Tokens and NFTs: Understanding Digital Ownership
Part 4 of our 5-part Blockchain Essentials series
In Parts 1 through to Part 3, we covered blockchain fundamentals: the distributed ledger, consensus mechanisms that keep it secure, and smart contracts that make it programmable.
Now we turn to what many people first think of when they hear “blockchain”: tokens and NFTs.
These digital assets have captured public attention through headline-grabbing sales and volatile speculation. But beyond the hype lies genuine innovation in how we represent and transfer ownership. Understanding tokens and NFTs is essential for anyone evaluating blockchain’s practical applications.
Fungible vs Non-Fungible: The Core Distinction
Before diving into tokens, we need to understand a fundamental concept: fungibility.
Fungible items are interchangeable. One £10 note is equivalent to any other £10 note. If you lend someone £10, you do not expect that specific note back; any £10 will do. Currencies, commodities like gold, and most financial instruments are fungible.
Non-fungible items are unique and not interchangeable. A specific painting is not equivalent to another painting, even by the same artist. Your house is not interchangeable with your neighbour’s house. Each item has distinct characteristics that affect its value.
This distinction maps directly onto blockchain tokens:
Fungible tokens are interchangeable digital assets. If you hold 100 tokens, each one is identical to every other token of that type. These are typically used for cryptocurrencies, governance rights, or representing fungible real-world assets.
Non-fungible tokens (NFTs) are unique digital assets. Each NFT has a distinct identity and cannot be substituted for another NFT, even within the same collection. These represent ownership of unique items: artwork, collectibles, tickets, credentials, or real-world assets.
Token Standards: The Technical Foundation
Blockchain tokens follow standards that define how they work. These standards ensure that tokens are compatible with wallets, exchanges, and other applications across the ecosystem.
ERC-20: The Fungible Token Standard
ERC-20 is the dominant standard for fungible tokens on Ethereum. It defines a common interface that all ERC-20 tokens share:
- Total supply of tokens
- Balance of any address
- Transfer tokens between addresses
- Approve third parties to spend tokens on your behalf
This standardisation means that any wallet or exchange supporting ERC-20 can automatically work with any ERC-20 token. When a new project launches a token following this standard, it immediately benefits from the existing infrastructure.
Most cryptocurrencies beyond Bitcoin and Ethereum’s native currency are ERC-20 tokens: stablecoins like USDC, governance tokens, utility tokens for specific platforms, and tokenised assets.
ERC-721: The NFT Standard
ERC-721 established the standard for non-fungible tokens. Unlike ERC-20, where tokens are interchangeable, each ERC-721 token has a unique identifier:
- Each token has a distinct token ID
- Ownership is tracked per token, not per balance
- Metadata links each token to its associated content
- Tokens can be individually transferred or approved
This standard enabled the NFT boom: digital art, collectibles, gaming items, and more. Each NFT is verifiably unique and ownership is recorded immutably on the blockchain.
ERC-1155: Multi-Token Standard
ERC-1155 combines features of both fungible and non-fungible tokens in a single contract. It allows a single smart contract to manage multiple token types:
- Some tokens can be fungible (useful for in-game currencies)
- Some can be non-fungible (unique items)
- Batch transfers reduce transaction costs
- More efficient for applications with many token types
Gaming applications particularly benefit from ERC-1155, where players might have both fungible resources (gold, gems) and unique items (specific weapons, characters).
Beyond Digital Art: Real NFT Utility
Public perception of NFTs often focuses on digital art sold for extraordinary sums. While the art market demonstrates one use case, it barely scratches the surface of what NFTs enable.
Tickets and Access Credentials
NFTs make excellent tickets. Each ticket is verifiably unique, cannot be counterfeited, and includes programmable rules:
Resale controls: Smart contracts can limit resale prices, preventing scalping while still allowing legitimate transfers.
Royalties: Original issuers can receive a percentage of secondary sales automatically, creating ongoing revenue streams.
Authenticity: Buyers can verify tickets came from the legitimate issuer by checking the blockchain.
Collectibility: Unlike paper tickets that get lost, NFT tickets persist in your wallet as memorabilia.
At REPTILE.HAUS, we built satosh.ie as a decentralised raffle platform that issues NFT tickets directly from smart contracts. Each ticket is verifiably part of a limited set, the raffle rules are transparent and immutable, and winners are determined by verifiable on-chain randomness. No trust in a raffle operator required; the code guarantees fairness.
Licences and Credentials
NFTs can represent software licences, professional credentials, or membership rights:
Node licences: For decentralised networks, NFTs represent the right to operate network infrastructure and earn rewards.
We have built this exact infrastructure for projects like PlayFi.ai and LiftData.ai, developing their DePIN (Decentralised Physical Infrastructure Network) node licence sale portals and minting systems.
