What is tokenization? Learn about Fungible, non fungible tokens & more

In the world of digital assets, we come across two types of tokens - fungible and non-fungible. While both terms might sound similar, they have vastly different meanings and implications. In this blog post, we'll provide a deeper dive into tokenization and how it's powering Embedded Crypto.

Token Standards and Soulbound Tokens

In the world of blockchain and cryptocurrencies, token standards play a crucial role in defining how tokens are created, managed, and transferred on the blockchain. There are several token standards available, but some of the most popular ones are ERC-20, ERC-721, and ERC-1155.

ERC-20 is a token standard that defines a set of rules for creating fungible tokens on the Ethereum blockchain. Fungible tokens are interchangeable, meaning that one token is equal to another, and can easily be exchanged for one another. This standard has been widely adopted by many projects, including stablecoins such as Tether and USDC.

ERC-721, on the other hand, is a token standard that defines a set of rules for creating non-fungible tokens (NFTs) on the Ethereum blockchain. Each ERC-721 token is unique and has its own set of attributes, making it different from other tokens. This standard has been widely used in the creation of digital art, collectibles, and gaming assets.

ERC-1155 is a newer token standard that allows for the creation of both fungible and non-fungible tokens on the same contract. This standard is designed to be more efficient than previous standards, as it allows for the creation of multiple tokens in a single transaction, reducing the gas fees and making it more cost-effective.

Another interesting development in the world of token standards is the concept of Soulbound tokens, introduced through the Ethereum Improvement Proposal (EIP) 4671. Soulbound tokens are a type of NFT that is permanently bound to its owner, ensuring that it cannot be transferred or sold. This concept is designed to provide a sense of ownership and identity to NFT owners, as they can permanently attach their digital identity to their assets. Since the introduction of Soulbound tokens, there have been further EIPs looking to provide additional functionality which is one of the reasons the Ethereum ecosystem continues to change and expand.

Fungible vs non-fungible

The term ‘fungible’ simply means that one asset is just like another. There is no difference, and both assets are interchangeable. This is the fundamental mechanism describing money. We all recognize $20 USD is $20 USD, and can easily exchange that for other goods and services. Prior to fungible asset classes we generally needed to use some type of barter system, trying to come to agreements such as my basket of apples is worth half a bucket of your turnips, which made trade much more difficult.

When assets are non-fungible, this means that an asset, while similar to others, has a unique value and is differentiated from others. While I could easily exchange $1 for $1, we can’t easily exchange an apple with a Picasso, since each has their own unique and different value. 

In cryptocurrency, a fungible coin or token is one that can be easily exchanged for another of its kind. An example would be Ethereum. Once added to your account there is no way to tell one ETH from another, and I can easily exchange them. On the other hand, a good example of non-functional token, or NFT, is a CryptoKitty or similar piece of digital art that has been ‘minted’ on the blockchain. You can’t easily exchange one CryptoKitty for another, since each has its own unique value. You need to convert (or sell) those assets to some type of fungible common denominator, like Ethereum.

Although Bitcoin is often referred to as a fungible digital currency, some argue that it is actually a non-fungible token. This is because every Bitcoin transaction involves specific inputs and outputs that can be traced on the blockchain. In other words, each satoshi (the smallest unit of Bitcoin) is not interchangeable with another satoshi, as they have unique transaction histories.

While Bitcoin may not be considered a typical NFT in the sense that it doesn't represent ownership of unique digital content or assets, its non-fungible properties highlight the complexity of tokenization and the potential for new use cases and applications beyond traditional currencies. As the field of tokenization continues to evolve, it is likely that we will see more innovative approaches to token creation and management that push the boundaries of what we consider fungible or non-fungible.

Big Companies in the NFT Space

Non-fungible tokens (NFTs) have become a popular topic of conversation in recent years, with many big companies jumping into the space to capitalize on the growing demand for unique digital content. Here are some examples of big companies in the NFT space:

1. 1. Candy Digital: Candy Digital is co-founded by Fanatics, Gary Vaynerchuk and others. It creates officially licensed NFTs that are tied to MLB teams and players, NASCAR, Netflix, WWE, and Getty Images. 

   2. Fanatics: Fanatics is a leading retailer of sports merchandise and apparel, and they have recently entered the NFT space with the launch of Fanatics NFT. Fanatics NFT allows fans to buy and trade unique digital collectibles that are tied to their favorite sports teams and players. The platform has already partnered with several sports leagues and teams, including the NFL, MLB, and Manchester City FC.

   3. Dapper Labs: Dapper Labs is the creator of CryptoKitties, one of the first popular NFTs on the Ethereum blockchain. They have since expanded to create other NFT-based games, such as NBA Top Shot, a platform for buying and selling officially licensed NBA NFTs. Dapper Labs has also developed the Flow blockchain, a fast and efficient blockchain designed for NFTs and other digital assets.

   4. Animoca Brands: Animoca Brands is a leading digital entertainment company that creates and publishes a wide range of mobile games, including blockchain games that use NFTs. They have partnered with several major brands and intellectual property owners, such as Formula 1, MotoGP, and The Sandbox, to create NFT-based games and experiences.

