By now, you should already be familiar with the differences between currencies, including the recently introduced central bank digital currency (CBDC), and cryptocurrency, but do you know that there is another unique asset called NFT (Non-Fungible Token)? Are you aware of how it is similar to and different from digital currency and cryptocurrency?
In a nutshell, the big picture about NFT is that it is closer to cryptocurrency than to currency. Currency submits to centralized regulations, hinges on real-world value, and has a relatively low degree of volatility. The other two assets are the opposites of currency in terms of those features.
This opposition lays the ground for the similarities between cryptocurrency and NFT. Despite their similarities, however, cryptocurrency and NFT remain two assets that are radically different. Here we will see how they are similar to and different from each other.
The Similarities Between NFT and Cryptocurrency
Both NFT (Non-Fungible Token) and cryptocurrency are crypto assets, so it’s rather easy to discover the similarities between both assets. In general, they are similar in terms of the following aspects.
Unlike fiat money, cryptocurrencies aren’t subject to centralized regulation. Neither banks nor governments have a regulating power over them. Both cryptocurrencies and NFT operate in a decentralized environment called a blockchain. This form of distributed ledger technology consists of a series of blocks among which cryptography-protected transactions take place, hence cryptocurrency.
Because there is no central entity controlling all the blocks, no centralized regulation can monitor the transactions and meddle with them. The strongest feature of the blockchain on which cryptocurrency and NFT transactions occur is the security and anonymity of each block.
The absence of a centralized regulation indeed guarantees security and anonymity, but it also poses a higher degree of volatility to the entire network. In a real-world banking system, the centralized regulation makes sure that volatility remains low to reduce risks and attract investors.
Because both cryptocurrency and NFT (Non-Fungible Token) operate on a decentralized platform, they are also known for being highly volatile. Their prices may drop or increase erratically, which is not what investors want. If you want to sell your digital art using NFT, be sure to be aware of this problem.
The transactions of NFT and cryptocurrencies are much more open and public than those of fiat money. In the traditional banking system, only the sender, the receiver, and the bank know the details of the transactions. Because NFT and cryptocurrency use a decentralized ledger, all transactions are public, so everyone in the blockchain is aware of the details of the transactions that take place within.
The similarities above seem to suggest that NFT and cryptocurrency are two identical entities; however, even though they operate on a similar platform, they can radically different in the following aspects.
1. Asset Type
Cryptocurrency can take the form of a coin or token, but NFT, as the name suggests, is always a token. Coin and token, despite their frequently interchangeable use, are different. Coins operate on their blockchain whereas tokens operate on another blockchain. Bitcoin has its coins, but certain tokens have to exist above another blockchain, with Ethereum being the most popular blockchain due to its smart contract.
Because of this core difference, the creation of coins is much more difficult than the creation of tokens, including NFT (Non-Fungible Token). They also serve a somewhat different function. Coins are more suitable for processing payments whereas tokens have more varied purposes. NFT, which is one of the cryptocurrency tokens, also serves a specific function for selling digital arts.
All cryptocurrency coins and some tokens are tradable, but NFT isn’t. NFT exists to represent a unique digital art. Because each art is unique and non-tradable, NFT is also unique and non-tradable, hence non-fungible. You cannot trade an NFT with another NFT just like you can trade the painting of the Mona Lisa and the statue of David.
Crypto coins are not unique to one another. Some tokens are also the same. NFT is a special case because every token is unique. Because of its uniqueness, one NFT can only represent one particular digital art. No two NFTs can represent the same art.
You can trade a coin with another coin or a fraction of it with another fraction. This is because crypto coins are divisible. NFT, on the other hand, is indivisible. When you buy an NFT, you buy the entire token and can never buy a fraction of it. As mentioned above, an NFT represents a unique art and an artwork will lose its entire value if you divide it into smaller pieces.
Although the NFT itself is indivisible, you can use it to represent the ownership of a divisible asset. Multiple buyers can own multiple NFTs that represent a real-world asset (non-digital asset) using a fractional ownership mechanism. The purchased NFTs themselves remain indivisible; however, using this mechanism, each can represent fractional ownership of a real estate property, a resort, or other similar real-world assets.
Unlike coins that are available for purchase almost everywhere, the sale and auction of NFTs take place only in several marketplaces. Due to NFT’s growing popularity, the number of NFT marketplaces increases from time to time.
Despite their growing number, only a few marketplaces maintain their reputation as reliable markets for NFTs. Among the biggest NFT marketplaces you can find now include OpenSea, CryptoPunks, Axie, Rarible, and Foundation. You can visit those places to learn more about how NFT sales and auctions work. Certain marketplaces are associated with a particular wallet, so you need to have the wallet first before participating in any transactions.
Cryptocurrency and NFT (Non-Fungible Token) are different from real-world currency and its digital counterpart because they operate on a radically different platform. However, even though cryptocurrency and NFTs operate on the same platform, there are many differences between them in various terms. If you plan to buy and sell digital arts within a blockchain network, you should now understand the specific type of token that you must use and how to deal with its transactions.