What are Tokens? Why do we Need Them?
In the world of cryptocurrency, tokens are the king. A token is a thing that serves as a tangible representation of a fact, quality, and can be anything of value. Tokens are not limited and restricted to one specific role; rather, they can fulfill several roles in their native ecosystem. Tokens can serve various purposes; for example, it can act as a gateway to the decentralized applications(DApps). Moreover, they can also qualify the holders to have certain voting rights. Fungible tokens are entirely exchangeable with each other, and one example of fungible assets are fiat currencies. Non Fungible tokens have burst into the mainstream due to the sudden popularity of crypto kitties, a virtual cat collectible game.
What are Fungible and Non-Fungible Tokens
As we have already seen what are tokens, let’s delve deep to explore both the types of tokens.
- Fungible Tokens
Due to decentralization, security, immutability, Blockchain is considered to be the perfect technology for managing all types of digital assets. But with such interchangeable tokens, this would not be possible. Such tokens work fine for cryptocurrencies, and in fact, fungibility is the fundamental feature of any currency.
Such tokens are built in such a way that each fraction of a token is equivalent to the next. For instance, Bitcoin, the most popular cryptocurrency, is fungible, which means one Bitcoin is equal to one Bitcoin, and it’s equal to all other Bitcoins. Such tokens are assumed to be interchangeable and divisible too.
In simpler words, these are types of cryptographic tokens that are basically identical or uniform and can be interchanged with other fungible tokens of the same type without any issues. Such tokens relate to the things we use every day, and it applies to real-world well as digital assets.
- Non-Fungible Tokens
Non-fungible tokens are special tokens that represent unique, collectible items. They are unique in the sense that they cannot be split or exactly changed for other non-fungible tokens of the same type. You can consider NFTs as tokens with no fungibility that offer a variety of unique opportunities for using blockchain technology. Crypto Kitties is the most popular example of non-fungible, collectible tokens.
Every CryptoKitty is unique, and no two CryptoKitties are the same; these are impracticable to break a CryptoKitty into smaller pieces, trade them, and reassemble them to create an equally valuable CryptoKitty, unlike fungible assets like Bitcoin.
Fungible Vs. Non-Fungible Tokens
Now, as we have understood what the two types of tokens are, let’s understand the fundamental differences between the two.
Fungible are Interchangeable
As we already mentioned, such tokens are interchangeable and can be exchanged with any other token of the equivalent kind. For example, fiat currencies are fungible. For example, $50 notes are interchangeable with other $50 notes. Similarly, one Bitcoin value can be exchanged with other Bitcoin, which makes no difference for holders.
Non-Fungible are Non-Interchangeable
Unlike Fungible tokens, such tokens are non-interchangeable as they cannot be replaced with the non-fungible token of the same type.
Fungible Tokens are Divisible
These tokens can be divisible into smaller units, and one can get any number of units, and it does not matter to holders as long as the value remains the same.
Non-Fungible Tokens are Non-Divisible
These tokens cannot be divided in any sense.
Fungible Tokens are Uniform
Each token is different from all other tokens of the same type.
Non-Fungible Ones are Unique
All tokens of each type are identical in specification, and each token is identical to each other.
Few Use Cases of Non-Fungible Tokens
Crypto kitties were the first use case of non-fungible tokens. But the invention of such tokens has taken the world of Blockchain by storm. Non-fungible tokens have numerous use cases across various domains. Just like crypto kitties, such tokens can be used to create entirely new types of collectibles. Not only this, these tokens have their application areas in KYC procedures, voting & elections, loyalty programs, art, real-world assets, virtual assets, copyright, supply chain tracking, medical data, and more.