How Non-Fungible Tokens are Different from Normal ERC20 Tokens

Non-Fungible Tokens (NFTs) are unique tokens, mostly digital assets, that live on the blockchain. This makes it easy to verify and authenticate the ownership and originality of digital art. While in most cases buyers get ownership of a file that could be on the public domain, they are mostly buying bragging rights and the possibility that its future value may be higher than what they paid for.

NFTs are used to represent anything of value in a unique way. It could be art, games, or even a person. NFTs are currently a hotbed in the crypto space and have taken the spotlight from traditional tokens based on Ethereum’s ERC20 standard. The ERC20 token standard is the technical standard on the Ethereum blockchain and is used for the creation of new fungible tokens.

An ERC20 standard is just a set of commands that a token responds to. Therefore, all ERC20 tokens, though different, have lots of similarities as they respond to the same commands. ERC20 tokens are created on Ethereum blockchain and are mainly used as utility tokens. Non-Fungible Tokens and ERC2o tokens are different, and one of the major differences between them is fungibility.

What is Fungibility

Fungibility refers to the property of goods whose individual units are interchangeable, and the individual units cannot be differentiated from another. Commodities such as precious metals and currencies are said to be fungible. For example, a $1 bill can be exchanged for another, and they both have the same value.

In the case of cryptocurrencies, the majority of tokens are fungible. A bitcoin owned by a person in Europe is the same as bitcoin owned by someone in Asia or anywhere in the world. This is also one of the major properties of ERC20 tokens. On the other hand, NFTs are non-fungible because they are unique. Each NFT is rare and does not have the same value as other NFTs. In the real world, paintings and other forms of artworks are non-fungible because they are unique and can be distinguished from other similar works. It is this rarity that gives them value.

Some artworks are being tokenized and turned into NFTs. On the Ethereum network,

NFTs are created using the ERC721 standard. To put into perspective, ERC721 is the standard for creating non-fungible tokens on the Ethereum network while the ERC20 standard is used to create fungible tokens.

Differences between NFTs and ERC20 Tokens

The popularity of Ethereum is based on the ability to create tokens that can be bought, sold, and traded on the open market. These fungible tokens have been the pillar of success for Ethereum from the days of the initial coin offering (ICO) mania in 2017 to the current decentralized finance (DeFi) boom. However, the recent surge in the NFT market has brought the ERC721 standard into the fold. The two standards — ERC20 and ERC721 are different, and so are the tokens created from them. Here are some of the differences:

  • NFT tokens are non- fungible, meaning that they are for creating collectible items such as CryptoKitties. They are also non-interchangeable. On the other hand, ERC20 tokens are interchangeable.
  • In ERC721, each token is unique. It’s like owning a pet such as a dog or cat. There is no other cat that is identical to another. NFT tokens are also unique in a similar manner and they are used to represent unique items such as art.
  • ERC20 tokens are divisible. For example, people can buy half of an Ether or any other ERC20-based token. However, the same cannot be done with NFTs. They are sold just as they are.
  • NFTs are scarce, and this is what gives them value. Developers can technically develop any number of NFT tokens but they chose to create only a few of them so that they can have value.

These differences do not make one token standard better than the other. In fact, they offer developers choices on the type of tokens they want to create. ERC20-based tokens are mainly traded by token holders or investors mainly because of the possibility that their value can increase in the future. NFTs are mainly purchased for their scarcity, uniqueness, and originality. The same reason why people traditionally buy rare forms of art could also be the same reasons driving people to buy NFTs. People are spending millions on NFTs, and tweets are being digitized and sold for hundreds of thousands, if not more.

Crazy and wild NFT deals

The NFT mania exploded in the past few months, with millions exchanging hands for what some could simply refer to as mere JPG files. However, buyers think otherwise. Some buy the NFTs believing that their value will increase down the road while other buyers are just art collectors.

In early March, Mike Winkelmann, a digital artist known as Beeple sold his digital art for $69 million. The buyer for the expensive NFT is a Singapore-based crypto whale only identified as “Metakovan.” Prior to this, Twitter co-founder and CEO Jack Dorsey sold the ever-ever tweeted he posted on the social media platform in 2006 for $2.5 million. Binance founder Changpeng Zhao also sold his tweet at an auction, and he attracted bids north of $130,000. Tesla CEO Elon Musk’s tweet is being sold as an NFT. The highest bid reached $1.1 million.

These seem like crazy figures for just tweets or jpg files. There could be more reasons why a person is willing to part ways with millions just for a file that resides on the blockchain.

The logic behind the millions paid for NFTs

The first obvious case is that many people see the booming industry as an opportunity for investments. An artwork that was sold for $66,666.66 in October 2020 fetched a staggering $6.6 million in February. The return on investment is very high, and buyers believe that when the rest of the world catches on, these NFTs would have a much higher market value.

The second possible reason could be mania. The crypto industry has seen many of these in the past. The ICO frenzy of 2017 is still fresh in the minds of many. At the peak of the ICO mania, companies raised millions in seconds, and a fair chunk of them didn’t manage to take off the ground. The same could be happening as buyers throw money around thinking that they will get better returns in the future. And other buyers are doing it for the love of art, or blockchain.

NFTs are regarded by some as the next chapter in the history of art.

The future of art, on the blockchain

Away from the millions and buzz around NFTs, some in the music industry believe that NFTs are a way of restoring music ownership to its former days. Not many people own music nowadays as they simply find it on the go on the various streaming services available.

Besides the current boom, non-fungible tokens are just different from ERC20 tokens based on the commands they respond to. And the question on everyone’s mind is: “Is this another bubble, or the beginning of a blockchain-inspired revolution?”

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