Imagine this: You pull up to the drive-thru window of your favorite fast food restaurant. Your friend occupies the passenger seat.
An employee hands over your order: two bags of french fries. You ask your friend which bag they want.
“I don’t care,” they reply. “They’re the same.”
Fungibility vs. Nonfungibility
French fries from the same fast food joint can be considered fungible. Whichever bag you choose, you’ll get crispy bites of salty, deep-fried goodness. Like other fungible items, french fries are also divisible, meaning you can split a fry in half and share it with a friend, each half having the same great taste. Ok, maybe this analogy is a bit of stretch in explaining fungibility, but you get the idea.
Fungibility is the ability of an identical good or asset to be interchanged with another identical good or asset with the same value. One $20 bill exchanged for another (real) $20 bill will have the same value. The dollar can also be divided into pennies, nickels, dimes and quarters, all having the same divisible value and freely interchangeable for dollars or other denominations.
The same is also true of many digital game assets. Buy a skin or a weapon in Apex Legends and your friend can buy the exact same one.
Nonfungible items have the opposite characteristics, including being unique, irreplaceable, and non-interchangeable. You and your friend might each have a pet dog, but you probably wouldn’t agree to exchange them. Your dogs each have unique traits and personalities that make them special to you. By contrast, two identical puppies from the same litter might be fungible (before you get to know them).
In online gaming, nonfungible items are an exciting development. They have unique qualities that can drive give them value. And when they’re stored on a blockchain—a public database of digital information—players enjoy true ownership of any items they earn, create, trade, or buy.
The Value of Digital Game Assets and Collectibles
Players who own items can then sell or trade those items with other players—something that can’t be done when the game owns players’ assets. What’s more, if the game shuts down, you still own your items. The game’s developers can’t take them away from you.
However, if the game shuts down, your items might lose value. If you care about their value because you paid money for them or were hoping to sell them, this development will be upsetting.
Still, because the items are tied to a blockchain and owned by the players, the possibility exists that a group of developers, recognizing that lots of people have assets from a game that’s no longer being played, could develop a new game that allows the use of those existing assets. Anyone who played the old game would have a built-in incentive to play the new game if they care about their existing assets. The new developers would have a clear target market. But it’s also possible that not enough people will be interested in repurposing the old game’s assets and they’ll simply become valueless.
Outside of gaming, nonfungible items can have value as collectibles. These collectibles might have a use within a game (like Cryptokitties), or they might exist purely outside of games (like digital art). Other examples include digital playing cards, digital MLB bobbleheads, and baseball players, and unique tools, weapons, and characters within games.
Nonfungible Tokens (NFT’s) provide a method to record the ownership of indivisible and unique assets on a blockchain. Being “non-fungible” as noted earlier, means they are irreplaceable and non-interchangeable.
Due to their non-fungibility, in addition to digital collectibles, NFT’s can be used to represent digital proxies of a wide range of real-world assets such as a concert ticket, a rare bottle of wine, or even a piece of jewelry. For this article, we will focus on NFTs that represent rare digital collectibles and in-game items, although we will look at other use cases as well a little later.
A vast majority of all NFT’s are built on the Ethereum blockchain. Here’s how it breaks down:
Ethereum – An open source blockchain platform that enables smart contracts to run, enabling the creation of NFT’s and a multitude of other uses.
ERC-721 – A free, open standard that describes how to build non-fungible or unique tokens on the Ethereum blockchain. ERC-721 tokens are rare, one-of-a-kind digital collectibles.
Ether – The underlying token or crypto currency powering the Ethereum blockchain. You can trade U.S. dollars for ether using an exchange such as Coinbase. (Ether, by the way, is fungible, as are bitcoins and dollars. Although many would argue bitcoin and U.S. dollars can be both fungible and non-fungible in that the history (illegal use or origin) of either can taint their status as a fungible asset.
Along with the immutable trust and transparency created by blockchain, supply and demand are what give tokens their value. Uniqueness adds another layer of potential value. NFTs can’t be replicated or taken away by developers.
Understanding NFTs through CryptoKitties
For an example of an NFT, just take a look at Kitty Explorer.
