Non-fungible tokens, or NFTs, have become quite a popular term over the past months with stories of people buying and selling them for millions of dollars. Yet, there is still confusion for many regarding what they are.
A fungible item refers to an item or good which can be replaced by an identical item – both in form and value. As an example, a R100 note can be exchanged with another R100 note which makes it fungible. An item that is non-fungible would thus refer to the opposite, which is an item that is unique and cannot be replaced such as the original Mona Lisa painting.
NFTs are effectively unique digital assets that can be bought or sold, yet have no tangible form. Currently, the most common forms of NFTs are digital art, music, and videos, but NFTs can be anything unique and digital that is also thought to hold value. There has even been an instance where the founder of Twitter sold a signed tweet as an NFT for $2.9 million. How NFTs work is that a non-fungible, digital file is taken and tokenized. This creates a certificate of ownership that can be bought or sold. These NFTs are then taken and recorded on a blockchain system, which is a decentralized and distributed ledger. NFTs are currently mainly part of the Ethereum blockchain, but many other cryptocurrencies have also started to add NFTs as a part of their own blockchain. All information with regards to ownership of NFTs is stored. This ensures security and enables the viewing of records of previous owners.
What has made NFTs valuable?
Though digital files can be copied and distributed over and over, a NFT provides proof of ownership of a single file. For example, though there are many print copies of the Mona Lisa, there is still only one original. Thus, users have been collecting NFTs much like individuals would collect an art collection in the hopes that one day, the pieces will increase in value.