To learn the differences between fungible and non-fungible tokens, you should consider their definition as the starting point. Essentially, tokens are tangible representations of a feeling, fact, or quality. There are many types of tokens we encounter in everyday life.
Tokens can contain value, voting rights, stakes, or anything else. In its native ecosystem, a token is not restricted to one particular role but could serve a variety of functions. Tokens can represent a particular utility of a company or an asset. Tokens can be given to investors in a public sale.
Here are a few factors to consider to understand the meaning of tokens:
- A token can serve as a gateway to blockchain applications, and users need tokens to access decentralized applications.
- It is also possible to use tokens to determine an individual’s eligibility for holding certain voting rights. EOS blockchain tokens, for example, permit individuals to vote for block creators.
- Additionally, tokens used as currency also play an active role in distinguishing fungible versus non-fungible tokens. With tokens, businesses and institutions can conduct internal and external transactions, and offer digital assets as a different kind of monetary system.
- Value exchange is another critical use of tokens. Thus, tokens could be used to develop a system of internal economics in an application.
- The applications for tokens as an indicator of ownership of unique entities are also important to consider.
In general, the main difference between fungible and non-fungible tokens is that non-fungible tokens focus on storing information.
As opposed to cryptocurrencies, non-fungible tokens lack any inherent value. In reality, non-fungible tokens derive their value from the assets or goods they represent. These tokens rely on a variety of token standards and smart contracts. In the blockchain industry, non-fungible tokens are becoming very popular as new-age tools for developing a virtual economic ecosystem.
By now you must understand that fungible tokens can be exchanged for each other. Fiat currencies are the best example of fungible assets. Certain fungible assets can be transferred from one owner to another to make payments. Thus exchanging fungible assets does not hold any significance since they are the same.
A fungible token is usually used to make payments and track balances.
The comparison of fungible and non-fungible tokens suggests that non-fungible tokens or NFTs have a distinct value proposition. Each NFT is a unique instance, and each token has a unique ID to make it easy to distinguish from other tokens in a smart contract. Each token has a specific owner and uniqueness, and thus their values may be different from one another.
Ethereum Standards as a major difference between FTs and NFTs
Token standards are the next important factor in determining whether a token is fungible or non-fungible. If you want to build a healthy ecosystem is important to develop decentralized applications on Ethereum which have seamless interaction with one another.
On the other hand, by having different types of tokens, like Alpha and BEta, you will have a hard time finding the same smart contract structures in them.
Tokens must also be able to interface with one another by defining the exact methods through which they can do so. However, this is not a good thing for scalability. Having 50 different tokens with 50 different smart contracts makes it difficult to narrow down the criteria and qualifications for ensuring that transfers can take place through all tokens.
Consequently, token transactions can involve a vast number of complex calculations. For this reason, token standards have emerged as an alternative way to define the difference between fungible and non-fungible tokens. Token standardization is undoubtedly a benchmark for differentiating fungible and non-fungible tokens.
Fungible tokens are created by using the ERC-20 standard while NFTs use ERC-721. We’ll talk more about these in another blog post.
In conclusion, we can say that non-fungible tokens and fungible tokens are both valid for their own purpose. The comparison of fungible and non-fungible tokens is a significant aspect that can determine the future of the blockchain ecosystem. In terms of security and immutability, non-fungible tokens have an advantage. In the asset tokenization process, users can add extra information and context to the metadata.
The relatively new nature of non-fungible tokens may make it difficult for users to trust them. Contrary to this, they have a broader acceptance in the blockchain ecosystem and have prominent applications in gaming and art.
During these turbulent times, fungible and non-fungible tokens will continue to be debated and any new advancements may have a major impact.