Web3

NFTs vs. Tokens vs. Coins

In: Web3, NFTs

As you wade into the Web3 waters, you'll get used to seeing tons of acronyms and other lingo related to digital assets. I'd bet by now you've come across the acronym NFT, and probably have a solid grasp of what they are.

But just in case...

What is an NFT?

NFT is short for Non-Fungible Token. It's usually pronounced EN-EFF-TEE, but some say "nifty" to be cute. Something I pay homage to in the name of this blog!

A token that is "non-fungible" means that it is unique and cannot be substituted or replaced with another identical token. By definition, there is no identical token to an NFT.

You're likely thinking of NFTs as a .jpg or digital asset. That's the form they often take, but a Non-Fungible Token is a token. Tokens are really just a bundle of code with defined characteristics.

And to make things just a tad more complicated before I make them clear – a token is not necessarily a cryptocurrency.

What are tokens?

Here's a great breakdown of the differences between the two from Gemini:

The two most common blockchain-based digital assets are cryptocurrencies and tokens. The biggest differentiation between the two is that cryptocurrencies have their own blockchains, whereas crypto tokens are built on an existing blockchain.

And yes, you read that right, there are several blockchains. People (myself included) often say "the blockchain" but each cryptocurrency has its own blockchain underpinning it.

A blockchain is a technology that underpins a cryptocurrency. And cryptocurrencies enable tokens.

Let me give you an example...

Bitcoin and Ether are both cryptocurrencies with their own underlying blockchain. NFTs as we experience many of them are tokens built on top of those underlying blockchains (most commonly Ethereum).

Other cryptocurrencies (such as Solana) have their own blockchain and NFTs being built on those networks as well.

Things get confusing when people start using the term coins.

What are coins?

"Coin" is usually used in an imprecise manner – they could be using it to refer to a currency or a token. Rally.io is an up-and-coming platform offering "Creator Coins" but those coins are actually tied to $RLY, a token on the Ethereum network.

When ICOs (Initial Coin Offerings) had their day in the sun, those coins were actually tokens on a blockchain.

Non-fungible vs. fungible tokens

So NFTs are tokens, and tokens are tokens...what's the difference? Well, FUNGIBLE tokens are interchangeable units that store value. Bitcoin (BTC) is fungible. Ether (ETH) is fungible. All Bitcoin are identical to one another and all Ether are identical to one another.

NFTs can be (and are) created on any blockchain. But the most common fungible tokens you'll come across today are built on the Ethereum network and using the ERC-20 token standard. NFTs on the Ethereum network are commonly using the ERC-721 token standard.

What's a token standard? Think of it as a blueprint or set of best practices for how to write the code for your smart contract (a program run by a blockchain) so that it does the thing you want it to do.

Ethereum has created token standards to help token creators be successful in utilizing the Ethereum blockchain for their tokens.

From the Ethereum docs:

📓
Here are some of the most popular token standards on Ethereum:

ERC-20 - A standard interface for fungible (interchangeable) tokens, like voting tokens, staking tokens or virtual currencies.

ERC-721 - A standard interface for non-fungible tokens, like a deed for artwork or a song.

So while most of the jpegs you see are ERC-721 non-fungible tokens, they are also just a bundle of code saved publicly on a blockchain. The image you see is just part of the metadata inside that bundle of code – the image characteristic is defined. But when you buy an NFT, you're buying that bundle of code.

Conclusion

When it comes to digital assets, you'll hear all kinds of language thrown around. You'll want to determine whether someone is talking about a fungible token (like Bitcoin or Ether) or a non-fungible token that is completely unique.

Much of the theoretical value of NFTs comes from the idea that scarcity creates value. That may be true, but only if people truly value that scarcity. Scarcity for scarcity's sake doesn't necessarily create value...so there is speculation as to whether there is true value in the proliferation of "scarce" NFT projects.

Coins typically refer to fungible tokens but can be used incorrectly if someone doesn't really know what they're talking about.

Written by
Jay Clouse
I'm the lead Creator Scientist writing this newsletter. I also host Creative Elements, a narrative-interview podcast talking with today's top creators with more than one million downloads.

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