NFT vs Token: Fungibility and Tokenization Explained

NFT vs Token

When Collins Dictionary named “NFT” the word of the year for 2021, some were ecstatic while others raised their eyebrows. After all, non fungible tokens haven’t been around long – just about half a decade. 

Yet, the token revolution has taken the world by storm. As more and more people become invested in digital art, non fungible tokens become the most desired collectible in the market. 

It all started back in the mid-2010s, when multiple digital currency projects arose along with their blockchain technology- Bitcoin, Ethereum, and finally, more specific NFT- and Metaverse-oriented blockchains such as Solana.

The NFT market has exploded in the last few years. Certainly, it’s could be related to the coronavirus pandemic forcing countless artists to turn to digital artwork for income.

But not all success is due to people increasingly working from home. Rather, the NFT token mania is the avant-garde of a new way of thinking the internet – that which many are starting to call Web3.

If the first iteration of the World Wide Web focused on accessibility and publication, Web 2.0 saw the rise of user-generated content, participation, and social media. Now, Web3 promises yet another revolution.

Proponents of Web3 see it as a new internet founded on decentralization, token-based economics, and blockchain technology. Crypto currency enthusiasts and creators also are starting to embrace the idea of a novel internet experience based on these principles.

Of course, NFTs are a central characteristic of a Web3 environment. Most NFTs exist on the Ethereum blockchain where they store data on the ownership of a digital asset or artwork.

Fungible or nonfungible, that is the question!

What makes NFTs special is their nonfungible nature. But what is fungibility? Fungibility, in short, refers to the ability of an asset to be traded or exchanged with one other of the same kind.

As such, physical money is a “fungible asset”, same as crypto currencies, meaning, they can be traded or exchanged for one another and they have equal value. A 5 dollar banknote will always have the same value as another 5 dollar banknote.

But a non fungible token cannot be traded for another as if they held the same value – each underlying digital asset the token is tied to is the proof of this difference. However, a fungible token can also be understood as a digital collectible.

Think of trading card, old stamps, or coin collections. These items hold no inherent value, but gain one as part of a series of collectible projects. Today, users can buy and trade tokens on an NFT marketplace such as OpenSea. 

Tokenization-based security

As we said, each non fungible token represents underlying digital assets which can take many forms. The digital tokencan store data of a social media post, digital artwork, music, and more. 

Any digital item can potentially be tokenized and become the medium of the NFT transaction. The security aspect of this decentralized financial operation is governed by smart contracts. 

A smart contract is an essential tool to the functioning of a non fungible token. It’s programming that exists within the blockchain and that allows the NFT transaction information to be stored and accessed when needed. 

Of course, smart contracts also allow for these data to stay transparent and immutable. As such, the blockchain networkassures cryptographic token protection for each decentralized transaction. No supervision is needed – security is embedded in the system.

Are all tokens NFTs?

NFTs are nonfungible tokens. But there are also fungible ones such as a crypto token, which represents a tradeable assetor utility housed in the blockchain. 

The structural difference between fungible and nonfungible tokens resides in their code: there are different smart contractslibraries for each.

For example, fungible tokens follow the ERC 20, a useful standard used for most medium of exchange currencies, voting rights, and staking. On the other hand, you have the ERC 721 token standard.

The ERC 721 comes into the fore when some items are valued more than others. For example, a collectible might have more rarity than others belonging to the same type. Digital real estate also is represented by the ERC 721. Therefore, NFTs are strictly tokens which enjoy nonfungibility. 

Conclusion: Physical art and Web3

Each non fungible asset can nonetheless be tokenized and bought with the help of a digital wallet. As such, tokens are similar to physical art.

Take the Mona Lisa – the most famous painting in world history. It is a physical asset worth billions of euros, yet it’s value is so high because there’s nothing like it. Its rarity is unparalleled.

If anything like the Mona Lisa were ever to grace an NFT platform, this unique asset would acquire limitless value. But it’s precisely because we cannot imagine this to happen that forces us to confront our double standard when it comes to digital creation.

All in all, tokenization is testimony to the world that Web3 is coming to change our understanding of trust and value. NFT exchange is one of the purest forms of this process, as creators and interested buyers come in contact directly and trust the blockchain network to secure the transaction on the digital artwork and its connected sensitive data.

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