Understanding the difference between NFTs and cryptocurrency
NFTs and cryptocurrency are terms you’ve probably heard about or read about in the news, but do you really understand what they are and how they work?
What is an NFT?
NFT stands for ‘non-fungible token’.
For those of you who don’t know what ‘fungible’ means (like me), fungibility is a term often used in economics to describe something which has interchangeable assets. Basically, it’s something that can be exchanged or replaced easily. Take money, for example – a £20 note can be easily exchanged for two £10 notes. A £10 note can easily be exchanged for two £5 notes. You get the picture.
Now, as I’m sure you’ve worked out, non-fungible items aren’t interchangeable. This means that NFTs are unique and can’t be replaced, unlike cryptocurrencies (more below).
NFTs are digital assets consisting of data stored in a blockchain with unique identifier codes that help distinguish them from each other.
How does an NFT work?
NFTs represent real-world objects, often digital creations that exist on other platforms.
For example, the ‘Charlie bit my finger’ video that we all know, and love was taken off YouTube in May 2021 and sold as NFT for £500,000. And, in March 2021, digital artist Beeple created an artwork of 5,000 daily drawings which sold as NFT for over $69 million – this set a record for the most expensive pieces of digital art sold so far.
Other object examples include:
- Video game skins and avatars
- Even Tweets! – Jack Dorsey, Co-Founder of Twitter, sold his first ever tweet as NFT for more than £2 million…
So, instead of someone buying a physical object, they buy the digital one instead. They also get exclusive ownership rights as NFTs can only have one owner at a time.
Of course, for those buying and selling assets using NFTS there needs to be some sort of record to show who owns them. This is where blockchain technology comes in. Each time an NFT is transferred or created, the action is permanently recorded on the blockchain, and even timestamped, meaning anyone can track and trace a single NFT back to its original source.
NFTs are typically held on the Ethereum blockchain, but others are available.
What is the value of owning NFTs?
Now, some of you may be reading this and thinking, “Why can’t I just take a screenshot?”.
But a screenshot is not the same. The value comes from owning the piece, exclusively.
As Zach, Founder of Mintable, said in his blog: “Taking a picture of the Mona Lisa at the Louvre is not exactly the same as owning a piece from Leonardo da Vinci.
“The same concept can be applied to NFTs for digital artwork. By taking a screenshot of an NFT, does not make you the rightful owner of the artwork.”
How are NFTs different to cryptocurrency?
NFTs and cryptocurrencies are related, but by no means the same.
They do share some similarities; they are both digital assets and they both rely on the same underlying blockchain technology. Some NFTs can also be brought and sold online with cryptocurrencies. Because of this, they tend to attract the same players. But the similarities end there.
The big, obvious difference between the two is the fact that cryptocurrency is a currency and therefore is fungible. As we’ve learnt, NFTs are not.
Cryptocurrencies are equal in value, and they can be traded or exchanged for one another – this is what makes them a trusted way of conducting transactions.
Cryptocurrencies are created through a process called ‘mining’, which uses computer power to solve complicated mathematical problems that generate coins.
If you own cryptocurrency, you don’t own anything physical (similar to NFTs). Any transaction works by moving a record or unit of measure from one person to another without using a trusted third party such as a bank.
Cryptocurrencies are also used for different purposes compared to NFTs.
Where NFTs are used to buy a digital object, crypto’s can be used to buy a wide range of physical products. E-commerce websites, luxury goods makers, car dealers and insurance companies have begun accepting crypto as a mode of payment.
Some view NFTs as limited to the digital art world but others believe the technology has more potential. The global non-fungible token market size was valued at USD 15.54 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 33.9% from 2022 to 2030. It is the technology’s uniqueness, individuality and transparency that makes it so attractive.
Similarly, the global cryptocurrency market is projected to grow from $910.3 million in 2021 to $1,902.5 million in 2028. As more people, businesses and countries start using digital currency as a financial exchange platform, then the only way is up.
With the advent of the Metaverse making digital experiences more immersive, inclusive, and accessible maybe you need to think about swapping your traditional wallet for a digital one.
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