Understanding NFTs: Fungible vs Non-Fungible Tokens Explained

The concept of fungibility is central to understanding the NFT revolution. As defined, fungibility is the property of a good whose individual units are interchangeable and indistinguishable. The quintessential example is currency: a five-dollar bill holds the same value and can be exchanged for another five-dollar bill or five one-dollar bills. Everyday items like groceries or standard notebooks also fall into this category. In contrast, non-fungible goods are unique and irreplaceable. The original Mona Lisa painting is the classic physical example—there is only one. Non-Fungible Tokens (NFTs) apply this principle to the digital realm, using blockchain technology to create cryptographic tokens that represent unique assets, ensuring each one is distinct and cannot be replicated on a one-to-one basis.

In the context of blockchain, tokens are virtual assets residing on their respective ledgers. While fungible tokens, like most cryptocurrencies, are identical and interchangeable (one Bitcoin equals another), NFTs are designed to be unique. They represent specific digital items, akin to tokenizing the Mona Lisa for the digital world. This uniqueness extends to various digital assets, including domain names like those from the Ethereum Name Service (ENS), social media handles, in-game items like gun skins in Counter-Strike: Global Offensive, and, most famously, digital collectibles.

NFTs are defined by several key characteristics derived from their blockchain foundation. They are standardized, offering common functionalities like ownership and transfer that developers can build upon. They are universal, meaning any application can read and interact with them due to the open nature of blockchains. They offer liquidity through active crypto-asset marketplaces where they can be traded. Crucially, they are immutable; once created via a smart contract, an NFT’s properties and ownership record are permanently etched onto the blockchain, only changeable through a recorded transfer. Finally, they are programmable, allowing developers to embed complex functionalities within the token’s smart contract.

These characteristics are enabled by specific technical standards. The ERC721 standard, first popularized by the CryptoKitties project, was the pioneering framework for representing truly unique non-fungible digital assets. It is an inheritable smart contract standard, often utilized via libraries like OpenZeppelin. The later ERC1155 standard, pioneered by Enjin, introduced greater flexibility by enabling ‘semi-fungible’ tokens. This allows for representing classes of unique assets—for instance, one token ID could represent 20 “Swords” and another 30 “Guns,” with individual metadata defining each item’s unique traits.

The unique properties of each NFT are defined by metadata, typically in JSON format. This metadata can be stored on-chain, directly on the blockchain (though limited by storage constraints on networks like Ethereum), or off-chain. Off-chain storage uses centralized systems like AWS or decentralized networks like the InterPlanetary File System (IPFS), with a link (tokenURI) stored in the smart contract pointing to the data.

The application of NFTs extends far beyond their initial viral success in digital collectibles. Projects like CryptoKitties, Decentraland, and Axie Infinity demonstrated NFTs’ power in creating verifiable, ownable, and tradable digital items. In gaming, NFTs solve a long-standing problem: they allow in-game rewards and assets earned by players to be truly owned and potentially used or traded outside the original game’s ecosystem, enabling interoperability.

Another significant use case is in certification. NFTs can be used to issue unique, non-transferable (or transferable) digital certificates, such as academic diplomas or professional licenses. Stored immutably on the blockchain, these certificates become tamper-proof and easily verifiable. The scope for NFT implementation is continually expanding, limited only by developer imagination, with platforms like Rarible and Crypto.com NFT Platform facilitating creation and trade. As more standards emerge, NFTs are poised to further redefine ownership and value exchange for unique assets in the digital age.