What is NFT or nonfungible token?
Before examining what a nonfungible token is, it’s important to explore the concept of fungibility. A necessary characteristic of all forms of money, fungibility is the ability of a currency to be interchangeable, which means a dollar equals a dollar equals a dollar.
The same dollar that can be used to pay the fruit vendor is the same dollar the fruit vendor can use to pay the baker. There is no uniqueness to anyone’s dollar. That’s what makes it a fungible asset. This is important because, without fungibility, trade would be impossible.
Keeping this in mind, the opposite property is nonfungibility. Compared to currency, which is interchangeable, nonfungible tokens are unique and cannot be replicated. An analogous example is Bitcoin (BTC). If users were able to copy their Bitcoin over and over again, its value would be rendered meaningless.
Here’s a real-world example. In the real world, there is only one Mona Lisa. There are many copies, but there is only one real version, and it’s sitting in the Louvre Museum in Paris, France. Experts have undertaken a lengthy and painstaking verification process to ensure that the Mona Lisa on display is the real one.
But there are two issues in the Mona Lisa example:
- Many users have a copy of the Mona Lisa in their homes. To make matters worse, a handful of them (for whatever reason) might claim that they, themselves, own the original version.
- This issue is compounded by an old rumor that’s been circulating: The Mona Lisa on display is a fake.
On the contrary, in terms of an NFT, users can consider the Mona Lisa in digital format. Algorithmically, there can be only one copy. There is no other copy. The original (and its owner) are easily and instantaneously verifiable with a unique identifier on the blockchain. Reliance on a third party for verification is no longer necessary, cutting down on costs across time and money.
It’s also much easier to verify proof of authenticity and ownership on the blockchain than it is in real life. So, why do real-world artworks, which can be copied and are difficult to verify, carry so much intrinsic value compared to NFTs?