Non-fungible tokens (Irreplaceable tokens) or NFTs contain identification information recorded in their smart contracts. This information makes them different from each other, so they cannot be directly replaced with other tokens.
Cryptocurrency, utility tokens, security tokens, or other…Digital assets and their classification are being developed together with encryption technology and blockchain technology. Non-fungible tokens (NFTs) are another example of rapid industry changes. In this guide, we have discussed their role, how they work, and how they are used.
What are non-fungible tokens?
non-fungible tokens contain identification information recorded in their smart contracts. This information makes them different from each other, so they cannot be directly replaced with other tokens. They cannot be exchanged with each other like the others because no two are the same. On the contrary, banknotes can be exchanged for each other, and if they have the same value, there is no difference to the holder.
At the same time, Bitcoin is a mutually fungible token. You can send one bitcoin to someone, and they can send one bitcoin to other people, and it’s still the same bitcoin. The fiat currency value of the bitcoin may vary according to the time between exchanges of bitcoins, but in essence, this bitcoin is the same. You can also send or receive any part of Bitcoin measured in Satoshi (satoshi) because fungible tokens are divisible.
Non-fungible tokens are indivisible, just as it is impossible to send someone part of a concert ticket. Part of the concert ticket itself is worthless and cannot be redeemed.
The CryptoKitties collection is the first irreplaceable token. Each blockchain-based cat is unique. If you send a CryptoKitty to someone and someone else will give you one in return, the two are completely different cats.
The unique information of a non-fungible token (such as CryptoKitty) is stored in its smart contract and recorded on the token’s blockchain. CryptoKitty is the Ethereum ERC-721 token, which is built using the Ethereum protocol and the Ethereum blockchain.
What makes NFTs special?
Non-fungible tokens have unique attributes and are usually linked to specific assets. They can be used to prove the ownership of digital assets (such as game skins) and can also be linked to the ownership of tangible assets.
Other tokens are fungible, such as Bitcoin, which is just like coins or banknotes. They have the same attributes and values when they are exchanged.
How are NFTs used?
Like crypto kitties such as CryptoKitties, irreplaceable tokens can also be used for digital assets that need to be distinguished from each other to prove their value or scarcity.
Another example of a non-fungible token is Decentraland’s LAND token. Decentraland is a virtual world based on blockchain, similar to Second Life. Each LAND token represents a virtual land in Decentraland identified by its virtual world coordinates.
SuperRare is another blockchain project that creates non-fungible tokens, allowing digital artists to link tokens to images or GIFs they create. Tokens represent the ownership of digital art and allow creators to retain and record their copyright and IP.
These NTFS tokens can be bought and sold like physical artworks. Irreplaceable tokens are not traded on standard cryptocurrency exchanges but digital markets such as Openbazaar or Decentraland’s LAND market.
How NFTs work
For example, tokens such as Bitcoin and Ethereum-based ERC-20 tokens are interchangeable. The non-fungible token standard for Ethereum used by CryptoKitties and Decentraland is ERC-721. You can also use other non-fungible token tools and support to create non-fungible tokens on other smart contract-enabled blockchains. Although Ethereum was the first to be widely used, NEO, EOS, and TRON now also have NFT standards.
Irreplaceable tokens and their smart contracts allow detailed attributes, such as the owner’s identity, rich metadata, or secure file links. Irreplaceable tokens irrevocably prove digital ownership, which is an important advancement for an increasingly digital world. They can see that the blockchain’s promise of trustlessness applies to almost any asset ownership or transaction.
Just like the challenges facing the blockchain so far, irreplaceable tokens, their protocols, and smart contract technologies are still under development. Creating decentralized applications and platforms for managing and creating non-fungible tokens is still relatively complex, and there are challenges in creating standards. Blockchain project development is fragmented, and many developers are developing their own projects. To be successful, a unified agreement and interoperability may be required.
Currently, irreplaceable tokens are mainly implemented in games and encrypted collectibles. For games, irreplaceable tokens can represent items in the game, such as skins, and developers may allow them to be ported to new games or allow other players to trade with each other.
However, their potential is vast and can also be applied to the sales and transactions of copyright and intellectual property, ticketing, and video games.
non-fungible tokens increase the potential for creating security tokens, the tokenization of digital assets, and real assets. Tangible assets such as property can be marked as partial or shared ownership. If these security tokens are irreplaceable, even if only tokens representing partial ownership are sold, asset ownership is completely traceable and clear.
Further applications of non-fungible tokens can also be certified, such as qualification certificates, software licenses, guarantees, and even birth and death certificates. The smart contract of the non-fungible tokens immutably proves the identity of the recipient or owner and can be stored in a digital wallet for easy access and presentation. One day, our digital wallet may contain proof of every certificate, license, and asset that we have.