Some time ago, most people were not interested in non-fungible tokens and didn’t even care to know what they meant and what they stood for.
It is quite another story today because the internet is filled with different stories about NFT projects, how to invest in NFT, and many similar topics.
Because of how complex NFTs are, it can be challenging to explain to people how these tokens work and how contrasting it is with fungible tokens.
Continue reading as we explore together the major differences that are shared by fungible and non-fungible tokens both in technologies and use cases.
What Are Fungible And Non Fungible Tokens?
You may not understand to a good extent the little or no similarities that are found when fungible and non-fungible tokens are examined.
Fungible tokens are items that can easily be interchanged with another similar one; they are not unique. An excellent example of fungible tokens is the US dollar, which is more relatable.
When you pick a 100-dollar bill, and then you meet another person who has another 100-dollar bill, the two of you can easily exchange them without any reduction in value or design. For fungible tokens, they are more known because of the value they have and not because of their rarity since they are interchangeable.
Another angle to look at fungible tokens is that they don’t have an original owner; currently, have you seen a dollar that has a traceable original owner?
All this is quite the opposite of non-fungible tokens; they exhibit the quality of uniqueness, and another NFT cannot interchange them. Unlike fungible tokens, the original owner and the current owner of a non-fungible token can be traced using the blockchain.
The creation, existence, and issuance of NFTs rely on the blockchain, and some of the most popular networks for NFTs are ERC-721 and ERC – 1155. The Ethereum network is not a monotonous blockchain where NFTs exist; NFTs can be created and issued on Polygon and Binance blockchains.
NFT Blockchain Networks
Ethereum blockchain is the leading platform where the existence and issuance of NFTs thrive very well; more than half of the NFT market lies on the Ethereum network.
The Ethereum blockchain is not a closed-source network; its governance token (ETH) is the largest asset in the crypto market by market cap after Bitcoin. Because of its ability to provide a platform for blockchain developers to develop services and applications, NFTs are minted in large numbers on the Ethereum blockchain.
The Polygon network is another blockchain that accommodates the existence and creation of non-fungible tokens.
The framework offered by this network is compatible with developers to create scaling solutions and financial services.
Dubbed as one of the fastest programming blockchains, Solana uses a combination of proof of stake and evidence of history to ensure simplicity on the blockchain.
Although Solana isn’t widely used as Ethereum, its POS and POH mechanisms create a platform where NFTs are made and sold with reduced gas fees and transaction time.
Difference Between Fungible And Non-Fungible Tokens
Features are the leading difference between fungible and non-fungible tokens; the two of them go in parallel lines in terms of features.
Fungible tokens are divisible, meaning you can take a 100-dollar bill and then divide it into two to give you a 50-dollar bill each. In the same way, you can also take one Bitcoin and then divide it into two to give 0.5 Bitcoin each.
Fungible tokens are also interchangeable because you can easily exchange 200 dollars with another person with the same 200 dollars without noticing differences. Another instance is that you can easily convert your Ethereum to Solana or another cryptocurrency without any problem.
This doesn’t apply to non-fungible tokens because you can’t interchange Bored Ape Yacht Club NFTs with Crypto Kitties; they are not interchangeable.
Rarity is another difference between NFTs and fungible tokens; NFTs are unique while there are so many similar fungible tokens. The details in every US 100 dollar note are the same: the images and the symbols on the dollar note. For NFTs, the Bored Ape Yacht Club NFT has its differences and is unique from other NFTs.
Non Fungible tokens and fungible tokens do not perform the same purposes or solve similar problems in the real world.
Fungible tokens are primarily used as a form of payment for services and products, just as the US dollar is used as a yardstick while performing financial transactions. Most of the time, the trades and transactions that occur in real-world scenarios are made using fungible tokens such as cryptocurrencies and fiat.
Fungible tokens also act as a store of value whereby the token maintains its value instead of having constant volatility and depreciation. The currency of a nation, like the US dollar, functions as some store of value to the economy of the United States.
Non-fungible Tokens, on the other hand, primarily function as a way of maintaining the intellectual rights and property of artwork and other things. Those who have intellectual properties that are in the form of music, videos, files, and even old tweets can easily convert them to NFT and claim the right as the owner.
Non Fungible Tokens are also used in the gaming industry to ensure that players are well compensated and rewarded for their activity on gaming platforms. Some gaming platforms such as Axie Infinity and The Sandbox use non-fungible tokens to reward their users as in-game collectibles.
Another feature NFTs have that does not exist for fungible tokens is that they are used in the healthcare sector to create lifelong identity verification.
Isn’t that awesome? The birth certificates of a baby can easily be converted to an NFT, making it impossible for the data on the NFT to be tampered with or destroyed.
Types Of NFTs And Fungible Tokens
The varieties of NFTs that are in existence are pretty different from fungible tokens; in some cases, they are not related in any way.
For fungible tokens, the types are broken down into utility tokens, governance tokens, and security tokens.
Utility tokens are fungible tokens that help to grant users access to a particular platform or service on the blockchain. The primary function of these utility tokens is to serve as a reward for performing some activities in a platform or ecosystem.
When it comes to cryptocurrencies, governance tokens function as some form of voting right for users of an ecosystem to dictate how the ecosystem should be operated.
Unlike other fungible tokens, security tokens don’t often get recognition on social media and the internet because they don’t serve many purposes. The primary purpose served by security tokens is that it functions as a way of getting some form of ownership in a company.
There are many kinds of non-fungible tokens, too, including video, collectibles, music, art, and game NFTs.
Video NFTs are a kind of non-fungibles made using moving pictures through blockchain technology to create and issue NFTs. Video NFTs are closely related to music NFTs; the only difference is that while the first may be moving pictures, the latter is organized sounds.
Game NFTs are in-game items in the form of NFTs that are used by gaming companies such as The Sandbox to reward their players.
Art NFTs are created mainly by digital artists who do not want their art or intellectual property pirated by other people without well-deserved credits. By converting their art to NFTs, they will forever remain the original owners of that art, whether the ownership rights are transferred or not.
Value transfer differs between fungible and non-fungible tokens; one is based on the number of tokens involved, and the other is based on uniqueness.
The value transfer of fungible tokens is determined by the number of tokens in the owner’s wallet. Assuming you are transferring Ethereum or 100 dollars to another wallet or account, the value primarily depends on the amount you will be moving.
In the case of non-fungible tokens, the value transfer of the tokens relies more on the uniqueness of the token. You should know that the more an NFT has rare or unique features, the more the value of the NFT will likely increase.
It is the uniqueness of the NFT that helps to drive the number of expectations that community members have for an NFT and the excitement behind the project.
However, one should note that the rarity and value of an NFT are not only determined by its number of traits. The traits of an NFT should be so uncommon that they should not be found in another NFT; this will help drive up the price and evaluation of the NFT.
Fungible and non-fungible tokens have little or no similarities but have significant differences, making them so contrasting.
While fungible tokens can easily be divided and interchanged with other fungible tokens, NFTs are unique and don’t have a replacement.
Currently, most fungible tokens are used as a store of value and for financial services, while non-fungible tokens are mainly used for rewards on gaming platforms.