Non-fungible token (NFT) is a term used to describe a unique digital asset whose ownership is tracked on a blockchain, such as Ethereum. Assets that can be represented as NFTs range from digital goods, such as items that exist within virtual worlds, to claims on physical assets such as clothing items or real estate. In the coming years, we will see NFTs used to unlock entirely new use cases that are only made possible by crypto.

Tokens redeemable for real world goods on Zora

While the Ethereum ecosystem is where most NFT activity has taken place to date, NFTs can exist on other smart contract platforms too. This is because, at their core, NFTs are just digital abstractions used to represent assets that are one of a kind. Non-fungible token isn’t the most intuitive term since we don’t commonly refer to the fungibility of objects in the physical world, but this is an important technical distinction when it comes to how an asset is represented on a blockchain. The goal for this post is not to detail every project within the NFT space, but to give a high level overview of what NFTs are, why they are interesting, and showcase some of their potential use cases.

NFTs are powerful because, when combined with other financial building blocks on Ethereum, they allow anyone to issue, own, and trade them. This makes interacting with NFTs significantly more efficient than in traditional platforms. The same reason why cryptocurrency used in payments is more efficient than traditional payments, that it is borderless and significantly easier to transfer, applies to NFTs. For example, if you want to create tradable in-game items as a game developer, then you can instantly have them be tradable through protocols that allow for decentralized exchange of NFTs. You don’t have to create your own marketplace or go through the onboarding process of a centralized platform in order to have the items be tradable.

NFT activity can go well past trading and include actions like being able to borrow and lend, support fractional ownership (e.g. NIFTEX), or use it as collateral in taking out a loan (e.g. NFTfi). The possibilities are endless when you have the ability to combine NFTs with DeFi building blocks. For example, the game Aavegotchi combines DeFi and NFT gaming where each Aavegotchi character represents a user’s collateral that is deposited within the lending platform Aave, but you can also battle the characters, level them up, and equip wearables that change their traits.

Aavegotchi gaming attributes change based on actions taken in DeFi