What is the difference between NFT and tokens? Basic knowledge that novices must read

Understanding the Concept of Tokens

In the world of blockchain and cryptocurrencies, tokens represent a broad category of digital assets. These are typically created on existing blockchain platforms such as Ethereum, Binance Smart Chain, or Solana. A token can symbolize various things — from currency to utility rights within a specific ecosystem.

There are several types of tokens, including fungible tokens, which are interchangeable with each other because they have identical value and properties. For example, one ETH is always equal to another ETH. These are commonly used for transactions, staking, or governance in decentralized applications (dApps).

Another type is utility tokens, which provide access to a product or service offered by a project. They do not necessarily represent ownership but grant certain privileges or functions within a platform. Lastly, security tokens are akin to traditional financial instruments like stocks or bonds, representing ownership in an asset and often regulated by financial authorities.

The Emergence of NFTs

NFTs, short for Non-Fungible Tokens, are unique digital assets that represent ownership of a specific item or piece of content. Unlike regular tokens, NFTs cannot be exchanged on a one-to-one basis because each has distinct properties and values. This uniqueness makes them ideal for representing digital collectibles, art, music, virtual real estate, and even domain names.

NFTs are primarily built using standards like ERC-721 and ERC-1155 on the Ethereum blockchain, though other blockchains now support their own versions. Each NFT contains metadata that verifies its authenticity, scarcity, and ownership history. This data is stored on-chain, making it transparent and tamper-proof.

When you purchase an NFT, you're essentially buying a digital certificate of ownership, not necessarily the underlying content itself. For instance, owning an NFT of a digital artwork doesn’t mean you own the copyright; it simply means you possess the verified original version of that file.

Key Differences Between NFTs and Regular Tokens

The most fundamental difference between NFTs and tokens lies in fungibility. Regular tokens, especially fungible ones, are interchangeable and hold equal value. One DAI is always worth another DAI, just like how one dollar bill equals another.

In contrast, each NFT is unique, which gives them non-fungible characteristics. Even if two NFTs exist on the same platform and appear similar, their metadata, serial numbers, and ownership records make them distinct. This uniqueness allows for individual pricing and valuation, unlike standard tokens that follow uniform market rates.

Additionally, use cases differ significantly. While tokens are widely used for fundraising through Initial Coin Offerings (ICOs), governance in decentralized autonomous organizations (DAOs), or as mediums of exchange, NFTs focus more on digital ownership and provenance. They empower creators to monetize their work directly without intermediaries and enable users to prove ownership of rare or limited-edition items.

How to Create and Manage NFTs

Creating an NFT involves a process known as minting. To begin, you need a digital wallet compatible with NFT platforms, such as MetaMask, Trust Wallet, or Coinbase Wallet. You also require some cryptocurrency to pay for gas fees during minting.

Here’s how to create an NFT:

• Choose a blockchain: Most NFTs are created on Ethereum, but alternatives like Binance Smart Chain, Flow, and Solana are gaining popularity.
• Select an NFT marketplace: Platforms like OpenSea, Rarible, Mintable, and LooksRare allow users to mint and sell NFTs.
• Upload your file: Supported formats usually include JPEG, PNG, MP3, MP4, and GIF. Ensure your file meets the size and format requirements.
• Add metadata: Provide details such as title, description, attributes, and properties that help define your NFT's uniqueness.
• Set royalties: Decide what percentage you want to earn from future resales of your NFT.
• Pay gas fees and confirm transaction: Once everything is set, confirm the minting process and wait for the NFT to appear in your wallet and the marketplace.

Managing NFTs involves transferring, selling, or listing them on secondary markets. Always ensure your wallet is secure and double-check recipient addresses before sending any NFTs.

Token Standards and Protocols

Tokens operate under specific standards that dictate their behavior on a blockchain. The most common standards on Ethereum are ERC-20 for fungible tokens and ERC-721 for NFTs. There’s also ERC-1155, which supports both fungible and non-fungible tokens within the same contract.

These standards ensure compatibility across wallets, exchanges, and dApps. For example, any ERC-20 token should work seamlessly with a wallet that supports this standard. Similarly, NFT marketplaces must recognize ERC-721 or ERC-1155 contracts to display and trade NFTs correctly.

Developers use smart contracts to implement these standards when launching new tokens. These contracts define rules for token transfers, approvals, balances, and other functionalities. Understanding these protocols helps users verify the legitimacy and functionality of tokens and NFTs before interacting with them.

Security Considerations for NFTs and Tokens

Both NFTs and tokens come with security risks that users must be aware of. Since blockchain transactions are irreversible, mistakes can lead to permanent loss of assets. Common threats include phishing attacks, fake marketplaces, malicious smart contracts, and scams involving counterfeit NFTs.

To protect yourself:

• Use trusted wallets and platforms: Stick to well-known services with strong reputations.
• Verify smart contract addresses: Before approving any transaction, cross-check the contract address with official sources.
• Enable two-factor authentication (2FA): This adds an extra layer of security to your accounts.
• Never share your seed phrase: It grants full access to your wallet and all associated assets.
• Be cautious of “free” NFTs or airdrops: Some may contain malware or phishing attempts designed to steal your private keys.

Educating yourself about common attack vectors and staying updated on best practices is essential for safely navigating the crypto space.

Frequently Asked Questions

Q: Can I convert a regular token into an NFT?A: Technically, you cannot convert a fungible token into a non-fungible token directly. However, some projects use tokenized representations where a unique identifier is added to a token to simulate NFT-like properties. This is uncommon and usually requires custom smart contracts.

Q: Do NFTs always increase in value over time?A: No, the value of an NFT depends on factors like demand, rarity, creator reputation, and market trends. Some NFTs lose value quickly, while others may appreciate based on community interest and utility.

Q: Are all NFTs built on Ethereum?A: While Ethereum was the first major platform for NFTs, many other blockchains now support NFT creation. These include Binance Smart Chain, Solana, Polygon, Avalanche, and Flow, each offering different features and lower fees than Ethereum.

Q: What happens if I lose my wallet where I store NFTs?A: If you lose access to your wallet and don't have a backup of your seed phrase, you will permanently lose your NFTs. There is no central authority to recover lost assets on the blockchain, so safeguarding your recovery phrase is critical.