- NFT stands for non-fungible token.
- They are representations of unique items in the digital or physical world.
- Most often implemented on the Ethereum blockchain.
- Built on the ERC-721 standard.
What is the difference between fungible and non-fungible tokens?
If an item or token is fungible, then it can be exchanged for another item or token of the same value. A good example of a fungible item is traditional currency. We can exchange a one dollar bill for any other one dollar bill. Cryptocurrencies like bitcoin or ether are also considered fungible. Every BTC is identical to every other BTC and can be used interchangeably. The same goes for ETH.
Non-fungible tokens (NFTs), on the other hand, are not interchangeable. They represent unique items in the digital world or the physical world. They can represent anything from cars or paintings to digital items like notarized documents or even personalized game characters. Their value is determined in other (fungible) cryptocurrencies or fiat money.
What are NFTs used for?
Because of their unique nature, NFTs offer new possibilities for many different areas in the crypto world. Non-fungible tokens allow developers to build the same kind of products and experiences we already love, with the additional benefits that come with blockchain technology.
NFTs can be used to represent traditional collectible items, like cards and accessories or gaming collectibles like skins, maps or unique weapons. NFTs have real-world applications, as well. They can represent legal documents, financial contracts, software licenses, any unique and irreplaceable item, even music or art.
NFTs were initially popularized by collectible games, one example of which is CryptoKitties, an Ethereum-based game that lets you buy, sell, trade and breed digital kittens. CryptoKitties has since spawned numerous similar NFT projects, demonstrating the usability of non-fungible tokens.
How do NFTs work?
For now, most NFTs are implemented on the Ethereum blockchain as ERC-721 tokens. To be able to trade these unique items and build a strong ecosystem of tokens, you need a standard for their implementation. Fungible tokens use the ERC-20 standard to make tokens compatible. Non-fungible tokens, however, need a different standard because of their uniqueness. In order for the blockchain to be able to accommodate NFTs, a brand new standard, called ERC-721, was written.
ERC-721 sets a standard by using smart contracts. The standard lists functions and their parameters which make NTF implementation possible, allowing NFTs to be managed, owned and traded. By standardizing NFTs, the developer community was able to create a new ecosystem of digital content, applications and games that use NFTs. The unique ID of each token means that no two tokens are identical.
Why are NFTs valuable?
The security and trustless nature of NFTs creates attractive reasons to own them. If we think of NFTs as collectible items, then it’s easy to see why these non-fungible tokens would be valuable to own. Additionally, NFTs are based on blockchain technology which means that you do not need to rely on trusted third-parties for storage or validation.
Every NFT is a representation of a unique item and is, therefore, one of a kind. This creates digital scarcity. ERC-721 allows developers to create representations of digital items that are both unique and irreplaceable. This means that you are the only one in the world who owns that particular item. And you can prove your ownership with the blockchain.
If you want to buy your very own NFT, you will first have to purchase cryptocurrencies like ETH and SOL. Bitstamp is one of the few exchanges in the world that allows you to trade traditional money for cryptocurrencies, with which you can then acquire NFTs. Open your account for free to buy and sell leading cryptocurrencies.