28 October 2020 | ZebPay Trade-Desk
NFTs, or Non-Fungible Tokens, offer a unique proposition, that make them both digitally viable but also scarce. Before venturing further into what NFTs are, and how they work, let’s understand the fundamental difference between a fungible and non-fungible asset.
A fungible asset, in this case a token, is one that can be easily replaced by something that is seemingly identical, and hence interchangeable. Examples include, a dollar bill, or a unit of common shares. The value is definite in these cases.
A Non-Fungible asset, or token, holds a special, and unique property, and this makes it difficult to determine its true value. Each asset/token will have unique information or attributes that make them irreplaceable or impossible to swap. Examples include precious gems or apartments.
Fungible and Non-Fungible Cryptocurrencies
Fungible cryptocurrencies represent the majority of tokens in today’s market. Fungible tokens are digital assets built so that each individual token (or part of a token) is equivalent to the next.
For example, fiat money is fungible as $100 notes are interchangeable with all other (real) $100 notes. Similarly, one BTC equals one BTC, and it’s equal to all other Bitcoins.
This makes fungibility completely essential to the concept of currency, whether they be crypto or otherwise. Another aspect of fungibility is the ability to change that $100 note into smaller denominations and still retain the same sum value. Consider Bitcoin, one can swap half a Bitcoin for anyone else’s half a Bitcoin, feeling confident that both Bitcoin halves hold the same value, despite being halves of different coins.
An example of a Non-Fungible Token (NFT), are CryptoKitties. Arguably one of the most known and popular collectibles in this space, and an early adopter. Every Crypokitty is unique, and depending on its pedigree, could be worth a lot of money. This makes their value vary dramatically. It is impossible to divide a CryptoKitty into any denomination, trade them, or duplicate them to create a new and equally valuable CryptoKitty. In essence, then, fungible tokens are divisible – meaning you can send a fraction of one ERC-20 token. On the other hand, non-fungible ERC-721 tokens cannot be divided and must be bought or sold whole.
Advantages and Disadvantages of NFTs
The inherent uniqueness of NFT’s offer several advantages:
- Specific Ownership – A non-fungible token represents something unique, both in the digital world and in the real world. Examples include collectibles and gaming in the digital world (CryptoKitty) to unique items in the real world (Houses and Cars).
- Secure Transfer and Trade – Traditionally, transferring ownership of a physical or digital item is at risk of fraud. With Blockchain security and the uniqueness of NFT’s, trading represented by the token is a lot simpler and efficient. As a token, it could potentially also allow the transfer of ownership of assets across platforms or even be interoperable across multiple domains.
- Data Integration and Control – NFT’s are customized and designed in a way that other tokens aren’t. In case of a NFT, the token itself holds all the data. The token holds data regarding the name and the ownership, but also the history of the token and any other associated information. This eliminates all possibility of any asymmetric information being attributed to any transaction.
- Usability – Non-fungible tokens enable the tokenization of all types of assets, whether digital or real. They allow unique investments tied to a physical object, like artwork, real estate, or any other real-world assets and securities. They also allow fractional ownership of goods that were not easily divisible before, like real estate, and other memorabilia. Tokenizing physical assets gives investors more liquidity.
However, NFT’s do have a few limitations as well:
- Complexity – NFT’s are built on the ERC-721 protocol, which is fairly new. Hence, it can be tricky and time consuming to develop decentralized applications for non-fungible tokens properly.
- Fractionalization – Whilst this is interesting in theory, there is a risk that doing so would turn these tokenized assets into securities and they would, therefore, need to be regulated accordingly.
- Infrastructure – The development of NFTs is heavily dependent on underlying infrastructure. Solving for scalability and transaction fees is likely to have a huge impact on the speed of development of this space. There is also the issue of the lack of accessibility when it comes to NFT tokens.
The Future of NFTs
The non-fungible token (NFT) environment continues to grow and 2020 has shown the industry is becoming far more robust. People have started to realize that NFTs can represent almost anything in the virtual world, and can be tied to the real world with concepts like event tickets and raffles. This year, the popularity of NFTs has jumped considerably, as the concept is seeing a massive amount of funds flowing into the industry.
The world is moving on from paper, and hence there can be many use cases for nonfungible tokens beyond just collectibles. For example, it could become a secure and immutable way of storing documents, and records or even artwork and property ownership. These real world assets can then be properly digitized and stored in a wallet, keeping them safe and ensuring that they cannot be altered or counterfeited by a third party.
Many predictions have been made by experts and enthusiasts alike, on what might be next in the NFT space. Many agree that utility NFTs will grow, the gamification (not just gaming) of everything is almost certain, mobile adoption is likely to increase; especially in gaming, and NFT development will be increasingly publicized along with NFT technology and standards being further enhanced. All this together, is like to see NFT adoption rise.
The market for non-fungible tokens is still developing, and somewhat harder to measure than the cryptocurrency market given the lack of spot prices for assets. After the CryptoKitties bubble in late 2018, the number of unique accounts interacting with NFTs has grown slowly but steadily. Given that it is still in its infancy stage, probably the best way to measure the growth of the market is to look at a leading indicator: developer interest in the space. Over the last year, the number of mainnet ERC721 contracts has grown exponentially as new developers enter the space.
NFTs have the potential to be one of the key components of a new blockchain-powered digital economy. They could be used in many different fields, such as video games, digital identity, licensing, certificates, or fine art – and even allow fractional ownership of items. Storing ownership and identification data on the blockchain would increase data integrity and privacy, while easy, trustless transfers and management of these assets could reduce friction in trade and the global economy.
Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.