What Are Non-Fungible Tokens (NFTs)?

non-fungible tokens

Non-Fungible Tokens are Radically Changing Ownership and Exchange of Rare Collections

Tokenization is well-suited for commodities like fiat currencies, gold, and physical land. A fungible asset’s representation on blockchain makes commodities tradable 24/7 via borderless and frictionless transactions. Fungible goods are interchangeable with each other: A $100 bill is replaceable with any other $100 bill.

Non-fungible goods are irreplaceable, unique, and limited in quantity. These can also be represented on blockchain via non-fungible tokens (NFTs). NFTs can represent artwork, collectibles, memorabilia, and personal data. Other examples include gaming characters, digital identities, and certificates.

Fungible Assets vs. Non-Fungible Possessions

The ownership of commodities is straightforward because these are easily divisible. NFTs are generally not divisible. However, blockchain projects are experimenting with fractional ownership of unique items like expensive fine art or memorabilia. Owners of collectibles can access new markets of capital. And for investors, they can acquire rare assets located anywhere in the world, as well as obtain new sources of capital gains or priceless ownership.

Divisible ownership (fractional non-fungible tokens or F-NFT) would enable micro-investors to participate in, say, a $10 million painting by investing in $1,000 worth of NFTs that represent said artwork, where before you’d have to buy the entire $10 million painting.

By using a smart contract, a creator can establish new revenue streams such as royalty payments. For example, a smart contract on tokenized artwork could enforce a percentage of sales to be sent to an original address. Artists, musicians, writers, and producers could see periodic royalty payments in addition to proceeds from the original sale.

Tokenization: Achieving Efficiencies at Scale

In the multi-trillion-dollar commodities market, tokenization and frictionless settlements achieve efficiencies at scale. Similarly, tokenization has the potential to make a massive impact on unique, rare, and/or priceless possessions. The size of the collectibles market worldwide is $370 billion. Video gaming is $151 billion globally; $64 billion for artwork; and $13.7 billion for digital identity.

While there’s plenty of excitement about NFTs, current use cases are limited when compared to its huge potential. In other words, it’s very early.

top 10 NFT markets

The above lists the top 10 NFT markets worldwide as of Oct. 8, 2020 according to nonfungible.com. In the first week of September, NFT sales worldwide reached nearly $1 million.

Non-fungible tokens mostly run on Ethereum, and that’s becoming a hindrance given expensive gas fees that plagued the clogged network through parts of 2020. The tokens are typically issued using ERC-721 or ERC-1155 standard. According to a Sept. 2020 article by nonfungible.com, “in recent weeks the price of [ETH] transaction fees has reached record levels. Creating a smart contract costs around $300, sending a simple transaction $5, transferring an NFT $20… Ouch!”

Expanding Financial Inclusion

Blockchain can be unleashed to make financial inclusion possible via NFTs. Just as some projects enable unbanked and neglected populations to access non-sovereign financial services.

But much needs to be resolved in order to guide the industry. For example, dividing an NFT that represents a college degree or digital persona may not make sense. Fractional ownership (F-NFT) in use cases that make sense may boost interest and adoption.

There are, however, case studies that show a path towards value creation and utility. An art teacher in Africa can micro-invest in masterpieces such as Picasso or Van Gogh paintings, and bequeath a (price-appreciating) NFT as inheritance for his children. A competitive video gamer can monetize unlocked rare characters by selling NFTs to fans in Asia. A car enthusiast can double or triple the sales price of his 1970 Shelby Mustang by auctioning an NFT to car enthusiasts worldwide.

“Digital traders such as cryptocurrency owners have access to liquidity through a larger, global market,” Jack Tao, our CEO , said last month in a media interview. “If you’re selling Bitcoin to a worldwide secondary market, buyers in Russia or Korea may be willing to pay a higher price. Thus, a non-local international platform allows asset owners to sell to the highest bidder, which is the way things should be in a free market. In Phemex’s case, we’ve also given our members zero-fee spot trading to significantly lower transaction costs.”

An NFT isn’t like most cryptocurrencies, per se. It can represent a virtual or real-world asset. But Jack’s observation also applies to NFTs.

Validating an Asset’s Originality

NFTs bring enhanced security and authentication of prized assets. Trust is critical when doing business, and therefore blockchain can increase trade and commercial activity in risky markets.

Distributed ledger technology (DLT) builds trust in non-fungible industries where fakes and forgeries are common, like artwork and memorabilia. In the U.K., for example, more than $480 million in artwork is stolen each year, according to research firm Havocscope.

A chain can immutably capture the originality of a collectible; track the item; create an operational and legal chain of custody; and document sequence of control, ownership, and transfer of pieces. Much like how a Bitcoin is immutably monitored throughout its journey.

Depending on how innovators design an application for intended use cases, a chain can also record a non-fungible asset’s history; add timestamps of key events; and list auction prices and other verified information.

Non-fungible tokens are a key component of a non-sovereign, borderless Web 3.0 economy. It’s an innovation that is fairly new and in the years to come, best practices will emerge on what’s possible.


For any inquiries contact us at support@phemex.com.

Follow our official Twitter account to stay updated on the latest news.

Join our community on Telegram to interact with us and other Phemex traders.

Phemex, Trade Simple