What are the differences between crypto and NFT? Of late, there seems to be a huge surge in the popularity of Non-Fungible Tokens or NFT.
However, most of the people, especially the beginners in the crypto world, do not know the actual difference between the NFTs and cryptocurrency. This article is for those people who want to know all about it.
As for cryptocurrencies, these are actually digital currencies but exist in an encrypted form.
Cryptocurrencies typically use the blockchain technology for the creation and transaction of crypto coins.
It characteristically does not depend on any central authority, financial institutions, or government agencies and regulators for verification and authentication of the transactions.
It is all done by the community and the participants of a particular network. Check out Differences Between Cryptocurrency and Blockchain.
As for the NFTs, these are simply digital assets that are one of its kinds. These digital assets represent the real-world items, once again in a digital form.
The NFTs help the creative artists a lot in protecting their rights and get what they deserve in terms of value and money.
5 Differences Between Crypto and NFT
NFTs are significantly different from cryptocurrencies as well as a digital currency. Here is a closer look at the differences between them.
NFT: The scalability of the two markets, crypto and NFT, also differs in their potential. The NFT marketplace was in rage a few years back for it being an open and truly free marketplace for artwork and digitized assets.
As of now in 2021, the market has seen exponential growth by a staggering 800% to reach a total value of nearly $490 million. This implies that the concept of tokenizing an asset, or the NFT marketplace to be precise, is here to stay.
However, the hype subsided soon because the public debut of NFTs was largely misunderstood. Still, it can be said that the long-term effects of NFTs can be far-reaching and truly transformative, provided the marketplace rests on DLT or Distributed Ledger Technology which will allow realizing their full potential.
Crypto: In contrast, scalability is a serious issue with the crypto market mainly due to the fact that it has to support the high rate of adoption of cryptocurrencies.
For this, it has to have a network that is strong enough to deal with a large number of transactions every day, to begin with. This should be done without any delays in the processing or any issues underlying.
Secondly, the network also needs to be credible and capable of handling the increasing number of transactions every day which will be enormous in the years to come.
Therefore, the crypto industry and the market need to look into the scale-up factors of its networks. These factors include its size, capacity, security, as well as providing adequate incentives to the miners in the form of transaction fees so that they are kept motivated, competitive, and engaged.
Simply put, the current infrastructure of crypto networks is not strong and big enough and needs an immediate expansion and development to enhance its transaction speed, which is significantly low now, to deal with the growing number of users.
2. Value Generation
NFT: A Non-Fungible Token is a cryptographic token. It represents an asset that is unique in value and each token is different from the other in all respects.
It is all due to the individual characteristics of the token that sets one apart from the other. Ideally, owning an NFT is just like owning a collectible antique which is a one-of-a-kind work of art. These unique digital assets or NFT tokens usually generate value due to their uniqueness.
Crypto: On the other hand, the crypto tokens typically generate value based on the demand and supply of the coins and how much a buyer is willing to pay to own them.
Therefore, the value of the crypto tokens usually depends on a large number of factors. Moreover, all the tokens of a specific crypto type, for example, Bitcoin, are similar to each other.
They are the replicas of each and each of them holds the same value which depends largely on the market scenario.
NFT: The NFT tokens are unique, as said above, and therefore you cannot weigh one token with another. This means that the NFT tokens are not interchangeable.
This is because each piece of art is one of its kinds and there is no other that can resemble that art form or the value of it in turn. However, ownership transfer can be made in the case of NFTs and a ledger entry is made on the blockchain.
However, this ledger entry is pretty much different from the ledger entry made during a crypto transfer because in this ledger entry the address to the file is also added.
This acts as a type of code that proves the ownership of a specific NFT while it is transferred to someone else. It is this code that actually gets transferred to the person the NFT is transferred to.
This allows a person to check who owns a particular NFT on the blockchain. Also, while creating an NFT on the blockchain, it is time stamped. This makes it easier for everyone to know about digital ownership as well as the identification of the same.
Crypto: However, when it comes to crypto coins, these too are digital assets just like the NFTs but these coins can be exchanged with another that has the same value.
For example, if there are two individuals and both of them are holding Bitcoin, they can exchange their coins among themselves on the blockchain.
While sending the coins from one person to another, a ledger entry is made on the blockchain which shows the transaction is made and the ownership is transferred between the two parties involved.
4. Purpose of Blockchain
Crypto: The purpose of blockchain for both NFTs and cryptocurrencies is also different. In cryptocurrencies blockchain as well as cryptography is used primarily to protect the privacy of a transaction so that only the recipients intended can understand it while others will see it just like any other unintelligible series of random characters.
There are two keys that preserve privacy and ensure integrity, namely the public and private keys. The public key, when shared, is used to transform a message into an unintelligible set of random characters and the private key puts it back into the original form.
