Episode 31 - Non-Fungible Tokens (NFTs)
If we look at the dictionary definition of the term fungible, it says “being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”
Let’s take an example. If you have a 1 dollar bill, you can exchange it for another 1 dollar bill. When we deposit cash in a bank and then withdraw some or all of it, we don’t get back the same currency notes that we deposited. But we still accept that money because these notes have the same total value. Hence, fiat currencies are fungible.
The same applies to cryptocurrencies, a bitcoin can be easily exchanged for another bitcoin because all bitcoins have the same value.
Non-fungible would then mean that something cannot be exchanged for another thing of the same kind. Let’s take an example — an original painting from a painter cannot be exchanged for another painting of the same kind because there is only one original and it has it’s value. Think Mona Lisa. You cannot exchange one Mona Lisa with another because another doesn’t exist.
The same concept applies to Non-Fungible Tokens. NFTs are used to represent unique assets on the blockchain. These unique assets could be anything — a painting, a gif, a piece of land, etc. This is important to note that NFTs are only representing physical or digital assets on a blockchain. Just like we represent the ownership of a piece of land using registry papers, we can represent the ownership of something unique by using an NFT.
NFTs make sense because they represent assets that have some specific context associated with them. This context makes these assets unique and hence non-fungible. Examples of such context are — a particular art by a specific artist, a piece of land with coordinates on Earth or Mars or Moon, the original manuscript of a particular book, etc.