Basic Non-Fungible Token Guide

NFTs are tokens that can be used to represent ownership of unique items like; art, collectibles, real estate etc. In this guide you learn how it works.

By The 'Staunch

The NFT space is currently breeding a new wave of cryptocurrency millionaire artisans!

This crypto investment guide is apt for everyone from a beginner to a professional, who is already aware of the nits and grits of NFT world.

It will also cater to amateurs in the space, but you’ve got to bear with me, while I discuss the most basic concepts related to this sector.

I ensure that once you reach the end of this guide, you’ll be equipped to take steps towards your purpose of investing in valuable NFTs.

But first things first, let’s get to understand the concept of fungibility.

Shall we…?

Definition of fungibility

According to Investopedia, fungibility is ability of an asset to be interchanged with some other individual assets of the same type.

You’re not going to expect the same piece of money paper that you gave me, right?

Any dollar paper bill would do, I guess?

You are more concerned about the value of dollar than that specific paper used to print the dollar money.

Therefore, when the value of an item is superior to the specifics of the item, it is a fungible item.

For example, currency notes, gold bar, etc., and this is to say, most things are non-fungible, but with a degree of fungibility attached to it.

Not only this, I have a coffee mug which I love very much, and have all my beverages in it.

Even though there can be several similar cups in the world, I am emotionally attached to a particular mug, making it non-fungible.

There are 3 categories of fungibility in the world currently:

Fungible items

Once anything is 100% interchangeable with a similar thing, then it’s a fungible item.

For example, a $5 note is interchangeable with either another $5 note or 5 $1 notes.

Semi-Fungible items

Anything which is fungible within a specific category can be termed semi-fungible.

For example, you want to buy a BMW X1 black colour.

It does not matter from which showroom you buy this car as the item will be the same in all the BMW showrooms.

However, a BMW X1 is not interchangeable with an Aston Martin Vantage.

Although both are cars, they do not provide the same value and thus, are not interchangeable.

Most of the world’s items fall under this category.

However, when an item is truly scarce and unique, it would be a non-fungible item, which brings us to the next category.

Non-Fungible items

A Non-Fungible item is usually an item that is desirable because of age, beauty, rarity, condition, utility, emotional with connection, and/or other unique features.

It can be physical item such as furniture, jewellery, paintings, etc., or a digital item such as domain name, email address, digital avatar, digital art, a song or movie collection.

These represent the items that are not factory-built for the masses.

It’s worth noting that concept of fungibility is subjective and relative in all aspects, as the society decides how interchangeable, scarce or unique an item is actually.

Ownership of physical items is easy.

You pay for a physical non-fungible item such as a physical painting and then you get possession of that painting.

Now, you can place that painting in your drawing room.

Historically, people have been predominantly inclined to own and trade physical objects.

It’s best explained by the fact that physical objects stimulate our senses, and don’t require the capacity to abstract.

As opposed to any service or a digital item (intangibles).

Ownership was usually synonymous with possession. But, ownership of digital items is a bit tricky in the real world which we will just discuss below…

Digital ownership

This is when you have right to access, and use an item anyhow they want without infringing on any copyright issues.

Blockchain could play an important role as an ownership layer on the internet.

Before, there was no way to achieve trust-less digital ownership, but now we the ability to own digital assets.

When a digital file is available on the internet, data about the true ownership of that file is also absent.

The creators of that file cannot see how, and where their work is being used.

There was a need to establish clear ownership rights – facilitating payment processes wherever required.

The blockchain forms a distributed ledger of transactions, duplicated across many computers and can be read or verified by anyone.

Bitcoin is probably the first digital asset that could be owned in a true sense.

It is also trust-less, which means there is no central authority that must maintain an account (like a bank) for keeping a record of how many BTC each person owns.

Now let’s talk about the NFT and how possible it is to have the ownership right to some of these cryptocurrency items.

What is NFT (Non-Fungible Token)?

A Non-Fungible Token (NFT) is a digital item that can be created, sold or purchased on an open market.

They’re owned and controlled by the user, without the permission or support of any centralized company.

So to make it more simpler for a layman’s understanding, a Non-Fungible Token is a single token that is encrypted on the blockchain network.

As it’s known, Bitcoin is changeable, and can be reprogrammed with the community consensus, but NFTs cannot be changed.

The most important feature of every NFT is that, they’re unique and proprietary assets.

NFTs are new type of collectibles such as stamps, tickets, coins, token assets – which the only difference is that it’s digital.

It is a certificate of authenticity created by the blockchain for a digital asset like; artwork, music or video contents.

It is worth noting that these are only current use cases of NFT.

