From Beginner to Expert and for Anybody In-between
Written By Garrett Mckeown, Founder of Market Watch and Freelance Crypto Journalist
So Much to See
There is a lot to learn when it comes to NFTs and the tokenization of fungibility online. The implications are large and potentially broad enough to touch everyone’s daily life in one way or another, but what it all means depends on you – are you an investor, an artist, a developer, a consumer, or a professional who’s industry is changing due to NFTs? Learn what an NFT is and how they are changing culture – and the global economy.
Let’s start with the basics.
What is an NFT?
An NFT is a “Non Fungible Token.” In the simplest terms NFTs represent digital uniqueness – or the ability to have a verifiably one of a kind digital representation of real goods and services. Think… original digital Mona Lisa secured by the strength of the blockchain.
Non Fungible? Token?
Fungibility is a descriptive property by which all matter can be separated into two groups – fungible and non fungible. In most cases Fungible means identical to the others, and in financial terms Fungibility is the ability to swap two instruments of the same value.
The fungibility of a trade is determined by various factors of the trade and there is always an agreed upon fungibility in every fair trade.
Although fungibility has always played a role in economics the properties of the blockchain combined with recent advancements such as smart contracts provided a new digital asset (token) that can be coded to be fungible, non fungible, or to have mixed qualities – properties dependent simply on code.
100% Unique Asset (Non Fungible – NFT)
The immutable properties of a distributed and cryptographically linked chain (blockchain) establish the digital environment necessary to facilitate the existence of a unique digital asset. Data is stored in a specific address on chain which can not be falsely manipulated. This address is the identifier needed to make something a unique and immutable asset. Bitcoins are NFTs and so are Ether Tokens. Ethereum added functionality to their NFTs by coding them with smart contracts.
A 100% non fungible token is completely unique – having at least one unique feature that can never be duplicated or modified. Although tradeable, an NFT is not swappable identically 1:1 as there can only be one unique copy.
100% Identical Asset (Fungible – Privacy Coin)
On the other end of the spectrum are 100% fungible tokens which provide privacy and can be traded 1:1 with with no history of the trade and no way to know which token is which after the trade. This represents a 100% fungible trade or 100% fungibility. Privacy coins like Monero claim to be fungible. Is Monero Fungible?
In reality no asset is 100% fungible or 100% non fungible and every asset varies in fungibility, thus there is a sliding scale to how fungible a token or other financial instrument is or isn’t. NFTs are as secure as the chain they reside on. Privacy coins are as fungible as the code that makes the chain. Even two atoms of gold have a different position in space. At some point everything is unique but everything can be duplicated. Conscience may be the last non fungible entity left, whos sanctity is already under attack by technology giants like Microsoft with patents in place to turn every living human brain into the same collective conscience artificial intelligence effectively changing the mind from being unique, individual, or non fungible to an identical brain to all the others, the same, or fungible.
Shifting Scale of Fungibility
Varying levels of fungibility are decided upon by the parties in a trade. The variables which determine the terms of the deal will ultimately include fungibility requirements. These requirements, while may not be explicitly stated or verbally expressed, always exist in every deal. Imagine the fact that over 99% of trades are made in the entire economy without either party knowing the definition of fungible.
Variables That Move the Scale
By understanding fungibility and the variables which determine it, you will have more control over the fungibility requirements necessary to trade and will have a trade advantage over basically the entire population. Your goal as a trading party should be to recognize the desired fungibility of interested parties, and negotiate yourself an advantageous position. Because most investors don’t recognize fungibility specifically it is a wide area to gain trade advantage and walk away with a good deal.
If the fungibility of a trade can not be met, but the deal is still to go down – a party may offer something else of value to maintain the deal. For example if two people are trading cards but one does not have the same quality then another card of object of value may be added to the deal.
The trading parties have the most control over the fungibility of a deal. Outside variables effect their choice but ultimately the trading parties determine the terms of the deal. Fungibility is always a factor in any trade, and educated parties consider it in every trade.
