Sean
- A non-fungible token (NFT) is a unique unit of data, a bit sequence, that is tracked using a digital ledger (which is called a blockchain)
- In general, a ledger is a book that is used to record all financial transactions for a business
- In this case, a distributed, digital ledger is a set of replicated and synchronized databases around the world that store who transfers what digital data to who. The transaction data across all the databases in the blockchain is exactly the same.
- The digital units of data, or bit sequences, tracked by the blockchain can be unique but interchangeable (like bitcoin and other cryptocurrencies) or can be unique and non-interchangeable (like a unique tokens or NFTs).
- The term coin is used for unique, but interchangeable digital data that is used as currency. I don’t have first hand experience working with crypto under the hood, but I’m assuming that there are two parts to every bitcoin file. The bitcoin binary, which I’m assuming is either a common sequence of 1’s and 0’s that has been defined as the standard unit of data, or a unique binary UUID that uniquely identifies the coin. The second part or the data is the digital signature that is stored with the binary that shows proof of ownership.
- This digital signature is the same type of digital signature used by websites for securing communication over HTTPS. Digital signatures are created using cryptography, hence the term, cryptocurrencies. Cryptography is a computer science term that refers to the methods used to secure information and communication.
- To understand the difference between digital coins and tokens better, let’s look at real world examples.
- Say you have a penny and I have a penny. Both pennies are unique. Say yours says 1945 and mine says 1985. They are unique, but we can exchange them and still have a pennies in our pockets.
- On the other hand, the term token is used for unique and non-interchangeable digital data. For example, let’s say you get a token from arcade 1 in California that you use to play games in that arcade. Then you fly out to New York and get a token from arcade 2 to play games there. Unless the two arcades across the country are from the same franchise, which most likely they are not, you won’t be able to use the tokens from arcade 1 in California at arcade 2 in New York. The tokens are unique and not interchangeable.
- Bitcoin and NFTs are both just bit sequences that contain a digital signature of ownership, and whose transfer of ownership is traced using the blockchain. Every transfer of a bitcoin or NFTs is recorded and synchronized across all the databases in the entire blockchain.
- The different blockchains track their own economy of digital coins and tokens. Each type of cryptocurrency is managed by its own blockchain ecosystem of databases and endpoints (like digital wallets and crypto ATMs).
- When you buy something with bitcoin, you transfer the coin data to the seller’s digital wallet. In this transaction, your signature is removed from the sequence, their signature is added to the sequence, and the transaction is recorded and mirrored across the entire blockchain.
