ELI5 NFT – What are Non-fungible Tokens?

ELI5 NFT – What are Non-fungible Tokens?

Money is an abstract concept. Although most people link money to dollar bills, coins or Uncle Scrooge swimming in a pile of gold coins, the value of money is a much more complex subject than it looks on the surface.

The Federal Reserve and other central banks run highly sophisticated statistical models to determine how much money they should inject into the markets. Every dollar bill, every euro bill and every coin anywhere in the world must be accounted for, otherwise inflation would mercilessly destroy value. Every greenback has a serial number that maps back to some database at the Treasury.

Crypto Upgrade

When users upgrade from fiat money to cryptocurrencies, the first thing everyone notices is how crypto lacks a physical representation of money.

“Where are my Bitcoins?” is a frequently asked question. So is the surprised expression on their face once the user learns that their Bitcoins don’t really exist anywhere. The concept of an unspent transaction output doesn’t seem to captivate new users on first sight.

But there’s a new and exciting development in cryptocurrencies that promises to make the technology a lot like fiat money: non-fungible tokens.

NFT – Non Fungible Tokens

What if you could mint cryptocurrency tokens that have a unique serial number?

The token, then, wouldn’t just be an unspent output sitting in a transaction on a blockchain. It’d be a unique object you could refer to by its serial number, just like a dollar or euro bill.

That’s basically what NFT’s, or non-fungible tokens, are all about : uniquely identified cryptocurrency tokens.

How is this an advantage, though? Isn’t cryptocurrency’s flexibility one of its greatest strengths? True! But there’s lots of cool applications for NFT’s.

“Virtual Dollar Bills”

When each token is unique, you can trade it just like you with do cash money. Special hardware tokens can be loaded up with impossible to tamper secret keys. The bearer of the physical token owns the value controlled by those private keys, regardless of actually knowing the private key or not.

This can be implemented using secure hardware. A trusted hardware platform would store a non-fungible token in it, then it can be used at a supermarket or any other point of sale just like cash money. Except it’s impossible to counterfeit, it’s 100% secure and decentralized. The customer and the store trade value instantly, without a bank involved.

Collectibles

Since each NFT is unique, it can also be used for collectibles.

A NFT could be uniquely linked to some physical collectible, like sports cards or other memorabilia, and its bearer would be the rightful owner of the represented good.

Non-fungible tokens can also be 100% virtual. Like in-game items or other digital goods. Being unique means you can represent specific digital assets, not just generic objects. A NFT could be used to represent some specific in-game real estate or asset, like a specific house, a weapon, an airplane and so forth.

With traditional cryptocurrency tokens you wouldn’t be able to specifically refer to an object just using a token. You’d need a separate database. With NFT’s, the information about which specific asset is being represented is stored in-token.

Counterfeit Protection

NFT’s can be used to uniquely identify rare or expensive items.

Since it’s impossible to clone or falsify a non-fungible token (it’s protected by the same strong cryptography as Bitcoin), the buyer would only trust an item to be legitimate if it’s accompanied by its NFT.

Counterfeit factories abroad can build real looking fake items, but they wouldn’t be able to access or clone a NFT to go with the item. At purchase time, the buyer would ask if the seller has an original NFT. The counterfeit seller would be unable to provide a legitimate token.

Conclusion

There are many other examples of uses for NFT’s. It’s an exciting new technology that promises to revolutionize online business, logistics, counterfeit control, premises access control and many other cool applications.

References

Wikipedia Entry

CoinTelegraph Introduction to NFT’s

The NFT Bible

What are NFT’s?

Binance Guide to NFT’s

Coindesk NFT Archives

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