These two keys act as digital signatures and are used commonly in blockchain for the purpose of authentication of a transaction as well as maintaining anonymity for the same.
NFT: As for the NFTs, blockchain too plays a crucial part, but primarily in creating the digital assets. It also uses cryptography to create a chain of blocks as and when the list of records grows.
Each of these blocks is tied to the previous block with a cryptographic hash which is actually a string of characters that identifies the unique asset as well as the set of data.
All the transaction records in this particular chain of blocks are stored in a Merkle Tree, which is a specially designed data structure. This eases the process of retrieving the previous records and also makes it faster with the use of the pair of keys.
This also makes it difficult for anyone to change the data of any transaction within the blockchain. Ideally, blockchain allows creating crypto assets that are non fungible, meaning it is unique and cannot be altered.
5. Use Cases
NFT: When it comes to the use cases, both NFTs and cryptocurrencies have plenty of them but varied. As for the NFTs, the use cases involve digital art, collectibles, generative art, profile pictures or avatars, games, music, virtual worlds, films, sports, fashion, memes, academia, utilities, and more.
Crypto: On the other hand, the uses cases of cryptocurrencies include low-cost fund transfer, yield farming, alternative store of wealth, startup investments, private transactions, non-cash remittance, getting paid for posts, renting out unutilized hard drive space to the cloud, travelling, buying any product or services, gaming, de-corrupting charities and more.
Which is Better Crypto or NFT?
Since NFTs are unique and quite different from cryptocurrencies in general, labeling them to be better than crypto may not be a prudent idea. It is primarily dependent on your needs and how exactly you want to make the best use of the spaces.
Therefore, the main question is about the scaling solutions offered by each space. In addition to that, there are other factors that you should also consider, mentioned as under.
Ideally, traditional blockchain is yet to achieve the scaling requirements to make the crypto platforms and networks work more effectively.
However, several platforms have already started to move from their traditional processes to better and more efficient ones that are less energy intensive as well.
For example, Ethereum 2.0 has implemented new methods such as shard chains that will improve its scalability by a significant margin.
Also, the conceptual framework of blockchain restricts the cryptocurrency platforms to make scalability their priority.
This means that, in spite of the best efforts put in by the engineers, the classic block structures will surely not be able to handle the larger volumes of transactions for the new digital economy.
It is for these specific reasons, crypto cannot scale as desired and is doomed to stale. However, the coins hold intrinsic value but that is independent of scalability.
For example, the underlying protocol of Bitcoin needs to scale further in order to move over and above the basic function of a store of value so that it results in a wider adoption.
When it comes to crypto-protocol development, it has always focused more on the decentralization and security aspects rather than on the scalability of the platforms.
Though it has made remarkable improvements in both these areas, scalability is one specific aspect that they need to focus more on now in order to develop more effective and productive crypto protocols that will be best suited for an explosive growth and mass adoption.
As for the NFTs, it is still not democratized but there are higher barriers of entry imposed in the conventional NFT marketplaces.
However, this is meant to be, but more on it later. Apart from that, there is a hefty amount of fee involved in minting an NFT and putting it up for sale.
This is typically not affordable by most of the artists and sellers with modest means. This, in spite of all the excitement created by the blockchain based NFT markets, turned out to be a place for the rich and the famous.
Now, the barriers to entry to the NFT marketplace at present are considered to be a blessing in disguise for the crypto market.
This is because the inability of the crypto protocol to handle and scale the transaction and minting requests will have created a much different, if not worse, kind of a situation and frustration without these barriers in place.
Users typically would have to wait for a long time to mint their crypto coins and even for a much longer time to sell them.
However, looking at things from an impartial perspective, a scalable and a low fee NFT marketplace is required in today’s scenario.
This will enable every user to take part in tokenizing assets and trading them in keeping with the novel promise of the NFT.
This will support both the independent creators and the artists alike and at the same time will help it to reach out to a larger audience allowing them to create and trade freely.
This will open up an entirely new sector of a new digital and decentralized economy, thanks to the scalable DLT.
As for the owners of the marketplace, this will allow them to charge more reasonable commissions on trade and offer their services to the people in a much better way.
This will, in turn, help them to generate more revenue from the volume of transactions alone which will be larger because the artists and creators will not have to go through the barriers to mint and trade tokenized assets practically.
Therefore, considering all the factors mentioned above, both crypto and NFT marketplace are as close to win-win situations as it gets, based on the use cases.
Should you choose to buy NFTs or cryptocurrencies amidst all the hype, make sure that you are one kind of a person who knows exactly how to cash in on the hype trains, knowing that these are extremely volatile.
You must be cautious, and most importantly, have a high risk tolerance.
No matter whichever you choose to invest in, NFT or crypto, do not feel pressured to invest in any one of them simply because everyone else is. Instead, exercise your discretion, know the differences, pros and cons, and finally, make the choice.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.