NFTs (Non-Fungible Tokens) exploded to a $41 billion USD market in 2021, and despite the downturn of the cryptocurrency markets in 2022, NFTs continue to be red-hot, as investors and fans alike continue to buy the hottest collections.
But what are NFTs? How do they work, and what makes them special? From what they are to how they function, our goal is to have the NFT explained in just a matter of minutes, and also inform the reader the steps into getting an NFT.
What is Fungibility?
NFTs stand for “Non-Fungible Tokens.” But what exactly is fungibility?
“Fungibility refers to an asset’s ability to be exchanged with a similar asset without sacrificing it’s value. Fungibility also defines an asset’s characteristics, such as divisibility and value.
For example, a $20 US dollar bill is identical to another $20 US dollar bill in terms of value. When you borrow a $20 US dollar bill from a friend, there is no expectation to return the same $20 bill when you eventually repay your friend. You can repay with a different $20 bill, or with two $10 bills, four $5 bills, and so on.
This principle generally applies across all currencies (e.g. USD, EUR, GBP, RMB, etc…). Currencies are fungible, and currency notes can be exchanged without sacrificing its value.
Non-fungibility is the opposite of this. With items which are non-fungible, you cannot exchange for a similar asset without sacrificing its value. Every asset is unique.
For example, your ask your friend to watch your one-year old German Shephard while you go on a three-day trip. Upon your return, you would expect your friend to return the same one-year old German Shephard back to you (instead of another, one-year old German Shephard). Your German Shephard is non-fungible, and is one of one only.
NFT Explained – Building on the Definition of Non-Fungibility
The previous examples set up the foundation for having the NFT explained, but without any references to cryptocurrencies or blockchain. Here, we take similar examples as before, but this time attempt to have the NFT explained via blockchain and cryptocurrency terminologies.
Instead of US dollars, we transition to cryptocurrencies (e.g. Bitcoin, Ether). Instead of German Shephards, we transition to CryptoPunks and the Bored Ape Yacht Club.
In general, like the US dollar, all cryptocurrencies are fungible. When you lend one Bitcoin to a friend, you do not need that friend to repay you with the exact same Bitcoin. The same goes for Ether, Doge, and all of the other popular cryptocurrencies available today.
On the other hand, NFTs can be thought of as a digital representation of the German Shephard. Instead of visually seeing the animal in real life, NFTs exist in the digital world, on the blockchain.
In fact, NFTs can represent anything in the real world or the digital world. From German Shephards to digital art, to physical real estate, NFTs are simply digital token representations of a real or digital asset.
Imagine that, instead of lending a friend your actual German Shephard, you lend them a digital art drawing of a German Shephard. This art drawing is represented as an NFT on the blockchain. Similar to lending your friend a piece of art in the real world, you would expect your friend to return the exact same NFT back to you once they have finished borrowing the art piece. No substitutions (e.g. art drawings of other German Shephards) are possible.
These days, CryptoPunks and the Bored Ape Yacht Club are all the rage with NFTs. CryptoPunks and Bored Apes are digital art collections of which there are 10,000 pieces of art for each collection. Therefore, instead of having the NFT explained with German Shephards, we can replace them with a CryptoPunk or a Bored Ape. If the owner of CryptoPunk #1234 were to lend out their NFT, the owner would expect the return of CryptoPunk #1234, and not CryptoPunk #2345 once the borrowing has been completed.
Each NFT, each asset, each CryptoPunk and Bored Ape differs from the other.
Because of the uniqueness of each NFT, individual NFTs can differ in value and attractiveness to buyers. Similar to the fact that not all of Picasso’s paintings have the same value, not all NFTs from the same collection will have the same value.
Getting Your First NFT
Now that we have the NFT explained, users may be curious as to how to get their first NFT. For the most beginner of beginners, it is best to start with the largest NFT marketplace on the planet – OpenSea. OpenSea is a trusted platform where the majority of the world’s most popular collections can be found. Users who have never purchased cryptocurrencies before will also need to learn how to do so – by setting up a Metamask wallet and linking the wallet to OpenSea.
In a future article, we will link this process so that those who now wish to buy their first NFT after having the NFT explained, can do so easily, comfortably, and with confidence.
Until then, browse the collections available on OpenSea, and stay tuned for other introductions to the world of cryptocurrency and NFTs!