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Understanding Fungible and Non-Fungible Tokens

Today we are going to look into fungible vs Non-Fungible Tokens, aka NFTs, aka nifty. They burst into the mainstream with the sudden popularity of cryptokitties – a virtual cat collectible game. While the Ethereum-based ERC-721 remains the most popular NFT in the market, there are several projects out there, like RSK, that have produced their own collectible tokens. So, before we go into any of this, let’s do some background research.

What is A Token?

In real life, a token is a thing which serves as a visible or tangible representation of a fact, quality, feeling, etc. you can empty your pockets right now and the chances are that you will stumble across a lot of real-life tokens.

  • Your office ID card shows that a company gainfully employs you.
  • Your driving license is a token, representing the fact that you have taken the training required to drive in your country.
  • Your hotel key card shows that you have paid the hotel for your room.

Similarly, in the cryptoverse, a token is a representation of “something” in its particular ecosystem. It could value, stake, voting right, or anything. A token is not limited to one specific role; it can fulfill many roles in its native ecosystem. A token represents an asset or utility that a company has, and they usually give it away to their investors during a public sale.

Fungible vs Non-Fungible Tokens

Alright, we have gained some background info on how tokens work, let’s look at the difference between fungible and non-fungible tokens. According to Investopedia:

“Fungibility is a good or asset’s interchangeability with other individual goods or assets of the same type.”

Let’s understand this with an example.

Suppose you borrow a $100 note from a friend. To pay her back, do you really need to pay her back with the exact same note?

Absolutely not.

You can pay her back with another $100 note. In fact, you can give your friend 2 50-dollar notes or even 10 10-dollar notes. It will be perfectly fine because dollars (or paper currencies in general) are, for the most part, fungible.

Now, let’s suppose you borrow your friend’s car. Will she be ok with you returning some other car to her? What if you break up her car and return her the engine, wheels, doors, etc.? You’ll be lucky if she doesn’t file a complaint against you!

So, what happened here?

A car counts as a collectible, which is why it is non-fungible.

This is the fundamental difference between a fungible asset and a non-fungible asset.

Currencies gain more value by their fungibility. The more widely regarded and accepted a specific currency is, the more people will use it, and hence more it’s perceived value will be. So, if payment is one of the main utilities of the token that you are interested in, then you should check whether the token is fungible or not.

Non-fungibility is a desired asset when your token is a collectible and gains its value from its uniqueness.

Ethereum Token Standards: ERC-20 vs ERC-721

To create a healthy ecosystem, it is essential that the Dapps built on top of Ethereum can seamlessly interact with one another. However, what will happen if we have two tokens, say Token Alpha and Token Beta, and both of them have different smart contract structures?

For the two tokens to interact, the developers will need to carefully study both their contracts and map out exactly how these tokens will work with each other.

Now, this doesn’t really bode well for scalability, does it?

If there are 100 different tokens with 100 different contracts, then to narrow down on all the qualifications and conditions required to make sure that transfers can go through between all these tokens will need a humongous amount of complex calculations. This is not an ideal scenario at all.

This is why a decision was taken to standardize the rules that govern the token’s underlying architecture. These sets of rules are called ERC-20. The “ERC” stands for “Ethereum Request for Comment,” while the number ’20’ is assigned to this request.

Let’s look into what builds the foundations of ERC20:

  • totalSupply
  • balanceOf
  • transfer
  • transferFrom
  • approve
  • allowance

Now, these are the rules and functions that the ERC-20 tokens must mandatorily have. However, they can also have the following 3 optional characteristics.

  • Token Name
  • Symbol
  • Decimal (up to 18)

These rules define the ERC-20, fungible standard.

Properties of Fungible Tokens

  • Another token of the same type can replace one token.
  • The underlying rules that are governing the tokens are the same.
  • Fungible tokens are divisible, and various smaller fractions could be used to pay back a larger amount. E.g. 1 BTC can be paid back with 0.50 BTC, 0.30 BTC, and 0.20 BTC.

