What Are Non-fungible Tokens (NFTs)?

date_range December 6, 2022
person Magic Square

A non-fungible token (NFT) is a digital asset that represents a unique piece of digital property. Unlike fungible tokens, which can be traded interchangeably, NFTs are unique and cannot be exchanged on an equal basis. They are verifiable proof of authenticity and ownership within a blockchain network.

NFTs Beyond PFPs & Gaming in Real World

It is hardly a secret that many industries have liquidity issues. Traditional luxury art and real estate are prime examples of businesses where the ability to buy and sell assets quickly is hampered by the fact that some assets are classified as luxuries that can only a few people can afford.

Non-fungible tokens have proffered a solution by creating a means that allows people to buy and sell these assets at a fraction of the cost. This is facilitated by fractionalization or fractional NFTs.

What is a Fractional NFT?

Fractional NFT is a method of dividing an NFT’s value into smaller portions that users may easily obtain. Although NFTs are non-fungible and indivisible, fractional NFTs find a way to maintain the whole while trading its parts.

NFTs are typically built on ERC-721 token standards; however, in order for them to be tradable, equivalent ERC20 (fungible tokens) tokens are minted to represent the quantity of the original ERC721 token. The ERC20 tokens are then linked to the original ERC721 tokens. Thus, a collector can easily purchase the ERC tokens that they can afford, thus owning the corresponding amount in the overall value of their ERC721 token.

This makes the exchange of tokens possible. Holders can buy and sell the ERC20 equivalent of an NFT on dedicated marketplaces, thus creating liquidity for an asset that was previously out of reach for many individuals.

Liquidity for Illiquid Assets

Fractional NFTs have effectively created an alternative way to make illiquid assets liquid. This means that expensive artworks and real estate properties can now be tokenized on the blockchain and broken into small components through fractionalization.

Individuals can now acquire and possess a fraction of artworks that they could not otherwise afford, and small-holder investors can now own a portion of a luxury property through fractionalization

The capabilities of fractional NFTs extend beyond the art and real estate industries. Other high-end investment alternatives such as gold, bonds, and silver could be tokenized and made available to the general public via fractionalization.

Final Thoughts

NFTs are transforming industries all over the world. Their intrinsic qualities, along with the potential to remain immutable on the blockchain, make them an enticing alternative for proffering solutions to long-standing problems across industries.

Start exploring the curated list of projects offering utility NFTs on the Magic Store today!