Fungibility applied to cryptocurrencies

Most of the cryptocurrencies you already know such as Bitcoin or Ethereum can be considered fungible (see below ⬇️). One BTC is worth another and two BTC can be exchanged with one another. It’s the same for all cryptocurrencies you could find on Coinmarketcap.

Since the history of transactions of most cryptocurrencies can be checked on block explorers, some tokens involved in illicit activity are flagged and blocked on exchanges. Therefore, cryptocurrencies with public transaction histories are not truly fungible. Full fungibility is currently achieved by privacy-focused coins such as Monero, because the transaction history is not publicly disclosed.

We won’t address these today, as we focus on non-fungible tokens. There were several attempts, as early as 2013 to create NFTs, but they were mostly unsuccessful. What made a difference was a new Ethereum standard, the ERC-721 which greatly facilitated the creation of “cryptocollectibles.” They are unique goods which share common attributes — the blockchain equivalent of Pokémon cards.

The humble beginnings powered by the ERC-721

Cryptokitties is what made NFTs known to the general audience — they are virtual kittens which were the precursors of the ERC-721.

The project went live in October and took a couple month to reach its peak of virality last December. Cryptokitties were such as success than the whole Ethereum network was clogged for several days by the flood of transactions.

Specific kittens, the most desirable of the bunch, reached prices in the 5 digits ($) and changed hands several times in a few days early December. Considering the success of the CryptoKitties, the ERC-721 went through the due diligence to get approved and finalized last June.

Non-fungible tokens in the everyday life

When it comes to pushing and improving new technologies, you’ll often find porn and video games sharing the front line.

Right now, collectible and video games are at the forefront of the innovation. Indeed, when it comes to pushing and improving new technologies, you’ll often find porn and video games sharing the front line.

However, the real-world applications of NFTs are very diverse, numerous, and much closer than we think. Thanks to their characteristics, NFTs can be an excellent support for the tokenization of real-life goods.

Tokenize means creating a token representing a good. The token by itself has no value; it draws its value from the good it represents.

Tokenize everything!

Tokenization allows to handle goods like tokens which open a wide range of possibilities: exchange, P2P transferring, fractional ownership (0.x), etc. Besides, other features can be added depending on the tokenized goods: list of the previous owners, history of the value of the good, exhaustive list of the goods’ characteristics, limitations of ownership…

Once the benefits of tokenization are understood, we realize that tokenizing real goods will let us spare ourselves the need for greedy intermediaries while getting many exciting new features.

Tokenization of real estate => who need notaries?

Tokenization of pieces of art => auctioneers and several other jobs would see their utility and even their existence challenged.

Tokenization of official documents (IDs for instance) => a substantial cleanup in the actors and institutions currently involved in their emission, as well as those in charge of detecting and preventing frauds.

In the three scenarios detailed above, checking the authenticity of these goods as well as making sure their owner is indeed the real owner of the good would be much easier than now.

The benefits of disintermediation thanks to tokenization

Tokenization is much bigger than creating a token to represent a real-world good. Let’s come back to the definition of NFTs we proposed: “unique goods which share common attributes.”

So tokenization would work as well for certificates. IDs, passports, report cards or even software license could be tokenized. Not only would it greatly facilitate the process of emitting and sharing them; it would also provide traceability, unlike anything we’ve ever known so far. Which in turns would make a 99.9% fraud detection and prevention goal a realistic one.

If we keep pushing the logic further, we could go back to the digital world and envision NFTs to store our digital identity. Our social network profiles could be open-source and easily exportable from one network to the others. Besides, it would give full control and ownership over our own data and prevent malicious third parties from stealing them.

Before we get there, we need to overcome the current limitations of both the Ethereum network and non-fungible tokens: as stated before, the CryptoKitties were enough to clog the whole Ethereum network for several days. The current state of the tech (or December’s state at least) is apparently insufficient for a large scale usage.