NFTs, currency characteristics

in #news
14 days ago


Among the many offshoots produced as a bi-product of the ongoing cryptocurrency experiment, nonfungible tokens have turned out to be one of the most explosive. In a few short months, over half a billion dollars worth of NFTs changed hands, as celebrities (from lists A to Z) clamored to profit from crypto’s latest craze.

But amid the rush to jump on the bandwagon, few have stopped to consider the veracity of the terminology applied to NFTs. After all, why would you stop to ponder semantics when there are millions of dollars to be made at the click of a button?

But in lieu of said millions, we decided to ask the question: Are nonfungible tokens actually a little bit fungible after all?

An asset or good is considered to be fungible if it can be interchanged with another of the same type of equal value. Hence the United State dollar is fungible because any one dollar can be exchanged for any other. The same applies to Bitcoin (BTC).

Fungibility makes up one of the four pillars of Aristotle’s concept of “good money” and is possibly the most important in creating a working currency. All cryptocurrencies are fungible by nature.

Nonfungible assets are those that can’t be trusted to have equal value due to unique variations in their make-up. For example, while diamonds could be useful in a bartering situation, their minute differences in cut, shape and quality exclude them from meeting Aristotle’s evaluation of good money.

But when it comes to NFTs, currency characteristics are irrelevant. The whole point is that each unit of the asset can be varied, unique, exclusive and rare. This is precisely where much of the perceived value of the NFT comes from — its nonfungibility.

On the Ethereum blockchain, NFTs are mostly built upon a token standard known as ERC-1155. Tokens built using ERC-1155 ensure nonfungibility and, as such, would be useless in forming the backbone of a regular currency.

Regular Ethereum tokens are built on the ERC-20 standard, which enables the issuance of identical, fungible tokens for use as actual currency. For this very reason, an ERC-20 token’s utility in registering anything unique or rare is null and void.

But what if…?
But hypothetically, if one were to create 21 million ERC-1155 NFTs — all programmed to be identical to each other — and then distribute them in a free airdrop, would an actual currency not naturally begin to form?

What would stop the tokens from being traded on the open market, each holding the same identical value as the other? This concept is not an invention of Cointelegraph’s; “fractionalized NFTs” are a phenomenon that has already emerged and quickly drawn the ire of United States Securities and Exchange Commissioner Hester Peirce.

Peirce, also referred to as “Crypto Mom” for her lenient stance on cryptocurrency regulation, warned that the use of fractionalized NFTs skirts dangerously close to breaking SEC securities laws. The very reason NFTs don’t constitute securities is because they are unique and nonfungible, noted Peirce, who said people were “getting very creative in the types of NFTs they’re putting out there.”

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