NFTs have garnered a lot of attention across traditional and cryptocurrency industries alike. Non Fungible Tokens are causing quite a commotion in the media, but what are they? This article will explain tokens.
Blockdaemon are the leading independent blockchain infrastructure provider… and we’re here to help. In this article we’ll take a deep dive into tokens, and we’ll answer these 4 common questions:
- What is a Token?
- What is a Blockchain Token?
- What is a Non-Fungible Token
We’ll look at how tokens have been used in the past, how they’re currently used, and how they might be used in the future.
1. What is a Token?
From sea shells to stones, physical tokens have represented units of value for thousands of years. Recent technological developments have given rise to the token economy, where real-life items and value can be represented in digital formats.
While Bitcoin pioneered the world’s first decentralized digital token, Ethereum enabled the creation of custom tokens using their own native token standards. These empowered a cohort of developers to issue their own tokens on Ethereum’s immutable blockchain. The two most popular token standards used today are ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens). The reasons these standards exist are explained as follows,
“Although Ethereum allows developers to create absolutely any kind of application without restriction to specific feature types, and prides itself on its “lack of features”, there is nevertheless a need to standardize certain very common use cases in order to allow users and applications to more easily interact with each other”.
Standardizing common use cases, such as the issuance of fungible and non-fungible tokens, radically improves user and developer experience. Today, both of these token standards have changed the way some people store, exchange and represent value through a digital medium. While still in its early stages, both fungible and non-fungible tokens present massive opportunities for the future of commerce. In this post, we’ll be looking at the differences between both fungible and non-fungible tokens, and their implications for how business is conducted in the future.
2. What is a blockchain token?
A token is a cryptographic asset stored on the blockchain. Tokens can be seen as financial stem cells, as they represent different types of assets based on the will of the issuer and their specific use cases. Tokenized dollars (e.g. Tether) and tokenized gold (e.g. Pax Gold) are some examples of commonly traded tokens representing real-world assets. However, many expect an economy powered by tokens in the future, representing stocks, bonds, securities, customer loyalty points and other financial instruments and products.
Fungible and non-fungible token standards will be the cornerstone of these financial innovations. While in ages past only governments or large institutions had the ability to mint their own tokens, now anyone with the requisite skills can issue their own assets, radically improving the possibilities for financial innovation.
3. What is a non-fungible token?
A non-fungible token (NFT) is one that is not automatically interchangeable with other tokens or a set amount of money. This makes it truly unique. The value of these tokens are not directly tied to the value of a specific currency. The price for sale or exchange of such a token must be agreed on by both parties. Non-fungible tokens can be tracked on a blockchain by a unique ID, and thus its owner, similar to a regular ownership document.
Use Cases For Non-Fungible Tokens
Non-fungible tokens are ideal for representing scarce assets natively on the blockchain. These are assets which are unique and represent ownership. Non-blockchain based digital assets such as JPEG images, video files and text documents can be easily duplicated. The power of NFTs are their ability to represent the scarcity of the original of such creations, meaning the owner of an original piece of artwork can be proven through a digital signature on the blockchain.
The below are some examples of how NFTs are or could be used:
The most common use case for NFTs at the moment is tokenizing assets. An example is this piece of artwork, an asset which was tokenized and sold for $69 million. Art is commonly used for tokenization because of its uniqueness. However, tokenizing assets extends to traditional industries such as real estate, where properties in crypto friendly jurisdictions such as Switzerland are increasingly represented digitally on the blockchain.
NFT marketplaces are the equivalent of exchanges for tokenized assets. They offer a secure platform for people to buy, sell and bid on assets which they can own in exchange for a fee, typically the native cryptocurrency of the blockchain they’re minted on. These marketplaces offer a user-friendly medium for interacting with NFTs.
NFT Loan Collateral
One of the major drawbacks of issuing loans on the blockchain is the inability to secure collateral. A potential use case for NFTs would be the tokenization of a real-world asset which could be used to secure a loan on the blockchain. This would be given to the entity issuing a loan which could be liquidated if the person receiving the loan failed to make repayments.
Such an arrangement would provide a promising new way of managing loans on smart contract platforms, as long as there was some legal framework around the linking of a real world and digital asset.
While we have seen NFTs becoming popular with digital artwork, trading cards and collectibles, the major use case for such technology is the ability to unlock trillions of dollars worth of value in traditionally illiquid assets.
Assets such as real estate and intellectual property are traditionally highly illiquid, meaning that they cannot be rapidly converted into cash. Converting such assets to NFTs would unlock the opportunity for such assets to be more easily traded and accessible for a digital-first consumer base. While still in its early stages, such applications hold great potential for future opportunities.
Although fungible and NFTs are relatively new to the blockchain industry, they have made waves through their current applications and expected future use cases. So far, the issuance of custom assets has generated billions of dollars worth of value, opened up the work for creators and developers to share their creations and built an avenue for new financial vehicles never before seen in the modern economy.
NFTs are useful for tokenizing both digital and real-world assets, the implications of which can unlock trillions worth of value in the years to come, as more brick-and-mortar assets become available on decentralized platforms.
Of course, the issuance of non-fungible tokens relies on the underlying blockchain that supports them. No matter what the platform, having access to high-quality, secure infrastructure is key for developing solutions that integrate non-fungible token technology. At Blockdaemon, we have built one of the world’s most trusted, high-quality networks of nodes supporting the top blockchain platforms. This means we provide the node infrastructure needed to win in the market.