To understand what an NFT is, it is important to understand the three main characteristics that make NFTs unique.
1. Programmability
NFTs are created and minted using blockchain technology. During the creation process, creators can program specific features and rules into an NFT through smart contracts.
Programmability refers to the ability to embed automated functions and conditions into an NFT, allowing it to do more than simply represent ownership.
Some examples of programmable NFT features include:
(a) Perpetual Royalties
Creators can program an NFT to automatically pay them a percentage of every future resale. This allows creators to continue earning royalties whenever the NFT changes hands.
(b) Access Control
NFTs can grant holders access to exclusive content, memberships, events, communities, or experiences.
(c) Gamification
NFTs can be designed to interact with blockchain-based games, serving as characters, items, rewards, or other in-game assets.
(d) Conditional Transfers
An NFT can be programmed so that it can only be transferred or sold when specific conditions are met. These conditions are written into the NFT’s smart contract.
Programmability makes NFTs dynamic, functional, and customizable rather than just static digital certificates. This feature has created new opportunities in digital ownership, asset tokenization, and finance.
2. Non-Divisibility
Unlike fiat currencies and cryptocurrencies, NFTs cannot normally be divided into smaller equal units.
For example:
- One Bitcoin (BTC) can be divided into 100 million units called satoshis.
- Ethereum (ETH) can be divided into very small units called wei.
- EDA Coin, the native cryptocurrency of the EdaFace Ecosystem, can also be divided into smaller units.
NFTs, however, are designed to exist as unique, whole assets.
For instance, an ape NFT cannot be meaningfully divided into smaller equal parts. Separating the head, hands, or legs would not create independent assets that represent the original NFT. Each part would be different and would not carry the same value or identity as the complete NFT.
Because NFTs are generally indivisible, multiple people who want to own a valuable NFT may choose to share ownership. This practice is known as fractional ownership or ownership fractionalization.
Under fractional ownership, several individuals jointly own an NFT, and any profits generated from the NFT are shared according to each person’s ownership percentage.
3. Non-Convertibility
Fungible assets, such as currencies and cryptocurrencies, have equal value units that can be freely exchanged.
For example:
- 2 BTC in one person’s wallet has the same value as 0.2 BTC in another person’s wallet.
- 100 EDA in one wallet is equal to 100 EDA in another wallet.
- $500 in one bank account has the same value as $500 in another account.
This property is known as fungibility, meaning that each unit of the asset is identical in value and can be exchanged for another equivalent unit.
NFTs do not possess this characteristic.
Each NFT is unique and cannot be directly exchanged for another NFT on a one-to-one basis. For example, one ape NFT cannot automatically be considered equal in value to another ape NFT, even if they belong to the same collection. Their rarity, attributes, ownership history, and market demand may differ.
Because NFTs are neither equally divisible nor directly interchangeable, they are referred to as non-fungible tokens.
In simple terms, non-fungibility means that an asset is:
- Not equally divisible, and
- Not directly interchangeable with another asset of the same type.
These characteristics give NFTs their uniqueness, identity, scarcity, and financial value.
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