---
title: 4.1 What is a Non-Fungible Token (NFT)?
description: Defining and understanding NFTs
---

# 4.1 What is a Non-Fungible Token (NFT)?

_“NFTs are a transportation technology, transaction technology, and ownership technology for intangible assets. **Most of the world-is non-fungible**. A part from financial products, most of the world is non-fungible. The largest asset class in the world is non-fungible. The only fungible things are some forms of money and securities. Are we going to tokenize real world assets? Sure. And most of them are non-fungible. We are going to start with things that are natively digital, NFTs started with collectables, art, and others.” - [A16z Podcast on NFTs](https://web3-with-a16z.simplecast.com/episodes/nfts-use-cases-art-tech-adoption-mainstreaming-kWvgrvhO)._


“_In the physical world, we own items. In fact, the majority of the things we interact with are owned independently. As we migrate into the digital world, why would we not do the same? In other words, digital ownership of unique assets and events, is a logical and necessary next step in the maturation of the internet. Of course we want to own our digital items! Why in the world would we cede that ground to a third party?!” - mk-ultra.near_

Many people are familiar today with non-fungible tokens (NFTs). Usually it has to do with some type of profile picture project (PFP), or a digital community using PFP’s like the Bored Ape Yacht Club. 

The Promise of Web3 is a radical overhaul of how value is accrued, managed, directed, and accessed. In conceptualizing NFT’s we are going to be zooming in specifically on the nature of value, and how tokenization of non-fungible value (value that is unique) is positioned to converge smoothly with how ‘digital’ the average person is beginning to live. To start from the very, very basics, we can differentiate fungible value, from non-fungible value. 

**Fungible Value / Tokens:** Value that is identical with itself, irrespective of how many parts it is segmented into. Examples of fungible value are tokens and currencies! One NEAR is One NEAR - and it doesn't differentiate the NEAR you have from the NEAR I might have. 

**Non-Fungible Value / Tokens:** A tokenized representation of a unique form of value. The non-fungibility of the asset is created by the contract itself. Whether the contract wraps an image, a video, specific data, access to a link, or a ticket that can be redeemed for something - is determined by the creator of the asset. However unlike tokens or currency, each and every non-fungible asset is uniquely identified and inconvertible with one another. 

## Why are non-fungible tokens important?

Many people have had a lot of trouble ‘getting’ NFT’s because they are missing the bigger macro trends taking place. Punk6529 outlines his framework for making sense of NFT’s in a manner that is original and extremely accurate for how one can look to leverage this technology for the future: 

## Two Frameworks for Understanding NFTs

### Framework 1: NFT’s as a Transportation and Financial Technology for Intangible Assets:

_“NFT’s as a transportation technology, carrier technology, financial technology, and transaction technology for intangible assets. Intangible assets are a gigantic category of societal assets. This means it's a new asset class. The explicit number is $77 trillion dollars of intangible assets on the books. This is larger than most of the global money supply and Gold ($10 trillion). We can use NFT’s to move around any of these intangible assets. Social convention determines the place of the token - if the artist and collectors agree the token represents the piece of art, it is enough. Social convention is all that is needed.”_

The main takeaways from Punk’s description of framework one centers on the notion of existing value, having trouble getting out into a domain whereby it can be traded, leased, or utilized in cohort with other forms of value. There are 77 trillion dollars of intangible assets, none of which can be easily moved around. NFT’s are an emergent technology to move such assets around. What is required to do this, is simply a change in social convention to recognize that the assets represent the rights and abilities put into them. So for example, an Artist and a collector must agree that the ownership of the token in the wallet, gives legal rights to move the piece of art. Or a broadcaster that a clip from a sports match gives ownership to re-monetize online. And so forth. The most important thing about this first framework is that it is a way of ‘opening up’ existing intangible value locked around the world today. 

### Framework 2: NFT’s as a New Class of Value, for Hitherto Un-valuable Assets

_“Most of the world is non-fungible. Other than financial products, everything else is non-fungible. Your house is non-fungible. Your office is non-fungible. The largest asset class in the world is real-estate. Your car is not fungible. Nothing is fungible. The only things that are fungible are some forms of money, and some securities. Are we going to tokenize real world assets? Yes and most of them are not going to be fungible tokens.”_

The second framework for making sense of NFT’s is the idea of creating entirely new forms of value, through the tokenization of non-fungible value in the world. According to Punk, this is largely overlooked today by both entrepreneurs and investors: _Most of the world is non-fungible!_ From items like houses and cars, to intangible realities like time and focus. The thesis of the second framework is that as the world becomes more digital - and capable of digitizing representations and facets of the physical world, that non-fungible value is poised to expand drastically as much of our world of value is non-fungible. 

With these two frameworks, we can get into the details of the _what_ and _how_ of NFT’s. 

## Understanding Non-Fungible Tokens (NFTs): The What and the How.

The unspoken presupposition of the product _non-fungible token_, is that we are taking _something_ of value and we are uniquely tokenizing it as a way of attaching value to it. More specifically, the value attached is a result of scarcity or exclusivity - as a non-fungible token there is a finite amount of whatever _something _we have tokenized. And that scarcity makes it limited. If the underlying _something _is of interest to many people, then it follows that the value of making it digitally scarce is proportionately high. 

