Beginner’s Guide to NFT: Non-Fungible Token

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This beginner’s guide to NFT is for people who are trying to understand – what all the hoopla around NFT is? What is NFT? How does it work? In this guide, I will answer all these questions and more.

If you understand the basics of how NFT works, you can skip the introduction part and skip to the topics which solve your query. For quick reference, you can use the table to content below. Without much delay, let’s understand what is NFT?

Related: How NFT market leveraged blockchain for explosive growth

What is NFT?

NFT is short for Non-Fungible Token. In technical terms – NFT is software code that verifies the properties of an irredeemable digital good or a digital representation of an irredeemable physical good on a digital medium.

To understand it better we need to know what does fungible and non-fungible means?

What is Fungibility?

When two items can be interchanged with each other because their value is the same and value is the important consideration in this exchange, then such an item is called a fungible item.

For example, you give me a $100 bill from your wallet and I give you back a $100 from my wallet. Then the note itself is not the same, but still, we won’t mind exchanging them because they have the same value – $100. Thus, in this case, the $100 bill is fungible.

But, what if that particular bill is a rare piece. For example, of particular historical significance or even emotional significance? In that case, this particular $100 bill won’t be replaceable with another $100 bill. This will make that particular 100 dollar bill a non-fungible item.

Thus, anything can be classified based on fungibility. There are 3 categories of fungibility.

  • Fungible
  • Semi-fungible
  • Non-fungible

What are fungible items

Anything that is 100% replaceable by a similar item is a fungible item.

fungible item example NFT 1

What are semi-fungible items

These are fungible items, but within their category or class only. Most of the items in our daily life are semi-fungible in nature.

For example:

You want to eat chips. And there are few chips on the table. Now it doesn’t matter which one you eat as long as it’s a potato chip of specific flavor. Like in the image below – you can pick the first one or the last one (of course a whole piece :D.

semi-fungible as long as the category of item is same

In a way, unless something is truly unique and one of it’s kind – it can be categorised as fungible or semi-fungible.

What are Non-Fungible items

A non-fungible item is one that is unique and holds value. The value part here is subjective and relative to many aspects.

These items(considered non-fungible) are basically not produced in factories for mass consumers. They are non-fungible mostly due to their rarity, uniqueness or scarce availability. Such items can be anything – domain name, email address, digital art, a song, or a movie or even physical item like furniture, jewellery, paintings, etc.

Due to their uniqueness, non-fungible items hold unique value too. Obviously, it also makes them quite valuable to their owners. Like a prized possession. And when you are an owner of a valuable non-fungible item, you like it to retain that value. The only way of doing that is by maintaining ownership and uniqueness of the item.

Ownership of Non-Fungible items

Now, as we just mentioned, a non-fungible item can be physical or digital.

In the case of a physical item – you can easily control the ownership. For example, if it’s a painting, then you can pay for that painting and take ownership of that painting. Due to the very nature of physical items, they can’t be copied or pirated at the click of a button. Yes, copies can be created, but it’s quite easy to ascertain which item is the original one.

But, in the case of digital items, it’s a tricky situation. Digital products have different use case and ownerships. All this comes under the topic of digital ownership.

What is Digital Ownership

Let me ask you a simple question:

When you pay for a Netflix subscription – do you own the movies/shows available on the platform or you just have access to watch them?

The answer is – ‘No’, you don’t own any of these digital products. When you subscribe, you only get access to watch these movies or shows. Even that access can be revoked by the platform as per their terms & conditions.

There is a very good article by Dr Rebecca (Watkins) Mardon. She is Senior Lecturer in Marketing & Strategy at Cardiff University / Prifysgol Caerdydd, Wales, United Kingdom. Here is the relevant excerpt from the article –

“The popularity of access-based consumption has obscured the rise of a range of fragmented ownership configurations in the digital realm. These provide the customer with an illusion of ownership while restricting their ownership rights. Companies such as Microsoft and Apple present consumers with the option to “buy” digital products such as eBooks. Consumers often make the understandable assumption that they will have full ownership rights over the products that they pay for, just as they have full ownership rights over the physical books that they buy from their local bookstore.

However, many of these products are subject to end-user license agreements which set out a more complex distribution of ownership rights. These long legal agreements are rarely read by consumers when it comes to products and services online. And even if they do read them, they are unlikely to fully understand the terms.

She adds, “Consumers need to become more sensitized to the restrictions on digital ownership. They must be made aware that the “full ownership” they have experienced over most of their physical possessions cannot be taken for granted when purchasing digital products. However, companies also have a responsibility to make these fragmented ownership forms more transparent.

In simple words – it means, we never truly own anything in the current structure of digital things and we just own a “right to access”.

This situation brings up the next relevant question – What is the solution? How to ‘own’ anything in the digital world?

The answer is – Blockchain

How Blockchain is the solution for digital ownership

The reason that digital ownership is tricky to have is due to the lack of true ownership data of that file. This means, once the file is out on the internet, the creators of that file have little to no control over how and where their file is being used or transferred. This is what is called a lack of trustless digital ownership.

To achieve trustless digital ownership, it needs clear ownership rights and payment processes (wherever required). This is the issue that Blockchain technology solves.

Blockchain technology helps in obtaining trustless digital ownership in the true sense. Bitcoin is the leading proof of the same. You can truly own a bitcoin, without needing any central authority to keep a record of how many bitcoins you own.

The way Blockchain technology helps is by creating distributed ledgers of transactions that are duplicated across many computers and can be read and verified by anyone, creating visibility of transactions.

Now let’s see how this beautiful piece of technology can help in NFT – Non-Fungible Token

What is a Non-Fungible Token (NFT)

NFT Market
Beginner's Guide to NFT: Non-Fungible Token 4

Non-Fungible Token or NFT for short help in integrating individual ownership rights with non-fungible digital assets.


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