTC. Within a few short weeks of their launch, cryptokitties racked up a fan base that spent millions in ether to purchase, feed, and nurture them.

Words Nearby fungible

Two NFTs from the same blockchain can look identical, but they are not interchangeable. Tokenizing a physical asset can streamline sales processes and remove intermediaries. NFTs representing digital or physical artwork on a blockchain can eliminate the need for agents and allow sellers to connect directly with their target audiences (assuming the artists know how to host their NFTs securely).

For this reason, NFTs shift the crypto paradigm by making each token unique and irreplaceable, making it impossible for one non-fungible token to be „equal“ to another. They are digital representations of assets and have been likened to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to create a third, unique NFT—the cryptocurrency industry calls this „breeding.“ Many blockchains can create NFTs, but they might be called something different. Like an Ethereum-based NFT, a Bitcoin Ordinal can be bought, sold, and traded.

History of Non-Fungible Tokens (NFTs)

Like physical money, cryptocurrencies are usually fungible from a financial perspective, meaning that they can be traded or exchanged, one for another. For example, one bitcoin is always equal in value to another bitcoin on a given exchange, similar to how every dollar bill of U.S. currency has an implicit exchange value of $1. This fungibility characteristic makes cryptocurrencies how many neo coins are there suitable as a secure medium of transaction in the digital economy. NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them. For instance, you could draw a smiley face on a banana, take a picture of it (which has metadata attached to it), and tokenize it on a blockchain.

A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time, place, etc. On the other hand, non-fungible tasks tend to be highly serial in nature and require the completion of earlier steps before later steps can even be started. As an example cryptocurrency trading 2021 of a serial task that is not fungible, suppose there was a group of nine newly pregnant women. After one month, these women would have experienced a total of nine months of pregnancy, but a complete baby would not have been formed. For example, say you had three notes with identical smiley faces drawn on them.

fungible Business English

After one opens the package and uses the product, however, it is usually considered unique and no longer interchangeable with unopened packages outside of exceptional circumstances, such as a return or exchange. NFTs are created through a process called minting, in which the asset’s information is encrypted and recorded on a blockchain. At a high level, the minting process entails a new block being created, NFT information being validated by a validator, and the block being closed.

These tokens are then stored on a blockchain, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique. To be sure, the idea of digital representations of physical assets is not novel, nor is the use of unique identification. However, when these concepts are combined with the benefits of a tamper-resistant blockchain with smart contracts and automation, they become a potent force for change.

When you tokenize one of them, that note becomes distinguishable from the others—it is non-fungible. The other two notes are indistinguishable, so they can each take the place of the other. For example, personal information stored on an immutable blockchain cannot be accessed, stolen, or used by anyone who doesn’t have the keys. Non-fungible tokens, which use blockchain technology like cryptocurrency, are generally impossible to hack. The software that stores the keys can be hacked, and the devices you hold the keys on can be lost or destroyed—so the blockchain mantra „not your keys, not your coin“ applies to NFTs as well as cryptocurrency. Many NFTs can only be purchased with cryptocurrency supported by the exchange you’re using.

Modern finance systems consist of sophisticated trading and loan systems for different asset types, from real estate to lending contracts to artwork. By enabling digital representations of assets, NFTs are a step forward in the reinvention of this infrastructure. On the other hand, diamonds and other gems are not perfectly fungible because their varying cuts, colors, grades, and sizes make it difficult to find several diamonds expected to have the same value. Packaged products on a retail shelf may be considered fungible if they are of the same type and equivalent in function and form. Customers and clerks can interchange packages freely until purchase, and sometimes afterward.

So, you’ll need a digital wallet and some crypto to make a purchase. You can purchase NFTs via other online NFT marketplaces like Rarible and SuperRare. Perhaps the most famous use case for NFTs is that of cryptokitties. Launched in November 2017, cryptokitties are digital representations of cats with unique identifications on Ethereum’s blockchain.

Examples of fungible in a Sentence

These examples are programmatically compiled from various online sources to illustrate current usage of the word ‚fungible.‘ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. In early March 2021, a group of NFTs by digital artist Beeple sold for over $69 million. The sale set a precedent and record for the most expensive digital art sold at the time. The artwork was a collage comprised of Beeple’s first 5,000 days of work. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more.

As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 5,000 NFTs of the same exact item are minted (similar to general admission tickets to a movie), each token has a unique identifier and can be distinguished from the others. The ERC-1155 standard, approved six months after ERC-721, improves upon ERC-721 by batching multiple non-fungible tokens into a single contract, reducing transaction costs. A good is said to be liquid if it can be easily exchanged for money or another good.