For a nice conceptual overview we can say the following: The _what _can be any of the following (note these are not mutually exclusive and there will be overlap between the different types): 

* **Any form of media or content - from the source.** Art, Music, an Article, a news clip, a highlight reel, etc. 
* **A financial instrument or financial position**. A bundle of assets (to create a basket, or loan), a house, a commodity, or a stake on a network that is yielding assets.  
* **A future opportunity.** Tickets for an event! A VIP dinner with a celebrity. 
* **The promise of a future opportunity.** Becoming eligible to become selected to receive a ticket! Get access to a community that gives away special investor deals. 
* **A benefit.** Immediate discount on your next purchase. Special VIP privileges when you attend an event. A free beverage next time you buy something at Starbucks.
* **Proof of participation.** A badge showing you attended this summit, sporting event, or seminar.
* **Proof of behavior or time commitment.** A badge for contributions to a team or project. A representation of how many games you watched. A identifier of in-person attendance to sports events.
* **Past behavior.** A certificate of completion. Recognition of being on a team. Recognition of scoring a goal, or being a scorer of points in a sport. Recognition of having gotten a penalty. Multimedia of your past performance.
* **Future behavior.** A free trip to the Bahamas. Eligibility to play in a D1 event since you passed the drug test. Access to a super-power in a video game. Ability to play as a specific character. Unlock for wearing a real-world item.
* **As a Reference of Ongoing Behavior. With the metadata being updated in the NFT.** The state of your sports career and game to game performance. The revenue and data from a day of sales at a sporting event. Your workout performance in the gym over a season.
* **Proof of accomplishment.** A diploma, award, belt of accomplishment in a martial arts sport, digital ID of your fastest pitch. 
* **Access**. Into the locker room. Into the VIP lounge. Into the Media area. Into the special fans club. 
* **Rights to use or incorporate.** As a professional player being used in a game for instance - to be able to take a piece of media of yourself and provide rights for others to use in their content or games.
* **Any type of recorded data, from a user or indicative of a user.** Number of times the user has played a game. Number of assets traded. Number of streams watched. Essentially we are taking the user behavior and wrapping it in a token representative of what that behavior has been. This is a more specified version of ‘past behavior’ specifically as it relates to the data of users. 

And now we can line up all of these _what’s_, and get into the weeds of _how_ they can be used: 


* **Wrap It (Enclose the Value):** My image can be purchased and there is a finite amount of copies. My song can only be listened to, if you own the NFT for it. 
* **Imbue Value:** Only with the NFT, are you eligible to lock it up and receive rewards from it. 
* **Fractionalize It:** The yield instrument can then be splintered into 1,000 pieces, and individually bought or sold as portions. 
* **Earn From It: (Royalties)** My article is re-sold or re-purchased for 10 years, and I earn 2% each time, irrespective of the price it is sold for. 
* **Gate / Protect:** You can only read this content, access this video, or comment on this post, with a scarce NFT. 
* **Push other Tokens Into It / Provide A Benefit To Something:** Holding the NFT gives you access to certificates, discounts, or other received benefits sent only to NFT holders, based upon prior agreements. 
* **Represent or Indicate: (Time Scarce NFTs)** You are given the NFT only after you have done activity X, spent time Y, or succeeded in event A. 

Usually at this point, is when the head is spinning, because it is so incredibly mind-boggling that we can wield software to entirely change, identify, and reward behavior.

This, broadly speaking, is the conceptual framework you should have in mind, going forward, as we think about this emerging asset class or product in Web3. And neither the _What_ nor the _How_ is exhaustive! These are open dynamic categories that will evolve with the world in the future. 

## Understanding the Long-Term Value Proposition of NFTs

When we step back and look at the roll-out of non-fungible value systems, there are two clear macro trends determining this process: 



### 1. Going Digital

Going digital refers to the process by which humans are spending more and more of their time in a digital reality (for example, looking at a screen). The macro trend suggests however, that this experience will broaden to encompass more and more of our lives, while also becoming more immersive and comfortable. As a result, the day to day human experience will be spending more and more time in the digital realm - and as Punk suggests - _we are going to want to have our stuff in that realm!_

_“I am not just a user where I can get kicked out of their database at any point in time. We can be thrown out with zero recourse at any point in time. With NFT’s you don’t have to be guests for digital options…The internet is becoming more immersive and more integrated. And we will be spending more time there. In which case we will want to have our stuff there. Most of that stuff, other than our money, is going to be non-fungible, it is now solved how we should own it.” (16:05)_

Notice the direction of this macro trend that facilitates the long-term value proposition of NFT’s centers on the movement of the human individual from the physical into the digital. 



### 2. Expanding From Digital to Physical

Conversely, the second macro trend, centers not on the human being per se, but rather the process by which NFT’s diffuse outwards into the world. This macro trend - similarly taking place with DeFi - begins with natively digital objects (like digital art and collectables), from which it can progressively expand outwards into In-game objects, brands and communities, fashion, and so forth. To paraphrase Punk: 

_We will start with things that are natively digital. NFT’s started with collectables, and then they expand from there. In-game objects. Brands and communities. Fashion. More generalized IP, blue-prints, designs - metaverse objects. Physical objects. We are only at the very, very beginning. There is no particular point where this ends._

Opposite from the first trend, the second trend sees the applicability and access to NFT’s diffusing outwards from the digital realm to increasingly sophisticated physical items. 

## Conclusion

Taken altogether, the two macro trends would suggest a convergence in the coming decade, from which the user is optimally prepared to handle non-fungible value in a digital environment, and the technology is sufficiently mature and diffused, from which it encompasses an ever-increasing amount of the physical world. This would apply - in line with the frameworks above - to both existing intangible assets, as well as hitherto un-valuable non-fungible items, which can now become tokenized.  
