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What Are Non-Fungible Tokens (NFTs)

Non-Fungible Tokens (NFTs) are tokens on a blockchain that represent ownership of a digital creation such as art, music, videos, video game content, writing, etc.

The first fungible tokens were developed on the Ethereum blockchain and are identified as ERC-20. Some believe Colored Coins, created in 2012, were the first step towards NFTs.

In 2017, a project launched by Dapper Labs on Ethereum called “CryptoKitties” was the first widely-recognized implementation of NFTs.

They aren't actual cryptocurrencies in the same sense as Bitcoin, but are built on a blockchain, usually on the Ethereum blockchain network, but can also be Solana, Polkadot, etc.

They're a unique digital asset that is not directly replaceable with another digital asset, similar to real estate where each piece of property is unique from others. They have the potential to be used to guarantee ownership of physical property and cut out expensive intermediaries who traditionally handle titling services and related legal documentation.

In contrast, a "fungible" token is one that is replaceable with another one identical to it. One Bitcoin can be exchanged for another Bitcoin, the same with physical currencies. One physical dollar bill is the same as the next.

Code is written into this digital token and recorded using the blockchain network it's based on to prove a list of historical ownership and the current owner of a unique digital asset.

Some projects sell NFTs without the actual creative or ownership rights of the digital asset itself.

The NFT license agreement is the most important thing that determines an NFT buyer's rights, so make sure you read it before buying. Also look at the history of the asset's ownership, and whether, once owned, an asset could be used to generate income.

A key difference between NFTs and stocks and cryptos is that stocks and cryptos are fungible. One share of Amazon is the same as another share of Amazon, and one Bitcoin token is equal to another. 

There are some extreme examples of ballooning NFT values. Twitter CEO Jack Dorsey's first tweet was sold as an NFT for $22.9 million in March 2021. In April 2022, the NFT went back on the market and wasn't able to reach more than a top bid of $280.

That said, for the average investor, NFTs represent a highly speculative class of investment that should probably be avoided.

As everything becomes more digital, there's a need to replicate the properties of physical items, and NFTs may be the technology to do so.


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