Meet Genesis, the world’s first cryptokitty (pictured above).
Genesis is one of thousands of cartoon cats that live on the blockchain. And each one is 100% unique. Every cryptokitty has a different design, different name, different color.
No two cryptokitties are the same.
They are “non-fungible.”
As a result, they each have a different value. The most expensive cryptokitty sold for more than $100,000. The cheapest can be bought for $10.
It might sound whimsical and fun, but the technology behind cryptokitties is quite revolutionary. It means we can “tokenize” everything from cats to real estate to birth certificates.
In this article, we’ll learn how they work, and how non-fungible tokens are being used.
A non-fungible token is one with completely unique features. It’s one-of-a-kind, like a cartoon cat. Because of its unique features, it has a unique value.
A real-life example is a baseball card. Each baseball card has a unique value because of its features, history, and ownership.
We can apply the same concept to other collectibles, like art, vintage cars, and real estate.
To explain fungibility further, let’s start by defining the opposite: a “fungible” asset.
Fungible Assets, Defined
The dollar is a fungible asset.
Every dollar has the same value, no matter who owns it or when it was created. If I lend you a $10 bill, I don’t mind if you give me back a completely different $10 bill. Its value is no different to the original one. I can walk into any store and the owner will still accept it as ten dollars.
But if I lend you a non-fungible asset, like a baseball card, I expect the same one back. It’s one-of-a-kind.
A Working Currency Must Be Fungible
Generally speaking, this is how currencies function. The American monetary system would collapse if every dollar had a different value.
In a stable money system, the currency must be fungible. We can’t assess the unique value of each coin or note.
Bitcoin is a Fungible Asset
Like the dollar, bitcoin is also “fungible.” Every bitcoin is worth the same as any other bitcoin.
A bitcoin mined by Satoshi Nakamoto himself in 2009 is no more valuable than a bitcoin mined yesterday.
The history of a particular bitcoin doesn’t change its value either. A bitcoin used to buy drugs on the infamous Silk Road website has the same value as one in your wallet. A stolen MT. Gox bitcoin is worth the same as any other.
Ether, XRP and bitcoin cash are also fungible assets. Like any currency, a major cryptocurrency must be fungible or there would be chaos.
So where do non-fungible tokens come in?
Non-Fungible Tokens on the Blockchain
At first, blockchain was built to record currency transactions, like bitcoin. However, Blockchain is now evolving beyond money.
People are learning that blockchain can be used to track and record anything: real estate, artwork, and cartoon cats.
These assets don’t have the same (fungible) value. Each has a different price according to its unique attributes.
That’s why non-fungible tokens were created.
Let’s go back to cats. Every cryptokitty is really just a non-fungible token. They’re all tracked and recorded on the same blockchain, but now they can each have a different price.
Beyond Cats: How Will We Use Non-Fungible Tokens?
The next big use-case for non-fungible tokens is probably gaming.
Gaming already uses non-fungible items. Weapons, armor, potions and other items all have unique value in the gaming world. (Gamers often sell, trade or even bet these items over the internet).
We are slowly seeing this move onto the blockchain with tokens.
Worldwide Asset Exchange (WAX) is already working on this. Its decentralized exchange allows people to trade gaming “skins,” such as weapons or armor, using a non-fungible token.
Decentraland is another example where users can purchase virtual land using non-fungible tokens. Each piece of land has a different value based on its features.
Tokenizing the Real World
The future of non-fungible tokens, however, could go even further.
We could potentially use this technology to tokenize the real world. Your house could be recorded by a non-fungible token on a blockchain, for example. It has a different and unique value to the house next door.
One city in Vermont is already experimenting with this idea. South Burlington uses a non-fungible token system to record land registry.
You could also tokenize your car ownership, artwork, and event tickets.
This is often referred to as solving the “provenance” problem, by validating the origins of ownership.
Tokenizing Your ID and Personal Information
The same concept can be applied to people. We all have unique aspects that make us different.
Humans are non-fungible.
That means our passports could be issued as a non-fungible token. Perhaps driving licenses, social security numbers, birth certificates, or university diplomas, too.
Fractional Ownership of Non-Fungible Tokens
If non-fungible tokens are used for artwork or real estate, we can also introduce fractional ownership. In other words, each person can own a smaller piece of something bigger.
In June 2018, an Andy Warhol painting was sold using fractional ownership. 49% of the $5.6 million painting was put up for sale with people using cryptocurrency to purchase a small ownership in the painting.
Let’s say a piece of land is recorded using a non-fungible token. A group of five investors can each own a 20% share of the token (although the token itself cannot be divided like, say, a bitcoin).
The Technical Part – ERC-721 Tokens
Non-fungible tokens are most-commonly created on Ethereum. They are known as ERC-721 tokens. Cryptokitties, for example, uses the ERC-721 token standard to make it work.
ERC-721 tokens are similar to other cryptocurrency tokens. They can be traded on exchanges and held in a wallet. But they are designed to include unique features.
They are different to ERC-20 tokens which are the Ethereum standard for fungible currencies.
Non-fungible tokens might have gained notoriety from a whimsical series of cartoon cats. But their potential is much larger. Non-fungible tokens may lead to the “tokenization of everything,” from real estate to art collections to our own ID.
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