Medium of Exchange
The currency that you choose to transact with affects the fungibility of the transaction. The more you know about the asset your are exchanging the more you can determine fungibility. With NFTs and the programming of money comes the ability to fine tune the fungibility of your currency, which leads us to our next variable.
The potential that comes with programming money is hard to realize but the surface has not yet been scratched.
Privacy and Security
If your identity, security, privacy, or reputation is at risk when trading you would require a higher level of assurance in the fungibility of your transaction. This can affect market size, trade fees, and more. Excessive fungibility requirements means a smaller market or more niche market to trade with.
The reputation of a coin or the parties in a trade affects the fungibility of the trade. A privacy coin with a standing history like Monero may be more trusted than a newer privacy coin and held as a requirement for trade. A family member or long time friend may not be held to the same standards when transferring funds between them due to your reputation with them as family.
History associated with an asset can affect it’s fungibility, as well as the history associated with the parties involved in the trade. The bitcoin in your wallet has a history leading all the way back to it’s inception block, a history that differs from the bitcoin in my wallet.
The platform you use to exchange changes the fungibility. Crypto exchanges have varying fees, in house tokens, K.Y.C requirements for trading, some take debit, ACH transfers, credit, crypto, etc… all these variables play a role in your trade. Even Walmart poses unique deals and restrictions on it’s customers, credit card platforms like visa do the same.
Governments can dictate trade regulations, fees, taxes, sanctions, embargos, seizures, searches, and more all by way of force and all of which affect the fungibility of your trades.
Use Cases for Non Fungible Tokens
NFT technology provides the ability to take physical items and uniquely represent them digitally, allowing the physical world the ability to tokenized and programmed. The merging of the physical and digital has already begun and NFT technology provides an enormous speculative environment where use cases gather millions of dollars in investments overnight. Some uses have been established while most have yet to be considered, invented, or brought to market.
NFTs are disrupting every industry, providing
- Digital Ownership over Property
- New Marketing Strategies and Systems
- Identification Services
- Original and Unique Media Creation
- Anti-Piracy and Online Theft Systems
- Digital Passes/Keys to Real or Digital Locks (Tickets, Coupons, etc)
- Security Systems
Avenues for Investment
Speculating on the future of digital fungibility offers multiple new investment vehicles and options. Opportunities for investment can, for the most part, be boiled down into two groups NFTs and NFT protocols. The NFT being the item and the protocol being the code/system/software that facilitates its use.
Basically any existing financial system or otherwise can be represented as an NFT and then programmed to offer new function, considering this reality – investment opportunities are vast. Research and an understanding of financial systems is your best bet to gaining the knowledge necessary to purchase the right NFTs or NFT protocols.
The simplest way to invest in NFTs is to buy and hold an NFT. An NFT can represent anything so this could be a piece of art, a song, a blockchain domain, or an identity.
An NFT is an item. Systems or protocols will be developed on blockchains to facilitate the use of NFTs. Protocols offering NFT services generally have tokens which can be used as speculative vessels to bet on the success of the platform. For example a social media site where the platform is the protocol and the user is the NFT, the posts are NFTs, the messages are NFTs etc. As an investor you can invest in NFT protocols generally by purchasing and holding the systems native token.
NFT protocols may change from token to token and offer different investments, but all protocols and NFTs exist on the chain they were deployed on. An NFT minted on the Ethereum network benefits Ethereum and an NFT minted on Binance Smart Chain benefits Binance. By holding ETH/BNB you invest in the blockchain and by proxy invest in every NFT minted on the chain.
Beeple sells NFT original art piece for $69 Million.
Budweiser buys NFT domain name Beer.eth for $100,000.
Visa buys CryptoPunk NFT avatar for $150,000.
It’s likely that everything you can see and everything you can’t will be represented digitally as an NFT. Protocols will be made to facilitate the use of these representations. We are lucky to be alive during this time as there is a lot of money to be made here. Hopefully this helped you understand more in depth what an NFT is and why it is.
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