The craze for NFTs or non-fungible tokens, which are nothing more than digitized assets of everything from drawings, art, music to even a hypothetical brain download turned into AI, has taken it all. the world by surprise. This is yet another example of individual investors who express their desire for innovative assets; new forms of digital assets in this case.

A Reuters report put NFT’s collective sales volume in the first half of this year at well above $ 2.5 billion and it now stands at $ 1.24 billion per quarter with 10,000 to 20,000 new ones. accounts created every week.

Indian investors are also joining in the fun. According to a report by
Economic times, WazirX has sold over 160 digital artworks in just one month after launching its NFT marketplace. NFTs have aroused the interest of new-age collectors as well as artists, who now believe they will have a larger market base to sell their products.

But what is an NFT? What are we really buying? And what should you know before buying? Is the NFT the only token? Let’s understand a little better about NFTs and tokens in general.

What is a token?

We’ve all used physical tokens in stores or theme parks. We pay money and this is “represented” by the token. This token represents your right to be served in a queue. Likewise, in the cryptoverse, tokens are a piece of code for which only you have the password and represent a certain record on a certain blockchain. This token is your “proof” that you own a particular record on this blockchain. You can transfer it to someone (from your wallet to someone’s wallet) and just like in the physical world, the token holder will be the deemed owner and reap the benefits.

A token is a transferable digital asset and represents one record of value among a group of records that may collectively represent a physical composite asset or intellectual property or something abstract (like bitcoins). Although the blockchain is the real ledger, the token you hold is proof or claim of your property that you can keep and use.

Fungible and Non-fungible Tokens – What’s the Difference?

There are two types of tokens – non-fungible and fungible. A fungible asset is something whose representative units can be easily traded. Money is a good example. Five $ 10 bills have the same value as one $ 50 bill. The same logic applies to assets represented by fungible tokens (FT) like Bitcoin – 20BTC equals two units of 10BTC each.

However, not all assets have fungible units. Just as real estate developers have different rates for garden view apartments or high floor apartments, even when they are in the same location and with the same square footage and other specifications, the value of each apartment can still be different due to the intrinsic nature of the unit which buyers value differently.

Likewise, tokens that represent different sections, units, or “identified” parts of composite assets are called non-fungible tokens (or NFTs) because each token created to represent the asset is different, representing different parts of the asset.

Examples of these tokens

Different real assets may be represented differently by NFTs or FTs. People have taken notice of cryptovers due to the introduction of cryptocurrencies like Bitcoin, Ether, etc. Almost all of the original tokens were fungible tokens, mainly because they were designed to serve as a payment alternative and, therefore, needed the same fungibility as money. To.

Non-fungible tokens are a new craze. When people realized that assets can be represented, they realized that it could open up a creative set of apps to tokenize. And NFTs that represent specific parts of those assets have become a better way to break down salable and claimable parts or units without actually breaking up the composite asset itself.

This offering of non-fungible but smaller units allowed the general public to participate, as they can now buy part even though they could have previously bought the entire asset.

There are many assets that can be unlocked and sold as tokens, either as NFTs or FTs. Art, crafts and paintings (all physical assets that have unique value, with their duplicates or clones or copies not having the same value) are suitable cases to be created and sold as NFT. Likewise, many intellectual property assets like songs, videos with unique copyrights attached can be sold as NFT. Thus, it is possible that you own a certain part of a song or a certain part of a painting via an NFT.

However, NFTs may not be the right solution for all assets. This is all the more true in cases where homogeneity, standardization is a more desirable characteristic. As a more specific example, when we designed the real estate market at RealX, we created a representative but standard unit called FRAX with a FRAX representing 1 square inch of an undivided area. The reason we created FRAX as an undivided unit was to ensure its fungibility. This fungibility will generate a better secondary market than it has otherwise. FRAX will naturally be fungible tokens, if and when we tokenize them.

The way things look

The opening up of NFTs as another digital asset class is an astonishing development. On the one hand, it frees up economic assets and their uses, and on the other hand, it allows access to such assets which would otherwise be a price barrier to affordability. This will change the usual investment matrix, not only for retail investors, but even for HNI and UHNI investors. This makes for a very interesting piece to look forward to.

(The author, Manish Kumar, is the co-founder of RealX and GREX. The opinions are his)