Cryptocurrencies are a new form of currency that is decentralized and uses cryptography for security. A cryptocurrency is a type of digital asset designed to work as a medium of exchange using cryptography to secure the transactions and control the creation of additional units. Cryptocurrencies use decentralized control, meaning that no central authority or government regulates them. The decentralization technique ensures that there’s no single point where failure can occur because if one point fails, the whole system doesn’t fail. Cryptography controls how cryptocurrencies are generated, stored, transferred and traded securely.
Cryptocurrencies still have many risks which make it difficult for mainstream adoption like volatility in price (the prices change rapidly) and lack of regulation by banks which leads to fraudulent activities such as Ponzi schemes.
Most cryptocurrencies cannot be exchanged directly with fiat currencies (regular currencies like the dollar) and can only be exchanged with other cryptocurrencies, which is still somewhat difficult (especially for laymen). A new class of cryptocurrency has emerged known as non-fungible tokens or NFTs.
So what are non-fungible tokens (NFTs) ?
NFTs are also a type of cryptocurrency but they have differences from other cryptocurrencies. In order to understand the different types, it’s important to first understand what fungible means as it pertains to cryptocurrency. Also, it’s important to understand what a token is .
Fungible means interchangeable. Most cryptocurrencies are used as a replacement for standard currencies and can be exchanged or traded with other people without any loss in value. This type of cryptocurrency is known as ERC20 tokens. Being fungible, each unit has no unique features both from an issuer perspective and a holder perspective. However, there’s the need to tokenize real-world assets and ensuring that each asset has unique features and characteristics so as to prove authenticity and ownership. This is where non-fungible tokens come in.
What types of NFTs exist and how do they differ from one another?
There are a number of tokens that exist that are not fungible from one another. This means that they can’t be exchanged on an open market for other assets, which is what traditional cryptocurrency does. An example of this would be Litecoin vs Ethereum vs Dogecoin. Litecoin is a more lightweight version of Bitcoin and it’s more effective for purchasing goods or services online. Whereas someone might use Ethereum to create a smart contract with no intermediaries necessary. Finally, Dogecoin is a more goofy cryptocurrency that was originally used as a tipping system for social media websites like Reddit and Twitter, but the creators had more lofty aspirations for it when it first began.
Another type of NFT that isn’t fungible from one another are CryptoKitties. These are unique tokens that have been created on top of the Ethereum network, and these can be used a number of different ways including gifting them to other users, breeding/siring digital kitties or trading them for other cryptocurrency. The last two activities have also contributed to their valuation going up so quickly over the last year. Meanwhile, CryptoPunks are also in the same vein in that they’re unique digital objects that exist on top of the Ethereum network. They can either be bought or sold, and there’s a finite amount of them that will ever exist from their origin point forward.
In contrast to non-fungible tokens like this, there are fungible tokens like Ethereum (ETH) that is used to pay for the gas needed to power the transactions on its network. There’s also bitcoin, Litecoin and Dogecoin which can all be traded for one another, similar to how the Euro can be exchanged with other types of fiat currency. Lastly, there are fungible tokens like Ripple (XRP) that can be used to make fast and cheap bank transactions. But every single one of these tokens is unique from the next in some way, shape or form, which means they can’t be traded for other assets on an open market.
The benefits and drawbacks of each type of NFTs
The advantages of NFTs are that they are programmable, easily transferable, and are always unique. This means they are perfect for protecting virtual goods. Unlike cryptocurrencies, NFTs are not fungible which means one coin is not equal to another. A few drawbacks of NFTs is that they cannot be traded on all cryptocurrency exchanges and the tokens can be hacked or stolen. NFTs are also more complicated to use compared with common cryptocurrencies. You can find out more about each type of NFT below.
The most popular type of NFT is the ERC-20 token on the Ethereum blockchain. This standard allows for interoperability between dApps (decentralized applications) and contracts on the Ethereum blockchain. These tokens can be stored in any ERC-20 compliant wallet, exchange or decentralized application. Some examples of ERC-20 tokens are OmiseGo and Binance Coin.
The second most popular NFT is the ERC-721 token on the Ethereum blockchain which represents a non-fungible asset. These tokens are more complicated than ERC-20 tokens because each token represents something unique. This means that one NFT cannot be substituted for another, in contrast to fungible currencies which is what most cryptocurrencies represent. A popular example of an ERC-721 is CryptoKitties which you can buy and trade using Ether, Bitcoin and other cryptocurrencies.
The third most popular type of NFT is the ERC-1155 token on the Ethereum blockchain which aims to be a more accessible standard that developers can use to create their own non-fungible tokens for their games or dApps. One advantage of this standard is that gamers can easily bring their virtual assets into other games or dApps across the Ethereum blockchain. The ERC-1155 tokens are compliant with existing standards like ERC-20, which means they can be encoded in any wallet or exchange that supports standard tokens. They are also more flexible to use than other types of NFTs because they don’t require developers to build new infrastructure. The first game that will use this standard is called War of Crypto.