The concept of fungibility refers to the ability for an asset to be exchanged equivalently with another asset of like kind. A practical example of a fungible asset is the US Dollar, where you can trade one dollar for another knowing the value is exactly the same regardless of which dollar you have. In contrast to fungible assets, non-fungible assets are valued differently based on their unique attributes and scarcity. One such example of this is baseball cards, where each individual baseball card is assigned a unique value depending on its attributes such as edition number, design, player, and rarity. Baseball cards are not fungible because every baseball card is valued differently and thus cannot be exchanged directly for any other baseball card.
A non-fungible token is created by an artist, creator, or license-holder through a process called minting. Minting is a process that involves signing a blockchain transaction that outlines the fundamental token details, which is then broadcasted to the blockchain to trigger a smart contract function which creates the token and assigns it to its owner.
Under the hood, a non-fungible token consists of a unique token identifier, or token ID, which is mapped to an owner identifier and stored inside a smart contract. When the owner of a given token ID wishes to transfer it to another user, it is easy to verify ownership and reassign the token to a new owner.
There are various challenges and risks that may affect the adoption of non-fungible tokens, including but not limited to:
i) Complexity : The technology and tooling behind non-fungible tokens and the decentralized applications (dapps) that underpin them are still nascent despite the increasing adoption amongst startups and enterprises alike; Many of the complexities associated with building NFT-related solutions are not yet abstracted by quality tooling.
ii) Regulatory/Legal Implications : With the introduction of new and innovative technologies, particularly ones that involve speculative or high-value assets, come distinct regulatory and legal considerations including but not limited to know your customer procedures, anti money laundering mechanisms, and securities law compliance.
iii) Rapid Innovation : The rapid pace of innovation in the NFT ecosystem and the blockchain networks on which they are issued presents challenges for those adopting the technology in the form of consistent change; agility and modularity are critical.
iv) Concerns Regarding Ecological Impact : Controversy continues in regard to the impact that energy-intensive blockchain networks that utilize the Proof-of-Work consensus mechanism have on climate change, and NFT-focused products have been a target for such criticism. However, solutions already exist to ameliorate this concern, such as the adoption of less energy-intensive consensus mechanisms and the use of “Layer 2” or L2 networks where transactions that mint NFTs can be validated more rapidly and efficiently outside of the main blockchain network. For example, the Ethereum blockchain network is well on its way to shifting towards the more energy-efficient Proof-of-Stake consensus mechanism in its Ethereum 2.0 launch, and Layer 2 solutions like Polygon and ImmutableX are already helping reduce the load today.
Address : 0x791eccE53d7eaE1a9CA220BD7CbC761C3f51C35C