What are Tokens in Blockchain world? What are Fungible Tokens & Non Fungible Tokens (NFTs)?
Still can't grasp the basic concept of Fungible and Non Fungible Tokens (NFTs)? If yes, then you might want to read this blog once.
You probably would have heard about the word "Token" or "NFT (Non-Fungible Token)" when you hear about blockchain. You may have also heard about cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), etc., associated with "tokens", "crypto tokens" or somewhat similar. But have you ever wondered what tokens actually mean in the blockchain world? If not, then you are at the right blog to learn about these terms in layman.
Tokens in the Blockchain world
In the Blockchain environment, in very simple words, any asset that is digitally transferrable between two people is called a token.
If I had to give an example from the real world, when you transfer $100 into your friend's bank account, or you purchase some land property that belonged to someone else, or you purchase a gold necklace from a jeweler, etc.... all of these are examples of transfer of assets between two people. Just like that, in the blockchain world, when BTC or ETH cryptocurrencies are being sent from one person to another, a transfer of assets is taking place between two people, and BTC & ETH are nothing but tokens, fungible ones. Oh, that leads us to what are "Fungible Tokens" ?
Fungible Tokens
The word Fungible itself means "replaceable by another identical item (of a product or commodity); mutually interchangeable" but where does this definition point to? In simpler words, suppose you have a $20 banknote, somebody else can also have a $20 banknote, forget somebody else, you may also have five $20 banknotes, which means there are many $20 notes which are identical, mutually interchangeable i.e, you can give someone $20 note and still have another $20 note in your pocket. The same example can be set to assets like gold, silver etc. The same goes for crypto coins like BTC & ETH; You can send someone 1 ETH and still have 1 ETH in your wallet, i.e., ETH is mutually interchangeable, which makes such crypto coins(tokens) fungible and that's why all the crypto coins actually are Fungible Tokens.
Conclusively, what fungible tokens mean is the tokens that are non-unique, divisible, interchangeable & have a store of value.
These fungible tokens each can be native to their blockchain respectively. Just like the US Dollar (USD) is issued by the US government in a US payment ecosystem; Indian Rupee (INR) is by the Indian government in an Indian payment ecosystem, the same goes for cryptocurrencies, Bitcoin (BTC) is issued in a specific volume native to the Bitcoin blockchain; Ethereum (ETH) is issued in a specific volume over the Ethereum blockchain.
These fungible tokens are usually used for payments.
Moreover, the blockchain doesn't limit its capability to fungible tokens, it has also non-fungible solutions for various applications, which we discuss next.
But before that, if you are enjoying it so far, please share this blog with your friends who are still trying to figure out these terms but end up getting stuck in technical language every time, will highly appreciate that😊. Okay then, off to the next topic:
Non Fungible Tokens (NFTs)
Now if you are hearing about cryptocurrencies in social media often, it wouldn't be possible that you haven't heard about NFTs. Yes, the commonly known "digital art" that gets valued in millions of dollars like Merge (US$91.8M), and Cryptopunk(US$23.7M). But are NFTs capable of these funky arts only? Before knowing the capability of NFTs, let's first understand what NFTs are.
NFTs as the name itself suggests are not fungible and we already discussed what fungible means. So, NFTs are unique, indivisible and irreplaceable tokens that represent the ownership of a unique digital or a real-world asset. We can say NFTs represent intellectual property.
For example, Just like an artist or a label records a song and has a traditional copyright to that song which represents the artist's or the label's ownership of that song; Another example could be owning land traditionally. Both of these properties are non-fungible properties, right? A land property you own can't be owned by some other person simultaneously. Similarly, some other artist or label can't owned by some other person or label at the same time.
All of the above are traditional examples where ownership would be established on paper and digitally in a centralized database prone to hackers, corruption and mutability. NFTs will do the same for you but in a more trusted and secure way over a decentralized network. The artist or the label can tokenize the recorded song into an NFT. Similarly, a land owner can tokenize the ownership into NFT.
An NFT includes a digital signature that represents the current ownership of the property that was tokenized into an NFT.
Now when we earlier spoke about non-fungible property being owned by only one person in any instance doesn't necessarily mean that once a property was tokenized into an NFT, it has to be forever yours. The ownership can be transferred just like when you sell the land, somebody else buys and owns the land. The same goes for NFTs as well, so if you tokenize a property, you can sell it and transfer the ownership as well. If you tokenize a property, you are the first owner of that property. After selling the property to the second owner, the second owner can also later sell to the third owner and so on that means ownership of an NFT can be transferred.
On top of all this, royalty can also be implemented in NFT, if you want you can implement an X% of royalty on your tokenized NFT which means whenever a transaction is made i.e., whenever the ownership of NFTs is transferred among multiple people, the cost at which ownership is transferred X% of that cost will go the crypto wallet of the first owner. For example, the music that you tokenized with a royalty of 5%, you put for sale and it gets sold for 0.15ETH, for the first time when it is sold by you, you won't get that 5% amount of the selling price but after it's sold for the first time, when it gets sold for another time at 0.30ETH, you will get 0.015ETH in your crypto wallet. And then when it gets sold again for 0.84ETH, you will get 0.042ETH in your crypto wallet and so on. So just like this, a specific percentage of royalty has been implemented on an NFT you tokenized and you get that percentage on the selling price in your crypto wallet every time the NFT gets resold.
NFTs can be anything, digital art, a physical painting or an AI algorithm, anything. Right now, NFTs are being broadly used for trading and owning digital collectibles. But the applications of NFTs are far more than that, some of which are: real estate, fractional investments in real physical assets, insurance buying, loan agreements & many more; and these applications are already being implemented out there in the real world, we may discuss about these applications in a separate blog.
Key Insights
By now, you should have already got the idea of what tokens, fungible tokens and NFTs and now you should be able to make them understand to others as well in layman's terms. Just for your reference again, following the insights from this post:-
Token: Any asset that is digitally transferrable between two people.
Fungibility: The ability of being: replaceable by another identical item (of the same product or commodity); being mutually interchangeable.
Fungible tokens: The tokens that are non-unique, divisible, interchangeable & have a store of value.
Cryptocurrencies are fungible tokens: Cryptocurrencies, such as Bitcoin(BTC), Ethereum(ETH) etc., basically are just fungible tokens.
Non-fungible tokens (NFTs): The tokens that are unique, indivisible and irreplaceable tokens that represent the ownership of a unique digital or a real-world asset.
Digital signature on NFT: An NFT includes a digital signature that represents the current ownership of the property that was tokenized into an NFT.
The first owner or original owner or creator of an NFT: If you tokenize a property, you are the first owner of that property.
Ownership transferability of an NFT: Ownership of an NFT can be transferred among multiple people.
NFT Royalty: A pre-defined percentage of the sale price of an NFT is paid to the first owner each time the NFT gets resold.
NFTs can be anything: Digital arts, physical paintings, music, cars, algorithms, anything can be tokenized into an NFT.
Applications of NFTs: Real estate, fractional investments in real physical assets, insurance buying, loan agreements and many more.