ERC-721 – The Non-Fungible Standard

The ERC-721 token standard helps create non-fungible tokens. In many ways, it is pretty similar to ERC-20 in functionality. This similarity exists for two reasons:

  • Firstly, it is easier for developers to make the transition. , they won’t have to learn a host of new things
  • It makes life much easier for users who can store these tokens in ordinary wallets and trade them on exchanges.

The interface for ERC-721 provides two methods:

  • ownerOf: to query a token’s owner
  • transferFrom: to transfer ownership of a token

ERC-721 Functions

The ERC-721 standard defines the following functions: name, symbol, totalSupply, balanceOf, ownerOf, approve, takeOwnership, transfer, tokenOfOwnerByIndex, and tokenMetadata. It also describes two events: Transfer and Approval.

Before we go into individual function discussions, you must know what we mean by the Token Ownership and Token Creation of the ERC-721 functions.

Pros and Cons of Non-fungible tokens

Pros

  • ERC-721 standard can be a way with which every significant asset could be tokenized on a public or hybrid blockchain with complete immutability and security.
  • Non-fungible tokens can be designed with way more resources than available to most during that time. Users can do this, adding extra context and information to the asset’s metadata.

Cons:

  • The ERC-721 token standard is still relatively new.
  • Fungible tokens are divisible upto a certain extent. ERC-721 simply can’t be divided and must be bought or sold whole.

As mentioned before, several projects have started issuing NFT tokens. One of those happens to be RSK.

What is RSK?

Rootstock (RSK) is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. Rootstock was born to be compatible with Ethereum’s applications (the web3/EVM/Solidity model) . The idea behind the creation of RSK was to give the Bitcoin blockchain smart contract functionalities. At its very core, Rootstock is a combination of:

  • A Turing-complete resource-accounted deterministic virtual machine (for smart contracts) compatible with Ethereum’s EVM.
  • A two-way pegged Bitcoin sidechain (for BTC denominated trade) based on a strong federation.
  • A SHA256D merge-mining consensus protocol (for consensus security relying on Bitcoin’s miners) with 30-seconds block interval. (for fast payments).

RSK: NFT Use Cases

Its partnership with Watafan can perfectly describe RSK’s advances in the field of non-fungible tokens.

Watafan will allow celebrities to create their own digital trading cards, aka watacards.

  • Celebrities can give away the watacards to their fans as a gift or autograph.
  • They can use their personal wallet to sign these cards cryptographically.
  • Smart contracts protect the intellectual property of the idols.
  • Every time fans trade watacards in the secondary market among each other. The concerned celebrity will receive a chunk of the shares.
  • Watafan aims to propel digital property to the next level by leveraging smart contracts. Watafan idols can secure their copyright and digital identity with RSK smart contracts.
  • 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.
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Cryptocurrencies

Just How Promising is the NFT Market?

The NFT market is the collection of all NFT trades. So, let’s define NFTs first. An NFT (Non-Fungible Token) is a special kind of crypto token that just cannot be exchanged for another (possibly) equivalent token. 

In the cryptocurrency universe, there are coins, tokens, and other miscellaneous digital assets; and there are non-fungible tokens. Of all these, NFTs stand out for one cool reason: each token is different and can be uniquely identified. Let’s contrast them with currencies – a dollar bill can be exchanged for another dollar bill to put this into perspective. But it wouldn’t be that straightforward exchanging a diamond ring with another. 

Crypto Tokens Primer

Before diving deep into NFTs and their promising future, let’s first review cryptocurrency tokens from a wider perspective. 

Generally, a crypto token is a digital representation of an asset or a specific utility. For instance, such a token could represent redeemable loyalty points. Typically, these tokens can be exchanged for cryptocurrencies, fiat currency, or some special privileges. Like all other cryptocurrencies, they reside on the blockchain – which allows them to leverage all the benefits of distributed ledgers.

