A guide to Non-Fungible Tokens (NFTs), 2023 - Flipbook - Page 5
What are NFTs?
Non-fungible tokens are a digital representation of ownership recorded
on a blockchain.
A blockchain is a decentralised database, and is best understood as a public,
digital ledger of transactions.
Blockchains use distributed ledger technology, which means the ledger
process is carried out autonomously and cannot be readily interfered with, so
transactions are indelible and easily verifiable.
Blockchains were originally used for currency-based transactions, using
cryptocurrencies, but have now expanded to incorporate new kinds of
cryptoasset, such as NFTs.
To understand what an NFT is, the terminology can be broken down as follows:
•
Non-fungible: non-fungible means non-interchangeable, so the asset
cannot be swapped or exchanged for another asset of the same kind.
For example, fiat currency is a fungible asset, as one coin or note can
be swapped for another of the same kind and value. In contrast, real
estate is a non-fungible asset, as clearly one house cannot be swapped
for another of the same value given that each possesses unique
characteristics which have significance above and beyond monetary value.
•
Token: a token is a piece of code forming part of a unit, or “block”, on the
blockchain.
There are a number of blockchains that support NFT technology, the most
well-known being Ethereum. The vast majority of NFTs are therefore based
on the Ethereum blockchain, although this may well change in the future given
the developing range of rival blockchains such as Solana, Cardano, Tezos and
Polkadot. On the Ethereum blockchain, fungible and non-fungible tokens are
distinguished by the use of different smart contract standards underlying each
type of token.
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