Non-fungible tokens (NFTs) are one-of-a-kind tokens. They are all unique. They are also indivisible, meaning that they cannot be divided into fractions. This makes them ideal for collectibles.
NFTs are the new hot item in crypto.
Fungible means an item that can be exchanged for a similar item for the same purpose. For most purposes, a $20 bill is fungible, meaning that it is equivalent to any other $20 bill. Similarly, most tokens are fungible. Every Bitcoin is the same as every other Bitcoin. Bitcoin is fungible by design, because its purpose is to act as a medium of exchange. One Bitcoin = One Bitcoin. Ether is also a fungible token.
This leads to the idea of a non-fungible token.
NFTs are minted through smart contracts. A smart contract assigns ownership of an NFT and manages the transfer of ownership of the NFT.
One of the early ideas for a non-fungible token was the colored coin. Vitalik Buterin and co-authors wrote the colored coins white paper as a thought piece about how the traceability of Bitcoins could be used to establish unique property characteristics.
NFTs are closely related to the idea of a collectibles. A collectible does not have intrinsic value, but they can be traded for the purpose of wealth transfer. Nick Szabo, one of the people associated with the origin of Bitcoin, wrote “Shelling Out: The Origins of Money” in 2005 as a historical explanation of the role of collectibles in society. Non-fungible tokens (NFTs) are one-of-a-kind collectibles. An NFT has a collectible ID, which is a unique identifier since no two NFTs are alike.
You use a wallet for buying NFTs, just like other forms of cryptocurrency.
CryptoKitties (CK) is a popular and early example of a non-fungible token. The CryptoKitties smart contract was deployed on the Ethereum network on November 22, 2017. Within several weeks, CryptoKitties accounted for 25% of Ethereum transaction volume.
The Core CryptoKitties smart contract tracks the immutable genes (“genotype”) and ownership of all CryptoKitties. The smart contract uses a non-fungible token on the Ethereum network. In other words, the cats are tokens on the Ethereum blockchain. This means that they can be bought, sold, or transferred digitally in a secure manner. The genotype of the Kitty that is generated by the smart contract is stored in the user account as a gene string. The images are not stored on the blockchain. The images are part of a user interface (UI) that is done by a centralized web server. Each cat’s distinct visual appearance is determined by its genotype stored in the smart contract.
Cryptozombies.io is a good way to understand how this works. CryptoZombies provides a tutorial for developing a decentralized application similar to Truffle Pet Shop. With CryptoZombies, you learn by making your own crypto-collectibles (NFTs) game.
opensea.io is a large NFT marketplace. NFTs can be traded in markets other than the original dapp where they were created.
In MetaMask, you can add NFTs to your wallet as custom tokens. MetaMask pulls data from opensea.io as a third party repository for NFTs.
robohash.org is an example of a web service that converts text into images. With any input text, it will produce a unique image of a robot. The image is a one-of-a-kind hash of the input text.
Other recent examples of NFTs are the artwork of Beeple and NBA Top Shots.
ERC-721 is a standard for making non-fungible tokens.
Note: a U.S. dollar bill has a unique identifying number on the front and a single Bitcoin can be traced back to its origin. These features can be used to distinguish one dollar from another and one Bitcoin from another. For certain purposes, the U.S. dollar bill and a Bitcoin coin are non-fungible.
References
Non-fungible tokens (NFT) page on ethereum.org