NFT Applications

One of the things that make the NFT market potentially explosive is its increasing adoption in various applications. Within the last few years, developers have come up with NFT-based solutions for different use cases. Let’s look at a few of these:

  • Crypto art – This emerging concept is a blend of art and blockchain technology. The idea has been used to help artists claim ownership of their works, create currencies specifically for buying artworks, and verify artwork’s authenticity, among other uses. Judging by the number of startups, there is growing interest in the use of NFTs in art. 
  • Digital collectibles – Collectibles such as trading cards have been developed based on NFTs. The Rare Pepes and Age of Chains projects are good examples of how NFTs have inspired the generation and distribution of digital collectibles. 
  • Gaming – The gaming industry is undoubtedly seeing unprecedented disruption levels, thanks to the invention of NFTs. There are already a myriad of NFT use cases within the gaming sector, and this list is growing. To understand the weight of NFTs’ potential in gaming, note that gaming activity on Cryptokitties (an Ethereum-based game that allows players to purchase, collect, breed, and sell virtual cats) once caused a traffic jam on the Ethereum blockchain. 

Why NFT Is set for Exponential Growth

As of June 2020, the total sales of NFTs had reached $100 million. The 1-year market performance of NFTs (between November 2019 and November 2020) has not been characterized by dramatic rises and falls – as has been the case with some of the major cryptocurrencies. Even so, the NFT market has shown a slow but steady growth within that period. Developments in the sector suggest that NFTs could only grow faster. Below are the top five reasons why you should think so too.

#1: Scarcity 

NFTs are designed with scarcity at the very core of their philosophy. Tokens such as trading cards and in-game assets exist in minimal quantities. For instance, each virtual cat on Cryptokitties is unique. This means that if you fancy the cat and really want to have it, you must be willing to spend some coins. This would not be the case if you could duplicate the cat or if all cats were equal.

As crazy as the idea sounds, the game’s logic’s psychological aspects make it work just as intended. The idea that there is only one unit of a certain item drives its demand.

#2: Fun and Simplicity

Compared to cryptocurrencies, NFTs are fun and simple to understand. These two features make it easy to learn and adopt NFTs for different uses. There is a multitude of NFT users who don’t even know they are enjoying the fruits of blockchain. In contrast, most cryptocurrency users are forced to learn some of the hard stuff about how crypto’s work is like picking a good wallet, avoiding scams, etc. In short, NFTs were invented (or have been adapted) majorly for fun use. 

Needless to say, the increasing use of NFTs in gaming will promote its adoption. Games have been used to promote the adoption of computers, health interventions, learning activities, and much more. These are all indications that the use of NFTs in gaming will give its adoption a power boost and ultimately contribute to this market’s growth.

#3: High Acceptance in Asia

Asia plays a crucial role in the gaming world. Even before cryptos came into existence, South Korea’s gaming industry had already invented the concept of redeemable in-house currencies, something that could allow you to convert in-house currencies to South Korean Won. Many fun, cute little characters (including many of the emojis we know today) were born in Japan.

The fact that most NFT projects (games in particular) target the Asian market means that they are likely to fit naturally into the region’s cultural context, and this will organically drive up the growth of the NFT market. 

#4: Attractive Investment

NFTs present themselves as equally attractive (if not more) as cryptocurrencies. Part of this high appeal comes from their simple nature. NFTs also highly resemble real-world valuables, which investors are already familiar with. An example is rare artworks whose valuation is widely criticized for being arbitrary. Factors such as who previously owned an artwork, the reputation of the gallery where it is curated, its provenance, etc., can exponentially drive up the artwork’s value. 

Back to NFTs – developers can easily create crypto artworks, such as game characters, and assign them these “special attributes.” In case you’re wondering why everyone won’t just create their characters and make money, well, it all boils down to scarcity. And this heavily depends on developer’s/investor’s creativity.  

