Published on:

May 5, 2021
A Simple and Comprehensive Guide on Non-Fungible Tokens
NFT

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Whether it is the rise of fintech or e-commerce, digitalization has played its part in improving accessibility for assets and enabling the frictionless transfer of value over the Internet. However, the current system still lacks credibility.

Any user buying a branded item, on the Internet or offline, is always concerned about its origin. For instance, buying a diamond from a nearby shop, a large retail store, or even from the Internet; the end customer can never be sure about its authenticity. More importantly, it is extremely difficult to establish the quality of the diamonds and then justify the cost by considering the factors such as the origin of the diamonds. When the diamond turns into jewelry and gets historic value, the need for credibility or origin increases exponentially.

Connecting this with other real-world assets such as art or collectibles makes it even more worthwhile to pursue the need for authenticity.

Enter NFTs

If you wanted to buy Mona Lisa, you can never be sure if it is the same Mona Lisa as painted by Leonardo da Vinci. There is a high probability of the original Mona Lisa being replaced with a fake. Even if it goes through extensive verifications, no one except Leonardo da Vinci can provide the much-needed credibility for the painting being original.

A major reason behind this is the fact that the painting has been bought and sold numerous times and it has been impossible to track the original one. Even certain attributes of the painting have changed with time and there is no way of establishing the authenticity of the original painting.

What if, there existed a digital record where Leonardo da Vinci himself provided the necessary description or characteristics to identify the original painting?

A digital record, where the ownership of the painting can be traced back to its origin, establishing trust among the buyers and creating a transparent environment for the valuation of the painting. Moreover, this digital record could be referred by any of the buyers to establish the authenticity of the painting by verifying the defined characteristics.

This is what Non-fungible tokens do.

The first step for understanding NFTs is realizing the fact that NFT is a token, representing an asset that is Non-Fungible. There are two concepts here – the first is tokenization on Blockchain and the second is an asset with the property of non-fungibility.

Fungible VS Non-Fungible Tokens

At a broad level, assets are of two types; fungible and non-fungible.

Fungible assets are those that can be interchanged because they possess similar properties. For example, if you own one bitcoin, it hardly matters which bitcoin it is because every bitcoin has the same value. Similarly, if you consider a real-world asset like the tire of your car, all 4 tires are the same. If you change the position of those tires or replace one of them with a new tire, it will make no difference.

Another thing to consider here is that every tire, of a particular size and company, is going to have the same value which simplifies the process of exchanging the