Non-Fungible Token (NFT)

Understanding Non-Fungible Tokens (NFTs)

When it comes to cryptocurrencies, like Bitcoin, they are generally fungible. This means that each unit of BTC is the same as another unit and can be exchanged without any additional considerations. Fungibility is also a key characteristic of traditional currencies, such as the USD. However, there are cases where tokens are non-fungible, especially when they serve as digital proof-of-ownership for underlying assets.

An example of non-fungible tokens is their use in representing digital art. For example, CryptoKitties, a popular Ethereum-based blockchain game, associated its tokens with unique images of cartoon cats. Users could trade these cats by exchanging the corresponding tokens.

Another significant example is the tokenization of real-world assets, like equity or commodities, to enable digital trading. In this situation, tokens represent distinct assets and are therefore non-fungible.

Occasionally, a token may lose its fungibility due to past activities. For instance, if a certain amount of Bitcoin, which is typically fungible, is used for illegal transactions or to fund illicit activities, it may become less- or non-fungible. Exchanges and other service providers are unlikely to accept such Bitcoin once its involvement in illegal activities becomes known.