Crypto and NFTs. The two biggest buzzwords of the industry. Unless you have been living under a rock you have probably heard these two terms. But what exactly are they and what are the differences?
Don’t worry, in this article, I will be answering those questions and much more. So without further ado, let’s jump right in.
So what’s the difference?
In simple terms, cryptocurrencies are digital tokens stored on decentralized networks known as blockchains. Blockchains are essentially a database where every transaction is open and permissionless. Similarly, NFTs utilize this same technology but with one key difference, non-fungibility. Each NFT has unique metadata which cannot be duplicated or faked. Conversely, cryptocurrencies are interchangeable.
What are Cryptocurrencies
Cryptocurrencies are currencies or tokens which are cryptographically stored on the blockchain. They facilitate transactions without the need for a third party.
Rather than a central authority governing the system, it is secured by a decentralized network of computers. This makes it completely permissionless. Anyone from anywhere can access the network and trading is done peer to peer.
The technology also utilizes various encryption techniques making it extremely secure. Not to mention, blockchain technology is open source.
In Lehman’s terms, a blockchain network is an online database that records every transaction, these transactions are open source making them completely transparent. Anyone can view the transactions.
What are NFTs?
Put simply, NFTs stand for non-fungible tokens. Think of them as digital receipts which are recorded on a public ledger. Each NFT has a unique identifier. In turn, this means they cannot be faked or duplicated cutting down on fraudulent activities.
They usually represent real-world assets such as art, music, and photography. The inherent value of these assets is usually determined by the rarity of the NFT.
Thanks to the decentralized technology artists don’t have to deal with an intermediary. No gallery or broker is taking a cut of the profit. Additionally, they can set the contract terms themselves. For instance, they can set a percentage of each sale to be taken for royalties. This includes the first sale and subsequent secondary sales.
Lastly, they utilize the same cryptographic technology as cryptocurrencies making them decentralized, permissionless, and transparent.
Comparison
| Cryptocurrencies | NFTs |
|---|---|
| Non fungible (Interchangeable) | Fungible (Singular and unique) |
| Secured by blockchain technology | Also secured by blockchain technology |
| Decentralized | Decentralized |
| Economic | Economic and non economic (music, art, etc.) |
Firstly, let’s talk about the first key difference fungibility. NFTs are truly unique assets. This can be a 1-of-1 digital painting or photograph. Each piece contains specific metadata, this includes a token ID, the collection it belongs to, and the specific traits. These traits determine the rarity.
Conversely, cryptocurrencies are interchangeable. They are not unique. They are primarily used as a medium of exchange. The relationship is purely transactional. This is similar to FIAT money. Users can exchange 5 bitcoin for 5 bitcoin like they would $5 for $5.
Whereas for NFTs it transcends into other aspects. For example, they can be seen as status symbols. People show off their rare collections with pride.
They also have utility. Holders of NFTs are granted perks, this could be exclusive access to events, merch, and concerts. This community spirit is not as prominent in popular crypto communities such as bitcoin and Ethereum.
Now let’s talk about the similarities. As mentioned earlier, both technologies utilize blockchain technology making them open to scrutiny. The code is verifiable which highlights any malicious activity.
With cryptocurrencies, this is important for highlighting smart contract bugs and exploits. Whereas, for NFTs, this can be used to identify fakes or plagiarized artwork.
Lastly, cryptocurrencies and NFTs can be exchanged for each other. Rather than traditional currencies such as US dollars, most trades use cryptocurrencies. This is because they are decentralized and permissionless.
Ultimately, this easy trading between both NFTs and cryptocurrencies can only happen because they utilize the same underlying technology.
If you want to view this article in video format then check out my video below:
Final Thoughts
Overall, cryptocurrencies and NFTs are more of the same than different. They are both decentralized cryptographic assets making them truly permissionless and transparent. However, there is one notable difference in the form of fungibility. NFTs are truly unique, whereas cryptocurrencies are not. Ultimately, they have their pros and cons. I hope you found this article useful and thanks for reading.
Want to learn about NFTs and copyright? Click here.
