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How Are Crypto and NFT Different? An Easy Explanation

Understanding the future of the internet

NFTs or Non fungible tokens have taken over the world by storm. From a bunch of nerds to household dinner table conversations, Crypto has also taken the center stage.

But what is the difference between these ‘digital assets’? Are Crypto and NFT different? It’s easy to confuse the two as both of them are built on Blockchain Technology. To dig deeper into this question, let us understand these assets and their key characteristics.

What is Crypto?

Crypto, or often referred to as Cryptocurrency is a form of digital asset based on Blockchain technology. It is decentralized in nature and offers a wide variety of uses. For example, Bitcoin, the largest Cryptocurrency by market cap is serving the purpose of being a store of value. On the other hand, Ether is the transaction fee (gas) that powers transactions on the Ethereum Blockchain.

A few key features of Crypto are as follows:

Decentralized:

When it comes to Crypto, there is no central authority that is running the show. Think of it like this; When you transfer money via PayPal to your friend, it looks like a tap of a button, but it triggers the following chain of actions in the background:

In a nutshell, 3 different intermediaries (your bank, your friend’s bank, and PayPal) engage across multiple touchpoints to complete this transaction. This creates friction in terms of time required and hence the fees involved.

Now imagine that one could send money directly from their wallet to their friend’s wallet without involving any other party. That is what Crypto helps us do.

Immutable:

Since Crypto is decentralized, there is no central authority who is managing the transactions on your behalf. Immutability ensures that nobody can change the transactions at will. As a result, this makes the entire system fraud proof.

Trusted Environment:

Since Blockchains that power these Cryptos are extremely secure, the need of intermediaries is removed from the cycle. Consequently, the two parties involved in a transaction do not need to trust a third party. This allows individuals to send or receive Crypto seamlessly and in a trusted environment.

What is NFT?

NFTs stand for non-fungible tokens. That doesn’t help right? Let’s break it down. Fungibility is the ability of something to be interchangeable. Think of money. It doesn’t matter if the $1 bill in your pocket is swapped with the one in mine. It will make no difference to the overall value we hold. Once again, if I give you four quarters in return of a $1 bill, nothing changes.

NFTs, as the name suggests, are non-fungible. This means that they represent a unique entity. This entity can be an image, video, music, etc. Non fungibility makes an asset completely unique. Since these assets are unique, the ownership of these assets can be managed. As a result, collecting these artifact assets is possible.

“But I could ‘right click and save as’ any image or music on the internet. How does it make it unique?”. Consider this scenario; You go to the Louvre Museum in France. While you are at it, you adore the beautiful Mona Lisa and click its pictures. You can cherish it at a later date, but does that give you ownership of the portrait? No it doesn’t!

That’s exactly what an NFT does, but for digital art (or any type of data) instead.

But What Really is NFT?

NFT simply represents a piece of data (Image, Text, video, audio etc.) with an address. This address may point towards an external server that carries the actual NFT asset (Image, GIF, Video etc.). Whosoever has the key (password) to this address becomes the owner of this data.

Simply, owning an NFT means writing on a Blockchain that you own the item placed on the address XYZ. The image below will help you visualize this:

The authenticity of this address is verified via Blockchain. The legitimacy of ownership and history can be seen and validated by anyone on the network.

Let us now see some properties of NFTs:

Non Fungibility:

As mentioned above, NFTs are non-fungible which means they are completely unique and can’t be interchanged for each other. You can exchange Bitcoin for Ether. But you cannot exchange John’s NFT with Gina’s NFT directly under a barter.

Indivisible:

While you could exchange $100 with two $50 bills, it doesn’t work the same way with NFTs. NFT loses its value if it loses its entirety, just like a chair loses its properties if you cut it down into pieces. A single leg of the chair has no importance individually, if it is not a part the chair itself. Yes, there are NFTs that are fractionalized, but each fraction in that case is treated as an individual NFT.

Programmable:

NFTs are capable of being programmed via smart contracts (a software code that outlines the rules of a transaction). This opens up a wide array of possibilities for NFTs. NFTs could be programmed to fetch the royalty for the creator on each sale. Unlike physical art which once sold, is gone for good.

Difference Between Crypto and NFT:

Apart from the fact that both technologies are based on Blockchain (or use-cases of Blockchain) everything else is different.

The best way to put it is that Crypto complements NFTs. Whenever you purchase NFTs, the transaction is powered by Crypto. Often, you make the payment for purchasing NFT in the form of one Crypto or the other. The following table further highlights the difference between Crypto and NFT:

Conclusion

The word Crypto has also become unanimous with the overall industry. This entire space is commonly referred to as “Crypto space”. When you think about that, it is likely that someone would consider NFTs as a subset of Crypto. Apart from that, the user base and target audience are pretty similar because both of them are Blockchain based use cases.

But remember, next time someone asks you if Crypto and NFTs are the same, you’d probably have a better answer to it.

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