What Is an NFT?
In the world of finance, “fungibility” refers to the ability of one item to be exchanged for another item of the same type without losing any value in the process.
For example, a dollar bill is fungible because you could give someone a dollar bill and receive a different dollar bill back, without losing any value. Every one dollar bill is worth the same as, and is fully interchangeable with, every other one dollar bill.
Something that is non-fungible, then, cannot be exchanged for other items without the risk of losing value. Examples of non-fungible assets include things like land and original works of art. You could exchange a piece of land for another piece of land, but it’s unlikely that both pieces of land would have the exact same value. Even if both pieces of land are of the same size, a range of factors (from location to soil type to elevation) could make one piece of land worth more than the other. Likewise, one artwork will not have exactly the same value as another piece of art.
When you extend the concept of non-fungibility to the crypto industry, you get non-fungible tokens, or NFTs. A non-fungible token is one that is designed to be a unique store of value that exists only within that particular token. You can’t exchange one NFT for another one without the risk of losing value.
Most crypto tokens are not NFTs. One bitcoin or ether will always have the same value as another bitcoin or ether, no matter when it was mined or who has owned it previously. In contrast, an NFT has unique data encoded into it that makes each NFT token fundamentally and intrinsically different from other NFT tokens — even other tokens of the same type or that are stored on the same blockchain.
The Indivisibility of NFTs
In addition to uniqueness, another important characteristic of NFTs is that they are not divisible into smaller parts. In other words, you can’t divide an NFT in half, into tenths or into any other denomination, as you could with most other types of tokens. If you want to buy or sell an NFT, you have to buy or sell the whole token.
The indivisible nature of NFTs emerges from the fact that each NFT is unique, and its value therefore can’t be systematically divided into smaller parts. If you tried to split an NFT into smaller pieces, you would destroy some of the NFT’s overall value, for the same reason that you couldn’t divide an acre of land into 10 smaller pieces and expect to sell each piece individually for one-tenth of the value of the land when sold as a full acre.
NFTs and the Collectibles Industry
In many respects, NFTs may seem less useful than traditional tokens. If you can’t easily exchange one NFT for another and you can’t divide an NFT into smaller parts, why would you bother using an NFT?
The answer is that NFTs are ideal for representing the value of physical or digital items that are themselves unique and indivisible, such as collectibles. This is why NFTs have perhaps made the greatest crypto inroads to date within the collectibles industry, where NFTs can be used to buy and sell things like one-of-a-kind pieces of art.
For collectibles, NFTs fulfill two key needs. One is registering the authenticity of an item on a blockchain. By recording unique metadata about a collectible (or, if the collectible is digital, recording the collectible itself) into an NFT token, collectors gain a deeper level of confidence that the item the NFT represents is unique and authentic, and that owning the NFT gives them sole ownership over the collectible. In this way, NFTs can help to combat the risk of fraud in the collectibles industry, where it can be hard to ensure that someone selling a collectible actually owns it or that the item being sold is what the seller claims it to be.
Second, NFTs make the process of buying and selling collectibles smoother and safer. It’s harder to cheat in a digital crypto transaction than it is in an offline one. Tools like smart contracts and mutually assured destruction escrow accounts can mitigate some of the risks that buyers and sellers face.
You could register ownership rights for a collectible on a blockchain without using an NFT. Lots of projects make it possible to register unique metadata on a blockchain. However, by coupling the registration of ownership and provenance data with a payment mechanism, NFTs do more than just record who owns what. An NFT’s ability to combine these two features is what makes them particularly valuable to the collectibles industry.
The NFT.NYC conference, which takes place next week in New York, will highlight the state of NFTs in the collectibles industry, as well as offer some perspective on how NFTs might evolve. The event will feature talks on concepts such as NFT fracturing (which means it might be possible to make NFT tokens divisible after all), how NFTs could be used to register web domains (which are an example of a non-fungible digital assets) and how NFTs are being used by startups like CryptoKitties and Sorare, which meshes NFTs, collectibles and the sports industry.