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What is a non-fungible token?

3 July 2019

temps de lecture 3 minutes

avatar-auteurManuel Valente

Can a digital asset be unique, indivisible and valuable? Cryptokitties, Etheremon or Decentraland are cryptoassets projects based on the concept of non-fungible tokens. Coinhouse has a look at this new concept to understand its uses, the utility of these tokens and their possible future applications.

Fungibility: why, how?

Fungibility is defined as an asset that can be exchanged for another of the same type and when no distinction can be made between the two: a 10 euros note can be exchanged for any other 10 euros note because they have the same value and are therefore fungible.

In the world of cryptoassets, bitcoins are also considered as fungible. However, it is possible thanks to blockchain explorers to know which addresses have had access to which bitcoin in the past. ”Tainted bitcoins” are for example defined as those units of bitcoin that are known to have been used in transactions involving illegal activities.

An asset really fungible : Monero

On the other hand, Monero is a fungible cryptocurrency because it is very complicated to track a monero transaction by knowing through which addresses the currency units have passed. We are very close to the idea of ”digital cash or ticket”. Ideally, a currency should be fungible because the value units should be tradable without friction. However, truly fungible cryptocurrencies, such as Monero, worry regulators who point possible usages for money laundering or terrorist financing.

Because if you say fungible, you mean anonymous. We quickly come across similar problems to the use of banknotes, increasingly being restricted by governments.

The principle of the non-fungible token

Now, let’s look at the opposite principle: the concept of non-fungible tokens (NFTs) was invented by Dieter Shirley and proposed in September 2017. It is defined under the ERC721 standard.

Unlike ERC20 tokens, which are often used in token emissions during ICOs and are fungible like bitcoins, ERC721 tokens have properties that make them unique and therefore non-fungible digital assets. Two NFTs from the same emission do not have the same attributes and are not equal. The analogy can be made with a collector’s item in real life: it is unique and cannot be reproduced or exchanged otherwise it will lose its value.

The Cryptokitties phenomenon

From December 2017, NFTs become popular thanks to Cryptokitties. The cryptokitties are digital kittens, each of which is represented by a unique and non-replicable token. A new token is produced every 15 minutes, and the notion of reproduction allows the characteristics to be passed from one generation to the next. At the pic of their activity, on December 5, 2017, cryptokitties transactions amounted to 140,000 out of a total of 700,000 ethereum transactions, about 20% of the total traffic.

The most expensive cryptokitty has been sold for 600 ETH, or 172,625 USD at the time of sale.

The non-fungible.com site lists all the non-fungible tokens of the Ethereum blockchain and allows you to track the exchanges that take place between users. To date, the project that captures the most value is Decentraland.

What value proposition?

If people are willing to pay fo non-fungible tokens, it is because the concept of a single asset on a blockchain is attractive. For Decentraland, each token represents a property right on a 10 by 10 meter parcel of land in a world that will be accessible in virtual reality.

The first adopters of this range of assets speculate on the scarcity of the token as well as its unique attributes. For example, a LAND token corresponding to a plot of land well located in the “city centre” will be more valuable than another in a less popular area.

What future for non-fungible tokens?

One of the first obvious applications is video games, including object management in online games such as World of Warcraft, League of Legends, etc. Users currently “hold” objects that have real value in the game but remain virtual on the company’s servers. If the company closes its doors, the objects “disappear”. With NFTs, objects will continue to exist on the Ethereum blockchain. Since the blockchain is public, it is even possible to create “intergame” objects.

Another application is the “tokenisation” of physical assets, which can now have a digital counterpart on a public blockchain. For example, it would be easy to tokenise a car by creating a token which will replace the registration document.

Non-fungible tokens are a new concept that has quickly gained momentum. While the cryptokitties phenomenon may seem just as a beginning lokking at the amounts exchanged, it helps to understand a new application of the blockchain which can, in the long run, play an important part in the way we interact with our digital objects and assets.

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