#5: Mainstream Adoption 

NFTs are making their debuts in different sectors of the mainstream economy, and they are already creating a frenzy. Nike, for example, has filed a patent for its proposed CryptoKicks – physical shoes with digital identities. CryptoKicks will allow Nike’s customers to set apart genuine sneakers from knock-offs. Since it will be possible to trace a pair of sneakers’ ownership history, we might start seeing high-stake auctions and the like. The bottom line is, NFTs have officially entered the mainstream economy, and it won’t be the same again. 

Final Thoughts

NFTs are among the latest inventions on the blockchain. While they have been adapted for several utilities, their use in gaming is particularly notable. To date, NFTs worth $100 million have been traded – which is a sign of investor confidence in the relatively new concept. Also, 2020 has been a fairly good year for the sector, which has so far recorded a slow but steady growth. NFTs are easy to learn and use, which gives them an edge when it comes to quick adoption among user communities. Coupled with scarcity, high adoption in Asia, its attractiveness to investors, and increasing mainstream adoption, the future of NFTs is highly promising. Naturally, the next thing to look out for is how to take advantage of this promising future. 

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Crypto Guides

What Should You Know About Non-Fungible Tokens?

Introduction 

The word tokens mostly bring the concept of currency in our minds, i.e., something that we can exchange for something else. However, this isn’t entirely correct. Rather than just being a currency, a token represents any fact, feeling, quality, etc. visibly and tangibly. A few common examples of a token can be:

Voters ID: It is a token of the fact that you are eligible to vote.

Driving License: It is a token that shows you have undergone the process of proving that you can dive responsibly.

Coins: These are the tokens that show the value of something like a pair of glasses is $10 worth.

There can be several such things that can be considered as tokens. Now, these tokens can be divided into two categories: Fungible and Non-Fungible. You must be aware of the concept of fungible tokens that can be exchanged for something. Let’s now learn what Non-Fungible Tokens are.

What Are Non-Fungible Tokens?

If we dive into the cryptocurrency market, you will see that the most prominent tokens are fungible. For instance, you can exchange a Bitcoin for another Bitcoin without affecting its price. On the other hand, Non-Fungible Tokens are the ones that don’t hold this property of being exchangeable. Each of them has its own value, like your car and watch has its own.

In simple words, fungible tokens can be replaced by something identical to it, while Non-Fungible Tokens can’t be. Another difference between the two is divisibility. Like you can divide a Bitcoin into two parts, you can’t split a non-fungible token due to its uniqueness.

Where Did The Concept Of Non-Fungible Tokens Arise?

Many people still don’t know how Non-Fungible Tokens came into the market. If you are one of them, then it is time to get aware of this factor. Non-Fungible Tokens’ concept came into notice when a blockchain-based platform, CryptoKitties, made $12 million worth of transactions of virtual kittens. As each cat has its own features and traits, it was sold and bought at different prices.

Therefore, these kittens followed with the two essential qualities of Non-Fungible Tokens:

  • One kitten can’t get exchanged with another one as their price differs.
  • One kitten can’t get divided into two or more parts.

And all these transactions took place in Ethereum. After CryptoKitten came into the limelight, several gaming platforms seem to opt for this method of transaction.

What Is The Future Of Non-Fungible Tokens?

Non-Fungible Tokens or NFTs hold a significant market in the gaming industry. Plus, more and more gaming platforms are now incorporating cryptocurrencies, giving more space for the use of NFTs. Players can make in-game purchases conveniently with the help of these NFTs, just like the kittens were sold on CrytoKitten. For example, buying and selling game skins, armours, and other similar assets will become even more accessible. But this isn’t the only use case of NFTs. With their advancements, they indeed will find a place of their own in the world.

We hope all this information will make the Non-Fungible Token’s concept clear to you. So now you can see how you can benefit from them and use them wherever possible.