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What’s possible with Non Fungible Tokens (NFTs)

Daily Hive | Hussein Hallak | Mar 10,

Non fundible tokens - What's possible with Non Fungible Tokens (NFTs)

Crypto tokens and fungibility

With the introduction of bitcoin and the rise of blockchain technology, we got crypto tokens. Crypto tokens are created through tokenization, a process of converting rights to an asset into a digital token protected by cryptography, tracked and exchanged on a blockchain network. Crypto tokens usually represent a particular fungible or non-fungible asset or utility.

Fungibility refers to the interchangeability of a good or asset. Put simply, when something is fungible, it means every other thing like it has the same value.  Fungibility is a core property or money.  Let’s say you have a 100 US dollar note. You probably don’t care if someone took it and gave you another 100 US dollar note in its place.  For you, it’s the same; it holds the same value.  One may be a little worn out, crumbled, or someone decided to use it as a temporary notepad. It’s still a 100 US dollar note, and it has the same value. However, you wouldn’t feel the same if someone took your 100 US dollar note and gave you a Canadian 100 dollar note because they do not have the same value.  We can say US dollars are interchangeable and therefore fungible. However, US dollars and Canadian dollars are not interchangeable, therefore, not fungible.

See:  Want to launch an ecosystem? Consider Tokenization

So a Non-Fungible Token is:

  • Proof of ownership of a real or digital asset
  • A unique ID number
  • All the identifiable characteristics of the asset
  • All the rights and privileges that come with ownership
  • Coded, packaged, encrypted using cryptography.
  • Recorded and tracked on a blockchain

Why do we need crypto tokens and blockchain anyway?!

Assets, tangible and intangible, are the cornerstone of business and trade. They are the resources we use to create, deliver, and capture value.  Tangible assets like real estate, vehicles, equipment, art collections, precious metals, fossil fuel, and crops are costly to move and transfer.  Intangible assets like patents, copyrights, music, digital art, and trademarks, while easier to move and transfer, are difficult to subdivide.

Depending on the asset, trades may have to go through extensive regulatory processes, centralized systems, and trusted middlemen, leading to high costs, the lack of efficiency, and security and privacy vulnerabilities.  These challenges make markets highly illiquid and not within reach of most people.  When an asset is tokenized, it becomes much easier to trade, and it can be made accessible from anywhere in the world. Tokens, after all, are pieces of information that can be transmitted on the internet and tracked using a distributed ledger (a blockchain).

See:  Will the Law Keep Up with Smart Contracts in 2021?

Tokenization can be done without using a blockchain. That’s what the stock market is. With every stock you purchase, you own a fraction of a company.  However, maintaining and running a stock market requires extensive technology infrastructure, intermediaries to handle clearing and settlement, and regulators to ensure everyone plays by the rules. When assets like stocks are tokenized using a blockchain-based system, there is no need for a central authority, intermediaries, or regulators to manage the exchange of those assets.  In a blockchain-based system, the rules can be built into the blockchain software and applied to everyone, eliminating the need for a regulating body.

What’s possible with NFTs?

Many will live their life without the prospect of seeing a Picasso in real life, but with tokenization, it is possible to change that.  Picasso’s masterpieces are in short supply and cost a fortune. The cheapest drawings are worth hundreds of thousands of dollars, and the most expensive was sold for $179 million.  So if we want to make a Picasso masterpiece available for many to own and enjoy the return on their investment, we must tokenize it.

That’s one way, but if the owner of the Picasso is not willing to share its ownership, they can still:

  • Sell the rights to 100 high-end prints in real size; each can be represented by an NFT called PicassoReal
  • Sell the rights to 500 high-end prints in a smaller size; each can be represented by an NFT called PicassoSmall
  • Sell the digital right to own a digital version of the painting that can be represented by an NFT called PicassoDigital

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If you decide to own a high-end print, say print 34/100, you also receive an NFT called PicassoReal proving that you are the owner of that print.  You can verify that the owner didn’t issue more than 100 PicassoReal tokens and find out how many were sold.  You can choose to hang on the print and sell it later for a higher price. When you do, you also transfer the ownership of the NFT to the person who bought the print to prove they are now the rightful owner of the print.  However, if someone got the print illegally or created a fake print, they can’t prove the ownership since they do not have the NFT representing that print.

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NCFA Jan 2018 resize - What's possible with Non Fungible Tokens (NFTs) The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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