Licence holders receive NFTs representing their participation rights, with all terms encoded in the smart contract.
Professional credentials: Imagine degrees or certifications as NFTs, instantly verifiable by potential employers without contacting the issuing institution.
Membership: Club memberships as NFTs, where holding the token grants access to exclusive content, events, or services.
Real-World Asset Tokenisation
NFTs can represent ownership of physical assets:
Real estate: Property ownership as NFTs enables fractional ownership, easier transfers, and programmable revenue sharing.
Luxury goods: Authentication of watches, handbags, or wine through NFTs that track provenance from manufacturer to current owner.
Fine art: Physical artworks with paired NFTs proving authenticity and tracking ownership history.
Token Economics: Designing Sustainable Systems
Creating tokens is technically straightforward. Creating tokens with sustainable value requires careful economic design, often called tokenomics.
Utility Tokens
Utility tokens provide access to products or services within a specific ecosystem. Their value derives from demand for what they enable:
- Access to platform features
- Payment for services within the ecosystem
- Reduced fees or enhanced capabilities for holders
- Participation in platform governance
The challenge: token value depends on platform adoption. Many utility tokens have struggled because the underlying platforms failed to achieve meaningful usage.
Governance Tokens
Governance tokens grant voting rights over protocol decisions:
- Upgrade proposals
- Parameter changes (fees, rates, thresholds)
- Treasury allocation
- Strategic direction
These align token holders with protocol success, as their influence is proportional to their stake. However, concentration of tokens among early investors can undermine decentralisation goals.
Security Tokens
Security tokens represent investment contracts: equity, debt, revenue shares, or other financial instruments. They typically fall under securities regulations, requiring compliance with relevant laws.
The potential benefit: securities that can be traded 24/7 on global markets, with programmable compliance and instant settlement. The challenge: navigating complex and evolving regulatory frameworks.
The Launchpad Model
One of the most significant applications of tokens has been fundraising for blockchain projects. Launchpads provide infrastructure for projects to raise capital by selling tokens to early supporters.
At REPTILE.HAUS, we built DAOMaker.com, which became the leading launchpad in Web3. The platform processed over $90 million in token sales, demonstrating the scale these systems can achieve.
How it works:
- Projects apply and undergo due diligence
- Sale terms are encoded in smart contracts
- Participants commit funds, often staking platform tokens for allocation rights
- Smart contracts handle distribution according to predefined rules
- Vesting schedules release tokens over time
The smart contract approach ensures fairness: no preferential treatment, transparent allocation rules, and automatic enforcement of vesting schedules.
Creating Value vs Capturing Value
Understanding tokens requires distinguishing between two different propositions:
Creating value: Does the token enable something genuinely useful? NFT tickets solve real problems with counterfeiting and scalping. Governance tokens enable decentralised decision-making. Utility tokens can align user incentives with platform success.
Capturing value: Does the token mechanism effectively capture the value created? Many projects create genuine utility but fail to design token mechanisms that translate that utility into token value.
When evaluating tokens, consider both dimensions. A technically sophisticated token with no real utility is worthless. A genuinely useful platform with poorly designed tokenomics may benefit users without benefiting token holders.
Risks and Considerations
Token investments carry significant risks:
Regulatory uncertainty: The legal status of many tokens remains unclear across jurisdictions. Regulations are evolving, and tokens currently considered legal might face restrictions.
Market volatility: Token prices can swing dramatically. Unlike equities with underlying assets and cash flows, many tokens have no floor value.
Technical risks: Smart contract bugs can result in total loss of funds. Even audited contracts can contain vulnerabilities.
Project risk: Most blockchain projects fail. Token values depend on teams delivering on their roadmaps.
Liquidity risk: Many tokens trade on limited exchanges with thin order books. Selling large positions can be difficult or move markets significantly.
Building Token-Based Systems
For businesses considering tokens, several questions warrant attention:
Do you need a token? Many blockchain applications work fine without custom tokens. Adding a token introduces regulatory complexity and requires ongoing community management.
What utility does it provide? The best tokens have clear utility that drives organic demand. Tokens without genuine utility rely on speculation, which is unsustainable.
How will you achieve distribution? Token distribution affects decentralisation, regulatory classification, and community building. Airdrops, sales, liquidity mining, and other mechanisms each have trade-offs.
What are the regulatory implications? Token classification varies by jurisdiction. Early legal guidance can prevent costly problems later.
What Comes Next
Tokens and NFTs represent digital ownership in ways that were previously impossible.
Whether fungible currencies or unique collectibles, they enable new forms of value creation and exchange.
In Part 5, our final article, we will survey real-world blockchain applications across industries.
We will draw on our experience building systems from infrastructure projects to launchpads to DePIN networks, showing how the concepts from this series come together in production systems.
