Non-fungible Tokens

NFT’s Explained 

Digital items that are scarce and considered unique are called non-fungible tokens (NFTs). Unlike bitcoin, or commodities, NFT’s are not fungible – meaning one unit is not the same as another unit. NFTs can be thought of as crypto-collectibles that are not easily exchanged for one another because no two NFTs are alike. While most people associate NFT’s with digital art work, video game rewards, ownership records of physical assets and intellectual property are also part of the “NFT” segment.

NFT’s open up new possibilities for owning and transacting unique assets. Provenance, payments and sales are recorded on-chain, allowing any market participant to see past transactions and also understand the ownership structure of the NFT. New schemes for royalties, transaction fees and fractionalized ownership are all made possible with smart contract-based NFT’s.

What to Know

NFTs contain information recorded into their smart contracts that identify them as unique from one another. Digital ownership of NFTs are typically based on the ERC721, or ERC1155 standard on Ethereum, or other non-Ethereum based blockchains such as Dapper Labs “Flow”. ERC721 set the initial framework for developers to create NFT’s. ERC1155 took it a step further and added a framework for NFT classes. For example, general admission tickets to a concert at a specific venue might be fungible with one another, but the entire class of general admission tickets for that concert is not fungible with another date, band, or location.

Why it Matters

Being represented on a standardized public blockchain allows for NFTs interoperability, which means they can be owned and transferred simply and efficiently. In addition, programmable chains with smart contract scripting allow for innovative ownership structures, fractionalization and ongoing monetization by the initial, or subsequent owners of the NFT.  

NFT’s have received a lot of attention in the digitally native art/collectibles space, but they also hold promise in the traditional asset/finance space. For example, mortgage loans and the securities created from bundling them are one of the largest markets in the world. NFT’s provide a way to take off-chain properties, loans or mortgage-backed securities and create NFT’s that would receive all the benefits provided by on-chain representation, including; ease of on-chain trading/settlement, innovative ownership structures, smoothed-out risk pooling and transparency of payment history and performance data.