Non-Fungible & Fungible Tokens: A Quick Overview
Blockchain technology is perhaps most well-known for underpinning the premier cryptocurrency Bitcoin. Indeed, cryptocurrencies, or let’s say, fungible tokens, are inarguably the most popular use-case of distributed ledger technology (DLT) to date. However, there’s more to this emerging technology than meets the eye through NFTs (non fungible tokens).
Under the umbrella term that is cryptocurrencies, there is a wide array of digital assets with their peculiar characteristics. To name a few, we have security tokens, utility tokens and digital collectibles among others.
Did you know that blockchain technology can be used to digitally store your driving license which can be accessed from anywhere in the world without you needing to physically carry it? Or to purchase a fraction of a highly-valuable piece of art having a market price in millions of dollars? Blockchain technology can be used to securely store nearly any imaginable item digitally. In blockchain jargon, we call this “tokenizing” an asset.
Blockchain technology can be used to create such personalized tokens in the form of non-fungible tokens (NFT). These tokens differ from fungible tokens in that they cannot be interchanged with another token of the same type or to put it simply, they are one of a kind (unique).
The potential benefits offered by NFTs are enormous and bear the capacity to play a crucial role in shaping tomorrow’s blockchain economy.
In this post, we explore in detail the difference between the two primary types of digital tokens: fungible tokens and non-fungible tokens. Additionally, we will also learn in detail some of the most popular real-world use-cases of NFTs and RSK´s approach to it.
What are Fungible Tokens?
To develop a fair understanding of fungible tokens, look no further than all the prominent cryptocurrencies today. In essence, fungible tokens can be exchanged among individuals for trading, sale and purchase of goods and services.
The rising popularity of cryptocurrencies has piqued the interest of several enterprises across the globe that are mulling launching their fungible tokens. For instance, last year, Facebook unveiled its ambitious Project Libra to fuel its ecosystem and foster financial inclusivity. Similarly, governments around the world are increasingly warming up to digital money as they contemplate launching central bank digital currencies (CBDC).
Properties of Fungible Tokens
To summarise what we have discussed about fungible tokens so far, they are:
1) Interchangeable – A fungible token can be exchanged to any other token of the same type. The aforementioned US dollar bill is a good example of this.
2) Identical – All fungible tokens are uniform in nature.
3) Infinitely Divisible – Fungible tokens are divisible and that would not make any difference to the user. Applying the US dollar analogy, one dollar is equivalent to two 50 cents and four quarters.
What are Non-Fungible Tokens?
While fungible tokens are primarily used in the form of currency, non-fungible tokens (NFTs), on the other hand, can be used for myriad purposes beyond just currencies. NFTs unlock a whole set of new opportunities for blockchain technology. The textbook definition of NFTs is tokens that cannot be replaced by another token of the same type.
For example, consider a flight ticket. Although an airline can issue hundreds of flight tickets at once, each of the tickets differs from the other in terms of data printed on it (name, age, gender, destination). If one were to exchange a flight ticket with a fellow passenger, the consequences could be disastrous, including reaching a completely different destination or not being able to board the flight at all.
It is this uniqueness that makes NFTs so valuable and, theoretically, scarce. Pretty much all collectibles can be considered non-fungible tokens because of their uniqueness and non-interchangeability.
Properties of Non-Fungible Tokens
Non-fungible tokens differ from fungible tokens on the following grounds:
1) Not Interchangeable – Non-fungible tokens cannot be interchanged for another non-fungible token of the same type. One cannot exchange their passport for a passport of another person
2) Non-Identical – Unlike the uniform fungible tokens, non-fungible tokens are unique
Scope of Non-Fungible Tokens in Blockchain Space
Now that we have discussed the features and differences between fungible and non-fungible tokens, we can explore their potential use-cases in the blockchain industry.
While fungible tokens’ use-cases are usually related to a medium of exchange or one specific utility, blockchain-powered non-fungible tokens can be used for many different purposes. Non-fungible tokens can power decentralized applications (dApps), and function as carriers of metadata about asset ownership, thereby fostering greater consumer confidence in the legitimacy of data.
Use-Cases of Non-Fungible Tokens
As a Digital Collectible
One of the most widely touted successful use-cases of blockchain-powered non-fungible tokens is the popular Ethereum-based virtual game CryptoKitties. The digital collectibles game launched in late 2017 features non-fungible tokens in the form of CryptoKitties which can be purchased, sold and traded among the platform’s users as assets.
CryptoKitties features a well-thought-out in-game economic model that leverages non-fungible tokens to provide users not only a unique gaming experience but also an opportunity to make money by trading game collectibles. The mechanics are simple. Purchase a few CryptoKitties, breed them to make a rarer CryptoKitty and auction the cat in the game’s secondary market.
This easy-to-understand approach to asset speculation quickly led to an increasing number of players flocking toward CryptoKitties with some non-fungible tokens, or CryptoKitties, selling for as high as $170,000.
