NFTs became a reality when the Ethereum blockchain added support for them as part of a new standard. One of the first uses was CryptoKitties, which allowed users to trade and sell virtual kittens. 

Tokens reside on their blockchain and represent an asset or utility. For example, a token can be a physical or a virtual object, such as armor in a game or a house. There is also the process of tokenization, which is essentially turning sensitive data (an account number, for instance) into encrypted forms of information. 

Apart from Ethereum, NFTs can live on other decentralized networks such as EOS and NEO. However, these platforms must have smart contract capability and a box full of NFT tools. Smart contracts, in this case, enable the inclusion of detailed descriptions such as metadata.

For example, one can have a crypto token representing x number of customer loyalty points on a blockchain used to manage such details for a retail chain. Another crypto token entitles the token holder to view 10 hours of streaming content on a video-sharing blockchain. Another crypto token may even represent other cryptocurrencies, such as a crypto token equal to 15 bitcoins on a particular blockchain. Such crypto tokens are tradable and transferrable among the various participants of the blockchain.

Crypto tokens are usually created, distributed, sold, and circulated through the standard initial coin offering (ICO) process that involves a crowdfunding exercise to fund project development.

These crypto-assets often serve as the transaction units on the blockchains created using the standard templates like those of the Ethereum network that allows a user to create tokens. Such blockchains work on the concept of smart contracts or decentralized applications, where the programmable, self-executing code is used to process and manage the various transactions occurring on the blockchain.

Subjective Value vs. Objective Value

Before digging into non-fungible tokens, it is essential to understand the difference between subjective and objective values. 

When we refer to objective value, we rely upon facts, data, and analysis. For example, a $100 ticket is no more, no less than $100. 

However, when discussing subjective value, we rather depend on a person's beliefs, perceptions, and preferences. This is primarily the case with art, where the interpretation of the buyer counts the most.

Fungible vs. Non-fungible

Fungibility is a good or asset’s ability to be interchanged with other individual goods or assets of the same type. Fungible assets simplify the exchange and trade processes, as fungibility implies equal value between the assets.

An asset is considered fungible when its units are interchangeable with one another, meaning they are indistinguishable. In other words, an asset class is fungible when each unit of the asset has the same validity and market value. For example, a pound of pure gold is equal to any other pound of pure gold, regardless of the shape. Other examples of fungible asset classes may include commodities, fiat currencies, bonds, precious metals, and cryptocurrencies.

However, an equal exchange of a fungible asset does not necessarily mean exchanging two identical units. As long as the transaction happens between instruments of the same kind and that share the same functionality, it can be considered as an equal exchange. For instance, an individual can exchange a five-dollar bill with five one-dollar bills, but they have the same validity. In this example, the US dollar is the fungible asset, while the bills merely represent their underlying value.

Generally, most cryptocurrencies are considered fungible assets. Bitcoin is fungible because each unit of BTC is equivalent to any other unit, meaning they have the same quality and functionality. So it doesn’t matter which block the coins were issued (mined). All Bitcoin units are part of the same blockchain and have the same functionality. Note that if someone forks the blockchain and creates a new Bitcoin, those coins won’t be considered original as they would be part of another network.

Importance of fungibility 

Whether it be digital currency or physical, paper money, a currency must be fungible if people are going to trust it to make daily transactions. If it is not fungible, then significant problems can occur. 

For example, imagine if only some $20 bills were interchangeable with others, and many were not. 

If people tried to pay for things with $20 bills that were not interchangeable with others, it would be complete madness. Fungibility helps a currency be able to be used reliably. Every unit of that currency is worth the same no matter which unit is being spent.

Fungibility is a necessity for any means of exchange that people will widely use for daily transactions.

What are NFT tokens

A non-fungible token represents a unique digital asset that cannot be equally traded for another NFT of the same type. Thus, they can represent digital art, a ticket to an event, an in-game item, or even a real-world asset such as a house. 

Among NFT properties, there are: 

1. Standardization.

2. Interoperability

3. Tradability

4. Liquidity

5. Immutability

6. Programmability

Characteristics of Non-Fungible Tokens

1. Rare – The value of NFTs comes from their scarcity. Although NFT developers can create any amount of non-fungible tokens, they often limit the tokens to increase rarity.