Expanded Use Cases for Non-Fungible Tokens

Non-fungible tokens (NFTs) have opened up a new world of possibilities for digital ownership and exchange, with unique digital content such as digital art, internet collectibles, and even digital player cards being sold for millions of dollars. Here are some expanded use cases for NFTs:

1. Replacing Usernames and Passwords: NFTs and digital wallets could be used to replace traditional usernames and passwords, providing a more secure and user-friendly method of authentication. Instead of remembering multiple usernames and passwords for different websites and services, users could simply connect their digital wallet and authenticate themselves using the NFTs held in their wallet. For example, a website with a employee or members-only section could require users to hold a specific NFT in their wallet to gain access.

2. Digital Art and Collectibles: NFTs have become a popular way for artists to monetize their digital artwork and create unique, one-of-a-kind collectibles. Platforms like SuperRare and OpenSea allow artists to showcase and sell their digital artwork as NFTs, with some pieces selling for millions of dollars.

3. Gaming and Esports: NFTs have the potential to revolutionize the gaming and esports industries by allowing for the creation of unique in-game assets that can be bought, sold, and traded by players. These assets can range from unique skins for characters to rare weapons or equipment. NFTs also allow for the creation of player cards and other digital collectibles that can be sold as limited edition items.

4. Ticketing and Events: NFTs can also be used in the ticketing industry to provide a secure and transparent way to sell and verify tickets for events. NFTs can be used to create unique tickets that cannot be duplicated, ensuring that the ticket holder is the rightful owner of the ticket. This also eliminates the need for ticket scalpers, as the value of the ticket is tied to the NFT and cannot be resold without the transfer of the NFT.

5. Real Estate: NFTs can also be used in virtual reality and metaverse environments, but also physical ownership of real estate. There are many projects looking to bridge the gap between real world assets, but one example would be USDC.homes and Roofstock where you can finance your crypto mortgage loan on Ethereum. As virtual worlds and metaverse platforms continue to grow in popularity and the legal structure of bridging real world assets becomes clearer, the use of NFTs to represent ownership will continue to rise.

6. Music and Entertainment: NFTs can be used in the music and entertainment industry to represent ownership of digital content such as music, videos, and other media. This allows creators to monetize their work and provide a more direct relationship with their fans.

Cross-Chain Interoperability and Transactions

One of the biggest challenges facing the blockchain industry is achieving cross-chain interoperability, which refers to the ability of different blockchain networks to communicate and exchange information with each other. With so many different blockchains in existence, each with their own unique features and protocols, interoperability is crucial for enabling seamless transactions and unlocking the full potential of tokenization.

Several companies and projects are working on solutions for cross-chain interoperability. One example is Wormhole, a cross-chain bridging platform that allows for the transfer of tokens and assets between different blockchain networks. Wormhole utilizes an innovative protocol that enables the creation of decentralized bridges between different blockchains, including Ethereum, Binance Smart Chain, and Polkadot, among others.

Nomad is another decentralized exchange platform that supports cross-chain trading between different blockchain networks. Nomad uses an innovative cross-chain bridging mechanism to facilitate seamless transactions between Ethereum, Binance Smart Chain, Polygon, and other networks.

Another company working on cross-chain interoperability is XY Finance, which enables fractional ownership of NFTs through its unique cryptographic token model. XY Finance utilizes layer-2 scaling solutions and cross-chain bridges to connect different blockchain networks and enable secure and efficient transactions. As well, XY Finance utilizes USDC for its X Swap funcationality.

Layer Zero is another project working on cross-chain interoperability, focusing on developing a universal blockchain interoperability protocol. This protocol will allow different blockchains to communicate and exchange information with each other, enabling the creation of new use cases and applications for tokenization. Layer Zero and Wormhole

Other notable projects working on cross-chain interoperability include Polkadot, Cosmos, and Chainlink. Polkadot is a multi-chain platform that enables cross-chain transactions and communication between different blockchain networks. Cosmos is a decentralized network of independent blockchains that can communicate with each other through its inter-blockchain communication protocol (IBC). Chainlink is an oracle network that connects smart contracts on different blockchains to external data sources, enabling the creation of more complex and robust decentralized applications.

Conclusion

Tokenization is driving change around the globe, unlocking new opportunities for digital ownership and exchange. Non-fungible tokens (NFTs) are at the forefront of this movement, providing a way to represent ownership of unique digital content and assets on the blockchain. Token standards such as ERC-20, ERC-721, and ERC-1155 play a crucial role in defining how tokens are created, managed, and transferred on the blockchain, while new developments like Soulbound tokens through EIP-4671 offer exciting new possibilities.

As more companies and industries explore the potential of NFTs and tokenization, it is clear that this digital revolution is only just beginning. To take part in this revolution, developers and entrepreneurs need the best platform to do so, and that platform is Cybrid.

Cybrid is a comprehensive Embedded Finance provider that empowers neobanks, financial institutions, and payment providers to seamlessly integrate crypto services into their products. With a range of features such as secure digital asset management, compliance, and scalable infrastructure, Cybrid ensures businesses can confidently build and launch innovative payment apps, trading platforms, and other financial application use cases that leverage cryptocurrencies like Circle USDC.