Though, NFTs are currently being used to identify ownership of digital Assets, they can also be similarly used for physical assets.

Think of the real-world problems that this technology can possibly solve in the physical world such as identity theft, forgery, etc.

An NFT consists of details about a digital asset it represents with details of owner, while maintaining the ownership ledger without any trust authority on a blockchain.

Ethereum is a typical example to understand the standardization of ownership in NFTs.

Predominantly, there are three token standards available on Ethereum blockchain:

  1. ERC 20 – A token standard issued for fungible digital assets
  2. ERC 721 – Token standard issued for non-fungible digital assets and was pioneered by CryptoKitties
  3. ERC 1155 – This token standard is used for semi-fungible digital assets and was pioneered by the Enjin team.

On the Ethereum blockchain, an NFT token would either be ERC 721 or ERC 1155 – with Ether bring the main blockchain in the space.

Further, NFT module would solve a number of problems concerning digital ownership such as;

  1. There would be no regional barriers
  2. There are no middlemen
  3. Increased liquidity of the asset due to token standards
  4. Reduced transaction costs
  5. Asset interoperability
  6. Redemption is easier
  7. Easy to trade
  8. Immutability and provable scarcity.

Digital art as an NFT

A digital art encrypted on a blockchain and represented by a unique token can be termed as NFT Digital Art.

2021 saw a boom in adoption of digital arts, which led to artists such as painters, web designers and artists selling their work through NFT marketplaces.

Places to find and buy NFTs

There are flood of NFT projects in the crypto market. However, I have some favourites, which you can always use today.

Decentraland (MANA)

Powered by the Ethereum blockchain, Decentraland is a virtual world that is decentralized.

It allow users to use customized avatars, trade collectibles and participate in the virtual world’s governance process.

Decentraland has the potential to create a whole metaverse on its platform.

Enjin (ENJ)

Enjin is a company that offers an ecosystem of integrated digital game products, making it easy for everyone to trade and monetize gaming products.

This allows game developers to tokenize in-game items on Ethereum, which is backed by Enjin coin (i.e. Enjin’s ERC-20 token).

Rarible (RARI)

Rarible is the NFT marketplace that utilizes the native RARI token to be a creator-centric platform.

Any user can easily create NFT for unique digital items, along with a fully functional crypto-coin marketplace.

They use a part of the revenue to subsidize the first mint transaction, where the NFT is created to fuel the growth of the platform.

What can be owned as NFT?

Anything can be owned through an NFT, as it has safer and trust-less ownership module that can be used for anything.

One necessary thing to bring into the NFT space is certificates, awards and degrees.

These items requires unique ownership to their respected owners.

What’s difference between digital ownership and access right?

In simple terms, digital ownership is the act of entirely owning a whole right to a digital item copy, which is very unique.

What problems can be exited with NFT?

Clearly, NFT is a new sector and there are a lot of issues that need to be resolved.

Copyright infringement issues and originality of an art work is noted currently as the major problems to be solved by non-fungible token.

Conclusion: Non-Fungible Tokens

I think the NFT space is still in its early stage, and there’s a lot of innovative developments that is expected in the coming times.

NFT can fuel the whole metaverse ecosystem, as well as create value in the physical world with clear and safe ownership standards.

A specific NFT art has low liquidity similar to the physical world.

However, marketplaces and platforms can have higher liquidity and have the potential to grow at an immense scale.

From an investment point of view, rather than investing in a specific art, you should try investing into the NFT ecosystem.

Incase you don’t know yet, it’s not every cryptocurrency wallet that can be used to store your Non-Fungible Tokens (NFT).

The best wallet to used is hardware wallet (like; Ledger Nano X/S), but if you can’t afford them, you can use any other crypto wallet in the market.

About the 'Staunch

Henry is the founder of Crypto Staunch. He studied accounting and finance at Godfrey Okoye University, but became a Cryptopreneur to pursue his interest in learning digital currency and asset investment. Since 2018, Henry Kings has writing about Crypto, DeFi & NFT to help other people get started in the space. His publications has been featured in Binance Square, Digest Africa, Tech Economy, International Business Times, CoinDesk and many other top Crypto media outlets.

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About The 'Staunch

Henry is the founder of Crypto Staunch. He studied accounting and finance at Godfrey Okoye University, but became a Cryptopreneur to pursue his interest in learning digital currency and asset investment. Since 2018, Henry Kings has writing about Crypto, DeFi & NFT to help other people get started in the space. His publications has been featured in Binance Square, Digest Africa, Tech Economy, International Business Times, CoinDesk and many other top Crypto media outlets.