2. Indivisible – Although not set in stone, most non-fungible tokens are indivisible into smaller units. You either purchase the entire amount of, say, a digital art piece or purchase no art at all.

3. Unique – This is perhaps the most significant characteristic of them all. NFTs have a permanent information tab that records their uniqueness. Think of this information as a certificate of authenticity.

Advantages of NFTs

Non-fungible tokens bring a new dimension to digital interactions.

‍The three leading advantages of NFTs are:

1. They're transferable – Unlike exchange-traded fungible tokens, NFTs are bought or sold on dedicated marketplaces. However, their value depends on their uniqueness.

2. They're authentic – Blockchain technology powers non-fungible tokens. Therefore, you know that your NFT is genuine since it’s nearly impossible to create counterfeits with a decentralized, immutable ledger.

3. They preserve ownership rights – Again, this refers to an NFT’s use of decentralized platforms where no owner can alter the data once committed.

NFT, on the other hand, is a class of cryptocurrency assets in which each item, or token, is unique. This makes them useless as a currency but quite useful for other things.

NFTs are tokens that we can use to represent ownership of unique items. They let us tokenize things like art, collectibles, even real estate. They can only have one official owner at a time, and the Ethereum blockchain secures them – no one can modify the record of ownership or copy/paste a new NFT into existence.

NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable with other items because they have unique properties.

NFT standards

ERC-721

ERC-721 is a free, open standard that describes building non-fungible or unique tokens on the Ethereum blockchain. While most tokens are fungible (every token is the same as every other token), ERC-721 tokens are all unique.

According to the documentation available on the Ethereum website, the ERC-721 introduces a standard for NFT. An ERC-721 token is a term used loosely to describe non-fungible tokens. Breaking down the term, ERC-721 refers to guiding standards when creating NFTs atop the Ethereum blockchain. Therefore, this is a token type that is built based on Ethereum’s ERC-721 standard.

Before creating this standard, people used to generate tokens that were all equal or fungible like ether. Since the implementation of ETC-721, developers can now deploy tokens with different values and attributes - such as descriptions, quantity available, type.

The following standard allows for the implementation of a standard API for NFTs within smart contracts. This standard provides basic functionality to track and transfer NFTs.

ERC-998

ERC-998 is an extension to the ERC-721 standard that adds non-fungible tokens to own other non-fungible tokens and ERC-20 tokens.

ERC-998 is an extension to the ERC-721 standard that adds the ability for non-fungible tokens to own other non-fungible tokens and ERC-20 tokens. Non-fungible tokens that implement ERC998 also implement the ERC-721 standard.

ERC-1155

While ERC-20 and ERC-721 tokens required a new smart contract deployed for each new “class” of tokens, the core concept behind ERC-1155 is that a single, smart contract can govern an infinite number of tokens. Each of these items could be “fungible,” having more than one copy available.

New functionality is possible with this design, such as transferring multiple token types at once, saving on transaction costs. Trading (escrow / atomic swaps) of multiple tokens can be built on top of this standard, and it removes the need to “approve” individual token contracts separately. It is also easy to describe and mix multiple fungible or non-fungible token types in a single contract.

Popular use-cases

Gaming

The first and best-known example of NFTs is CryptoKitties, a game where virtual cats could be bought and sold. These NFTs could even “breed” with one another to create new cats with different attributes represented in their NFTs. Created in October 2017, CryptoKitties is a virtual game that allows players to adopt, raise and trade virtual cats.

According to their website, "CryptoKitties is one of the world's first blockchain games. 'Blockchain' is the technology that makes things like bitcoin possible. While CryptoKitties isn't a digital currency, it does offer the same security: each CryptoKitty is one-of-a-kind and 100% owned by you. It cannot be replicated, taken away, or destroyed."

Art

Rarible is a marketplace that allows digital artists and creators to issue and sell custom crypto assets representing ownership in their digital work. Of note, Rarible is both a marketplace for those assets and a distributed network built on Ethereum that enables their trade without an intermediary.

However, Rarible is proof NFTs have since grown beyond virtual cats. Examples of NFTs found on Rarible’s marketplace include digital artworks, memes, and even parcels of virtual land.

Central to the platform is RARI, Rarible’s cryptocurrency. By owning RARI tokens, users can vote on proposals that affect the platform, moderate creators, and curate featured artwork.