Crypto Currency

What the NFT is an NFT?

NFTs have made the news lately with some NFTs selling for millions of dollars.  What are these NFTs?  Are they the next big thing or just more hype?

NFT.  You may have heard the term.  Usually in the context of Bitcoin or blockchain and also in the context of someone making a stack of money.  What are these NFT things? Are they worth the money? Is it just hype? Let me explain!

What is an NFT?

First, let’s start with a definition.  NFT means Non-Fungible Token. We all know what a token is, but fungible?  What is that? A mushroom? Well, no.  ‘Fungible’ means exchangeable.  ‘Non-Fungible’ (which is the term we’re interested in) essentially means unique.  For example, money is fungible.  You give me $20 and I give you $20 and we end up where we started.  We may have swapped physical notes but it makes no difference.  In contrast, land is non-fungible.  Every piece of land is unique in the world.  I can’t swap my house for yours and we end up where we started.  Even if the houses are worth the same and look the same they are still unique. In that sense, they can’t be exchanged like our $20 notes.  They are non-fungible.

In the online world, it’s almost impossible to have non-fungible assets. As soon as you post something online (like a happy snap from your visit to the Great Wall in 2005) it can be copied and exchanged.  Essentially, a digital asset is fungible. I can swap my copy of Star Wars for your copy of Star Wars and we end up where we started.  Hence piracy.  Hence also why companies like Netflix and Google and Apple go to so much trouble to prevent you from downloading songs and videos.

This is where NFTs come in. NFTs are causing a stir because they are a way of making a unique digital asset.  Essentially it’s like making a coin, or a token, that’s unique to you.  I won’t go into how NFTs manage to do this except to say they are built on blockchain technology.

What are NFTs Good For?

So, what’s the big deal?  Well, that’s the $64 million dollar question (or the $69 million dollar answer if you’re Mike Winkelmann).  What does an NFT give you exactly?

Essentially, it gives you proof of authenticity.  Let’s say that you’re an art collector in the ‘real world’.  You purchase a painting from an artist and, along with the painting, you get a certificate of authenticity.  Other people may make forgeries of your artwork, but you can prove that yours is the genuine article because only you have the certificate.  NFTs work the same way – they are a certificate, or token, that verifies you are the genuine owner of an asset.

NFTs have a few advantages over their paper counterparts.  Unlike a paper certificate, it’s impossible to forge an NFT thanks to the wonders of blockchain technology.  Also, being digital, the token can include the asset inside it.  When I create, or ‘mint’, a NFT I can include the digital asset (for example, my happy snap) in the token itself.  When you purchase my NFT* you also get a copy of the digital artwork you now own.

So, now I have a digital representation of my asset and certificate of authenticity bundled into one.  What can I do with it? Why, sell it of course! If my happy snap meant anything to anyone, they may like to purchase the ‘authentic’ copy from me. Now my NFT is being traded like property.

NFTs can also work like a licence or a contract.  For example, I could allow the sale of, say, 100 authentic copies of my Great Wall photo.  Each purchaser knows they’ve purchased a limited run of 100 photos and any others are simply forgeries.  Or, I could mint an NFT of my photo that gave the holder of the NFT, say, the right to exhibit my photo at commercial galleries but nothing else.  I could also specify that each time my NFTs (I have a few now) are sold I get paid a royalty, and I’d be paid automatically each time a transaction was made.

So, now I have a digital token that’s unique to me, can be bought and sold, can’t be forged, will pay me royalties automatically if I wish and authentically proves that whoever owns it has the right’s I want them to have to my digital asset.  What’s not to love?

What are NFTs Not Good For?

One word.  Protection.

NFTs do not protect your ownership of your asset.  Much like anyone can take a photo of your real-world artwork and commission a forgery, anyone can download and make a copy of the digital asset inside an NFT.

NFTs don’t protect your assets, what they do is establish authenticity.

Who Cares?

The crux of the value proposition of NFTs, at least for now, is in the authenticity trade.

Anyone can copy my Great Wall photo, think it’s marvellous (is it?), exhibit it in their gallery and make a motza. Nobody will get caught unless they ask the question: ‘who’s photo is that anyway?’. NFTs only matter if authenticity matters.  NFTs are not an anti-piracy measure.

When the NFT is the asset

Now, there’s an exception to this statement, and that’s where the token itself is the asset.  In the online world, a token may represent something of value, for an online game for example.  The CryptoKitties game is a good example of this.  In this game you can trade virtual cats which are represented as NFTs.  The cats themselves are the asset of value and each cat is unique.

Outside of games though, it appears that most NFT marketplaces are trading authenticity tokens attached to real-world assets.

Other issues with NFTs

NFTs are indestructible. Once an NFT is created it exists forever.  It can’t be deleted or destroyed.  Also, once you sell an NFT, like any physical object, you lose control of it.  You can’t, say demand it back or control its resale.  The NFT market is decentralised, meaning there’s no NFT corporation overseeing it.  Therefore, there’s nothing stopping a person selling the same asset multiple times on different marketplaces.

What does the future hold?

That is hard to say.  NFTs, like cryptocurrencies generally, have made a splash as a speculative trading asset.  The ridiculous prices paid for some NFTs indicates a hype or bubble more than inherent value.

That said, there is a potential for disruption behind the concept of an NFT – the ability to have a unique asset exist or represented digitally.  It is a potential solution.  For now though, the solution has not yet found a compelling problem to solve.

For more information and expert advice, ask to speak to Mark Ferraretto at Ezra Legal on (08) 8231 6100 or email markf@ezralegal.com.au

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Mark Ferraretto

Lawyer – IT and Data Privacy

Ezra Legal

Mark Ferraretto

Categories: Blog, Technology

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