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NFTs and Stablecoins, What is the Difference?
It is always hard to keep up with an industry that constantly launches new successful products by the year. The blockchain world is one such industry that seems just to be scratching the surface of its full potential. Even then, it has managed to top over 22000 different cryptos as of the end of January 2023.
While not particularly new in crypto terms, NFTs and Stablecoins are still very new concepts to most people who aren’t avid followers of the blockchain space. Are the two the same thing? If not, what are the differences between the two?
To better grasp the differences between them, it is wise to know what NFT and Stablecoins are.
Well, NFT stands for Non-fungible tokens. An NFT is a cryptographic asset based on blockchain technology with a unique identification code and metadata.
The level of distinctiveness and uniqueness of the identification code and metadata is such that it can distinguish it from any other NFT. Therefore, it has no replica and cannot be exchanged at parity with another NFT or any other NFT and other assets.
NFTs are very popular in art and real estate, where they digitally represent artwork or real estate pieces. In short, this means their value will be tied to the value of the specific artwork or real estate piece.
A stablecoin is a class of cryptocurrency backed by an underlying reserve asset. The aim of supporting it is to offer some price stability in the otherwise highly volatile crypto space.
The backing, referred to as a peg mirrors how several currencies of various nations are pegged to the US dollar. Therefore, its value is determined by the value of its reserve asset, achieving this by maintaining a fixed exchange rate with the reserve asset. The reserve asset is usually a Fiat currency, but it may also offer price stability, gold being a popular one.
Differences between NFTs and Stablecoins
Just based on their definitions, it becomes apparent that the two are quite different. But they also seem similar in having their value dictated by the underlying asset. So, what are the key differences between the two?
Different classes of Assets
NFTs and Stablecoins are different classes of digital assets entirely. An NFT is a cryptographic asset that’s based on blockchain technology. It is, therefore, not considered crypto.
All stablecoins, on the other hand, are a class of cryptocurrencies, all being altcoins.
Different Ways Of Creation
Stablecoins are created in 2 main ways. First, they can result from a hard fork from a previous crypto blockchain. The second way of creation is to start as a whole new crypto project, often complete with their blockchain and consensus protocol. To mint more of a similar stablecoin, one needs to engage in crypto mining.
NFTs, on the other hand, can also start as brand new projects just like Stablecoins, but without their blockchain or consensus protocol. ‘breeding’ two other NFTs can create a new NFT, the new product being unique and different from its ‘parent’ NFTs. The feature is possible thanks to its extensible characteristics.
Different states of fungibility
Stablecoins are fungible. This means that a certain single unit of a specific stablecoin is usually a perfect replica of other similar stablecoins. As such, this makes them perfectly and universally interchangeable with each other. In other words, 1 unit of Tether, a stablecoin, can be exchanged for another single unit of Tether.
NFTs are, by their definition, non-fungible. That means there are no two NFTs in the world that are perfect replicas of each other. It also means there’s no universal agreement for exchanging one unit of NFT for another, thanks to their uniqueness.
An NFT’s non-fungibility aspect means it can not be used as a unit of exchange. It would be ambiguous if each person purchasing products in an outlet had a unit of exchange with a different exchange rate to every other unit of exchange. There would be myriad issues with estimating the NFTs’ worth and getting a balance. That uniqueness makes them excellent digital representations of every unique piece of an asset, such as artwork or real estate.
Stablecoins’ fungibility aspect and its reduced price volatility make it an excellent medium of exchange and unit of trade. It brings the lower price volatility of fiat currency to the crypto world, making it possible to know its value a few days or months later. It is also a good store of value since it’s possible for one to not experience drastic value depreciation over short times.
All NFTs trace their origin to the ERC 721 standard of the Ethereum blockchain. The standard defines the ownership details, minimum interface, security information, and the metadata required in gaming tokens. The ERC 1155 furthers this concept by batching multiple NFTs into a single contract. It also reduces their transaction and storage costs.
The first put the concept of Stablecoins into practice through the release of Tether, first documented on a white paper in 2012. The coin uses a simple concept of administering a peg to fiat currencies, with five distinct coins, each with a different peg.
While NFTs and Stablecoins share the characteristic of having a value determined by an underlying asset, they are quite different. The difference is broad, from their origins to their creation mode and usage.
NFTs and Stablecoins are even considered indifferent classes of digital assets, but all fall under the blockchain space. They both are a true testament to blockchain’s immense potential, with innovations always coming with an increase in functional specificity. The blockchain space is capable of revolutionizing the way the global financial system works in a significant way.