Difference between fungible and non-fungible tokens
There is probably almost no one within the Web3 world who would have never heard about “non-fungible tokens”, aka NFTs.
The NFT Hype has captured the crypto market in 2021 and has shown an outstanding growth.
Some NFT pieces were sold on the market for more than a million dollars – in fact, some of the prices are in the tens of millions! The most famous NFT Connections include: Beeple, Everydays (sold for $69.3 million), Julian Assange and Pak, Clock (sold for $52.7 million), and the infamous Bored Ape Yacht Club NFTs with a current market cap of $ 1,985,143,079 and a sales price of over $400,000.
In this article, we will dive deep in the definitions, use cases and differences between these two assets.
What is a fungible token?
All the cryptocurrencies we know (Bitcoin, but also ETH, DOGE, AVALANCHE and so on) are examples of fungible tokens. Together with stablecoins such as USDT, BUSD or Fiat money such as the Dollar and Euro and even gold, they are called fungible assets.
Fungible tokens can be divided and exchanged for another asset of the same kind and therefore they are not unique.
These assets are made in a way where each fragment of the token is equal to the others and interchangeable with other assets of the same value.
This forms the main difference between NFTs and cryptocurrencies.
Think of the difference like this:
If I have a $100 banknote, I can split it into two $50s and the total value will still be $100. I can also split it into two $25 and one $50 and exchange them with you for a $100 banknote. In any case, I have $100. The same will apply to the cryptocurrencies too, including BTC, ETH, SOL and so on.
In the same way, I can use my 20 USD to buy a small fraction of 1 ETH. My 20 USD will be worth 0.012965 of one ETH and the same reasoning would work for BTC and all the other currencies as well as Fiat Money.
What is a non-fungible token?
Meanwhile, NFTs are non-fungible, which means that an NFT cannot be exchanged for another or a fraction of another because of their uniqueness. This uniqueness is also the reason why NFTs can be “authentic” and have unique ownership. While a fungible token can be owned by literally anyone, a NFT will have one specific owner. We will explain how this works technically on blockchain later in the article.
With non-fungible tokens, it is not possible to split them into components and automatically exchange these for something of the same value. You cannot simply swap your Ape NFT for a Beeple or Everydays with the same value. You will instead need to hand over and take over ownership of the token.
Again, you cannot divide your NFT into fractions to buy a fraction of another NFT.
When traded, non-fungible tokens will be exchanged for something that is totally different and separate from its original form.
A non-fungible token does not have to be a digital piece of art. Anything with an ownership is defined as non-fungible, including your university degree, any ticket on your name as well as any property you own are all considered non-fungible assets.
How does ownership work for NFTs and how is it different from other fungible crypto assets?
Ownership is the main and most important difference between regular crypto assets and NFTs.
NFTs are stored on the blockchain just like fungible assets, but the difference is the account associated with them. This difference between fungible token ownership and NFT ownership can be simply illustrated as follows: When you have a Dollar, it does not matter which specific one you have – you just have one of the millions of the same dollar banknotes. However, with NFTs, you have ownership of the one specific asset which is stored on the blockchain.
Furthermore, each NFT is stored on a public and transparent blockchain. Therefore, NFTs are decentralized applications which can be traced and the authenticity of it can be verified while the transparency of the owner remains authentic.
Although both fungible and non-fungible tokens are stored on the blockchain, these two will have different standards and functions in terms of their storage on the chain. In other words, the operation of the smart contracts connected to these assets will differ between fungible and non-fungible tokens.
Where and how are non-fungible tokens used?
Besides being used as digital and physical collectables, NFT use cases in the gaming world are increasing enormously. NFTs are nowadays widely used for blockchain gaming applications. These NFTs can be upgraded, transformed, traded or staked in the game to create income for the player and can be transferred or sold between players in the game too.
NFTs can also be used as utility tokens by acting as an access ticket or card to a certain platform or gaming projects, which helps you join the initial coin or NFT offerings or ecosystems in the Metaverse.
Along with decentralized marketplaces, real life companies are using NFTs for rewarding their customers with loyalty points or other rewards. Companies issue NFTs that can be redeemed to receive discounts or special offers.
Let's get a little technical. Fungible and non-fungible tokens will also differ in terms of the standards they rely on within the chain. What are these standards and their differences?
What are ERC20 standards (Tokens)?
ERC-20 is a protocol on the Ethereum blockchain which carries a set of rules that determines how to share, exchange or transfer new tokens to a crypto wallet. Fungible tokens rely on this protocol.
ERC-20 has a set of rules that require certain qualities of a token, such as Token Name, Symbol, Decimal, Total Supply, Balance, transfer, transfer from, approval and allowance.
What are ERC721 standards (Tokens)?
Non-fungible tokens rely on ERC721 standards and are known as ERC721 tokens on the chain. Each NFT token is connected to a different owner, which makes them unique. So, when several tokens are created within a single smart contract, each of them holds a different value.
ERC721 also has a set of rules that require certain qualities of a token. Such as, how ownership is decided, how tokens are created, how tokens are transferred and how tokens are burned.
Although the Ethereum network is known as the main distributed ledger technology, some developers use other DLTs (Distributed Ledger Technologies) which can provide other qualities. The reason for this recent search stems from the high transfer fees and some faults in the smart contracts that have been identified on the ETH network.
Hedera is an example of these new public DLTs.
Hedera provides very fast transfer capability when transferring tokens and non-fungible tokens can be minted with a discount of over 90%. It also requires no waiting time for block confirmations.
The future of non-fungible assets is bright and the potential areas of use of these assets are increasing day by day.
Their popularity is now beyond that of in-game assets and digital art. Especially their implementation in the real world companies and properties will make these digital items interesting for even larger crowds, and they will help businesses create new ways to reach out to their customers. Thus, the popularity and the potential uses of these assets will increase even more in the future.