Verifying Personal Credentials
Non-fungible tokens find another peculiar use-case in the area of credentials verification or identity management. Through digital identification, an individual’s documents, such as driving license, passport, and academic credentials, can be fed and stored securely on a blockchain in the form of a non-fungible token.
Rather than using paper credential documents that often run the risk of being fake and bogus, a digital record stored on the blockchain would offer complete transparency and legitimacy concerning the authenticity of the document. Consequently, easy access to digital records of documents would also help in quicker personal identity checks such as KYC.
Software licensing is another significant area where non-fungible tokens can have a substantial impact. Traditionally, software licenses have existed in the form of keys represented by a long unique string of alphabets and numbers. However, these keys can easily be stolen or shared among individuals which leads to revenue loss for the software provider. With the help of non-fungible tokens, however, ownership can be restricted to one person or entity only who would be the software’s legitimate user.
Non-fungible tokens can be stored in the users´ digital wallets and function as the key giving them access to the software. This way the process of proving ownership of a service or product becomes easier and the owner preserves its privacy, as they only require to prove the ownership of the non-fungible token without having to share any other personal details. Through smart-contracts, these non-fungible tokens can be made subject to a licensing period too.
Fractional Ownership of Real Estate
Imagine owning a part of a posh condominium in New York City. Earlier, this proposition would seem out of range for the vast majority of individuals considering the ridiculously expensive real estate market in the largest metropolitan cities in the world. With non-fungible tokens, however, this is now possible.
Through the process of “tokenization,” real-world assets can be split into smaller fragments which can then be captured within non-fungible tokens held by individuals representing actual ownership.
To give an example, in October 2018, a luxury Manhattan condo having a market valuation of $30 million was tokenized on the blockchain to enable interested buyers to purchase a fraction of the property according to what their finances allowed.
Tokenization not only democratizes asset classes such as real estate that has high entry barriers for small investors but also provides a ready liquidity solution to an industry infamous for its illiquidity.
Supply Chain Management
Since its inception, blockchain technology has been positioned as an ideal candidate to disrupt the highly fragmented and opaque supply chain fabric across the world. The use of non-fungible tokens as a means of tracking items ensures the utmost data transparency and authenticity. Non-fungible tokens as previously mentioned, can be tweaked to meet any requirement. In the context of supply chain management, non-fungible tokens can be used to store dynamic information such as the location, temperature and size of the items.
For instance, in 2019, popular fashion brand Louis Vuitton unveiled its plans to launch a blockchain platform that would use non-fungible tokens to authenticate the provenance of high-priced goods. Non-fungible tokens could be used to identify and trace the entire supply chain journey of a Louis Vuitton handbag or any other unique product.
Similarly, by attaching dynamic data attributes to non-fungible tokens, extra precautions could be taken about the quality of perishable goods such as vegetables and meat. An individual can scan the RFC chip attached to a package of meat to check its temperature through all points of the supply chain and determine whether it is fit for consumption or not.
As can be inferred from the aforementioned examples, non-fungible tokens offer enormous flexibility which makes them ideal for use across a wide range of industries.
RSK Smart Contracts Powering Non-Fungible Token Economy
Leading smart contracts platform RSK has made significant advances in the various facets of the blockchain industry and non-fungible tokens are no exception. For instance, Watafan allows idols across the globe to create their own digital trading cards called watacards to commemorate important moments of their lives. The watacards are signed cryptographically by the celebrities from their personal wallet on the blockchain.
RSK smart contracts preserve the intellectual property of Watafan idols. These trading cards have collective value for their scarcity and exclusivity and are backed by the tamper-proof security and transparency of RSK. Watafan aims to propel the digital property to the next level by leveraging smart contracts. By using RSK smart contracts, Watafan is helping artists from all walks of life who find it difficult to protect their copyright. Long-term, watacards will cement themselves as a new kind of asset that can help preserve the intellectual copyrights of artists, athletes, musicians, actors, and others.
As you might have figured by now, the scope of possibilities is endless with non-fungible tokens. The RSK blockchain-powered Watafan app is just one of the novel ways how non-fungible tokens can help in democratizing industries by giving individuals complete control over their assets. NFTs can protect ownership, are transferable and prevent fraud or counterfeit problems. Non-fungible tokens can mitigate the opacity associated with supply chain channels, curb piracy, identify legitimate academic degrees and education certificates, make elections transparent, and verify medical data, among other things. Think about Art,Collectibles, Gaming, Real State, Renewable Energies, Identities and different types of virtual and real word assets and the possibilities are endless.
RSK blockchain is cognizant of the untapped potential of both fungible and non-fungible tokens and continues to spread awareness and develop in this young and exciting space to enable individuals and enterprises both fully realize the potential of blockchain technology. To get started coding your own collectable token we invite you to visit the following video and guide.