Most currencies, including cryptocurrencies, are fungible. This means that they are all identical. In other words, you could replace one of the tokens with another token of the same type without any difference. For example, if you and your friend each had a dollar bill, you could swap them for each other and still have the same assets you started with.
Most cryptocurrencies (and all fiat currencies) aim for fungibility. This is crucial for situations when the currency acts as a store of value, means of exchange, or unit of account. All major cryptocurrencies, including Ethereum and Bitcoin, are fungible.
With the idea of fungibility in mind, understanding non-fungible tokens becomes easier. Simply put, these are tokens that do not have that property of fungibility. In other words, each token is unique in some way so you cannot simply exchange them for each other and get the same thing. Non-fungible tokens get their value from their characteristics. By contrast, fungible tokens get value because of what they represent.
There are still a relatively limited number of non-fungible tokens, at least compared to fungible tokens. Most of the current non-fungible tokens follow the ERC-721 standard, although some use other standards that rely on different protocols.
With non-fungible tokens, developers are able to create a digital scarcity. This scarcity is verifiable without any need for a central organization that confirms authenticity. This particular form of digital scarcity does not rely on security and validation of a single entity, like a game creator when creating scarcity for avatars.
There are numerous potential applications for non-fungible tokens. One of the most common is in the case of digital collectibles of some sort. They can also be used to represent real-world assets, such as art or real estate.
One of the biggest advantages of non-fungible tokens is the ability to put nearly anything on the hybrid or public blockchain, with full security and immutability. With a non-fungible token, you can also store attributes thanks to rich metadata that is also authenticated. One of the biggest downsides is that the ERC-721 protocol commonly used is still relatively new, which makes non-fungible tokens slow for acceptance. It can also be time-consuming to develop the tokens and the decentralized applications that use them.
There are numerous projects that use non-fungible tokens already in progress or fully functional. The most famous of these is CryptoKitties, which is a collectible-based game that lets you breed and trade digital cats. Every cat is fully unique without the ability to replicate it, destroy it, or take it away. The game is incredibly popular among those interested in digital collectibles.
Another example is Decentraland, which features digitally scarce land that you can purchase and develop. There are also projects using artwork or real estate, such as Blocksquare.
There will likely be a great deal of expansion for non-fungible tokens in the future.