What makes these items nonfungible when they look identical and seem to have all the same characteristics?
In this case, it’s their descriptions, which are randomly generated by the game’s code when the cat is first born through the CryptoKitty breeding process. When you click on kitty #4, you get this:
“Hey, cutie! My name’s Founder, Cat #4. I once peed on Princess Diana’s cat. They had it coming. I once got in a fight with a rooster and won. Our friendship will be gullible, gorgeous, and full of ice cream.”
And when you click on kitty #5, you get this:
“Hey, cutie! I’m Founder Cat #5. I’m often referred to as the Michael Scott of the group. I once dreamed of being a Spin Instructor. Now I can be found braiding people’s hair all day. I like your face.”
The differences between these two CryptoKitties are similar to how two plane tickets may appear to be identical at a quick glance, but closer inspection reveals that they have different destinations, seat assignments, and prices. A plane ticket is also issued to a specific person and cannot be used by someone else without circumventing airport security. Similarly, an NFT is the property of a specific person. That ownership can’t be changed without their permission (except by hacking and theft).
Besides CryptoKitties, other examples of NFTs and their platforms include
- LAND (digitally scarce land) in a metaverse called Decentraland
- Axie (digital pets) in Axie Infinity
- Rare digital art in SuperRare
- Mons (monsters) in Ethermon
- Breedable, collectible flowers in CryptoFlowers
- Event tickets in Cryptotickets
Scarcity and Indivisibility: Key Traits of NFTs
For a long time, we’ve thought of digital assets as being fungible and infinitely reproducible. Napster showed us just how true that is for digital music back in the late 1990s.
The ERC-721 standard allows for digital scarcity. Scarcity can increase an item’s value if that item is in demand. Demand + Scarcity = Profit Opportunity.
A blockchain’s record of ownership allows us to verify an item’s scarcity. Anyone can examine this public database of digital information using a blockchain explorer such as Etherscan. Here’s how.
At the top of the page at Etherscan.io, you’ll see a drop-down menu for tokens. Click it, then select “ERC-721 Top Tokens.” Find the token type you want to look up—say, CryptoKitties, LAND in Decentraland, or GODS in Gods Unchained—and click on it.
On the middle right side of the resulting page is a search bar. Click the magnifying glass icon, then enter the six- or seven-digit token number of a particular CryptoKitty and hit enter. You’ll then be able to see who currently owns it, as well as the chain of previous ownership and transactions.
You can’t buy half a CryptoKitty. NFTs cannot be divided. It’s just like if you owned a collectible Mustang; you wouldn’t want to own only the front half. That’s not even a thing. You either own the whole car, or you own none of it.
But if you had $20,000, you could give $10,000 to someone else because dollars are fungible and divisible. Fungible tokens are divisible, too, which is why you can buy 0.5 ETH or 0.003 ETH. You don’t have to buy 1.0 ETH.
But you can put multiple NFTs together. With at least two ERC-721 tokens, you can create a distinct type of NFT called a composable. Composables are based on the ERC-998 token. For example, your composable might be a digital house, and each room would be represented by one NFT. The ERC-998 standard would let you sell all the rooms as a single house instead of trying to unload each room separately.
Other NFT Projects and Uses
All told, there are hundreds of NFT projects are under development according to a recent conversation I had with Gauthier Zuppinger, founder of Nonfungible.com. You can see more than 80 of those projects at NonfungibleAlliance.org. And 0xcert, a team working to bring NFTs mainstream, has published overviews of 18 NFTs on Medium.
What other uses do NFTs have? Well, they can also be used for identity certification and authentication by tokenizing documents such as driver’s licenses or passports; for charity, donation, and fundraising; and for securing and transferring software licenses. Real estate and vehicles can also be tokenized to allow for more secure transactions and easier proof of ownership.
In addition to their practical and fun uses, by understanding how these tokens work, which ones are undervalued, and how to buy and sell them quickly at a profit, some people are even earning money from NFTs simply by flipping them.
Nonfungible tokens offer an exciting new opportunity in online gaming and collecting, allowing players to truly own the assets they create, earn, and purchase. NFTs also have practical purposes in everyday life for proving identity and ownership and conducting commerce.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies, or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.