Non-fungible tokens or NFTs have become hot commodities in recent years. Celebrities, artists, and entertainment companies are offering NFTs for millions of dollars in some cases and collectors are buying them up. However, this is a new and evolving area. As a result, there are people on both sides that do not fully understand what NFTs are, what laws apply to them, and the risks and rewards of getting into the market.
What Is an NFT?
An NFT is a digital file containing art, music, video, or similar content. This content must be a digital creation or a digital image of a tangible item. NFTs are “minted” on a blockchain, which is a type of public database where information is stored in groups or blocks, timestamped, and verified by a decentralized network of computers around the world creating a permanent ledger.
Once an NFT is part of the blockchain, it has a unique and permanent identifier, cannot be duplicated or deleted, and its authenticity can be verified. The end result is an original digital piece of art (or a unique copy of a limited series of reproductions) that can be bought and sold as any other collectible. However, because it is unique (non-fungible), it cannot be traded like cryptocurrencies.
Some well-known examples of NFTs include the NBA’s Top Shots digital basketball cards and a digital collage of art by Beeple that sold at Christie’s for $69 million.
What Are the Differences Between Digital Currency, Cryptocurrency, and NFTs?
Digital currency (also known as a digital wallet) is an electronic form of money and can be used in all of the same ways as tangible money to purchase goods or services and conduct business. It does not rely on blockchain technology. The use of digital currency typically requires the involvement of third-parties or intermediaries to settle and verify transactions.
Cryptocurrency is a digital or virtual currency that is secured by cryptography, unique digital signatures and complex mathematical algorithms which protect the currency from counterfeiting. Cryptocurrencies rely on blockchain technology. Examples of cryptocurrencies include BTC (on the Bitcoin Blockchain), ETH (on the Etherium blockchain), and SOL (on the Solana blockchain). These currencies are issued by private systems and are not regulated as a currency by the government. However, they are subject to various federal and state laws. Note that NFTs originally started on the Ethereum blockchain.
How Do NFTs Work?
When someone buys an NFT, they receive the digital content and the unique identifier or token that represents the ledger entry that is recorded and transmitted via the blockchain. This ensures that the buyer receives an authentic piece of content. The value of the NFT is determined by the market as with any piece of artwork.
How Can NFTs Be Purchased?
NFTs are available through multiple platforms. For example, the NBA has its own site for Top Shots. The Beeple digital art was sold by Christies. There are also many peer-to-peer NFT marketplaces including OpenSea, Rarible, DigitalEyes, Axie Marketplace, and others.
What Are the Advantages and Disadvantages of NFTs?
Artists and brands are entering the NFT marketplace to gain an additional revenue stream. This is particularly beneficial to artists who have been hurt by the sharing of digital copies of their work over the internet and now have a way to offer a unique work to collectors.
NFTs also enable creators or owners of the work to continue to receive royalties when their works are bought by a new purchaser. This is because the digital file can contain a royalty “rider” that automatically compensates the artist/owner upon transfer of the NFT pursuant to the code included in the corresponding blockchain smart contract.
For collectors, there is the potential to make money if they sell an NFT for more money. While they own the NFT, they know they have something unique and valuable, which is part of why collectors buy art.
However, NFTs are relatively new and speculative. It is difficult to know whether they will retain their value over time. There are also concerns about potential forgeries and hackers. In addition, it is easy to make copies of the digital content in the NFT and share them publicly. However, those copies would not have the same value as the NFT.
Complaints have also been made about the amount of energy it takes to create and sell NFTs. Blockchain technology uses significant power, more than some countries.
NFTs are not for everyone. If you are interested in creating, buying, or selling an NFT, it is important to consult an experienced attorney to understand the risks and rewards and avoid costly mistakes.
