Post Authored By: Natalie Elizaroff
Non-Fungible Tokens (NFTs) have recently come under spotlight and people are split between spending millions and wondering whether they are worth the investment.
What are NFTs?
To understand NFTs, you have to understand fungibility. Fungibility or fungible items are assets that can be interchanged at a fixed price point.[1] Bitcoins, dollars, and the like will all exchange at the same rate – so $100 will still be $100 (whether that will come in $20s or $5s). On the flipside, NFTs are digitally unique assets that cannot be exchanged on a 1:1 basis. Instead, they act more like collector’s items that cannot be readily duplicated, coming with distinct values different from any other NFT. They are powered by blockchain technology [2] that records and authenticates the validity of the NFTs. NFTs are the gateway for digital rights – where you can finally sit down and say that you own a rare digital aspect on the internet.
What is Blockchain Technology?
Blockchain technology is an online system that records information in a way that makes it nearly impossible to alter or cheat the system. It is a type of digital shared ledger of transactions maintained by a series of computers on a network which distributes the shared data and is accessible to all network participants. [3] Information on the network is recorded as “blocks” of data and as more transactions get recorded that are related to the first block, it chains together in a chronological order. These blockchain records serve as the equivalent of a Carfax report, featuring all previous transactions for the NFT.
What is the History of NFTs?
NFTs date back to 2012 when ‘Colored Coins’ were hitting the market. Colored coins were very small amounts of a bitcoin and could be used to represent property, coupons, and even company shares. [4] Although flawed, these were the first form of NFTs that would then open the door to marketplaces like OpenSea, KnownOrigin.io, and OPSkins built on infrastructures such as MetaMask, Pixura, and BitCrystals to name just a few. NFTs have expanded incredibly ever since 2012, and players in the NFT network can purchase everything from virtual breedable cats (CryptoKitties) to virtual plots of land (Decentraland). The market is constantly expanding and due to fact that NFTs are on-chain tokens, interoperability between blockchain games is possible. [5]
What Use do NFTs Have?
It seems like NFTs have an innumerable number of uses – and this can only expand as the market and the understanding of them grows. NFTs have been used for original digital artworks, music, collectibles, tickets to events, clothing items, domain names, and in-game items – to name a few. The potential is limitless and some real-world examples of exchanges can be seen here:
- Twitter’s Co-Founder Jack Dorsey auctioned his first Tweet as an NFT, which reached a bid of $2.5 million by Sina Estavi (CEO of Bridge Oracle). [6]
- Actor William Shatner sold 10,000 packs of memorabilia with a total of 125,000 digital photograph NFTs on the World Asset eXchange (WAX Blockchain) in just nine minutes in July 2020. [7]
- Digital artist Mike Winkelmann (known as Beeple) resold an animation called ‘Crossroads’ for $6.6m on an NFT platform called Nifty Gateway. [8]
NFTs are clearly not limited to gaming and creative formats because they can be representative of physical property, identity verification, financial documents, and other valuables that could be tokenized in a digital format. [9]
What is the Future of NFTs and the Law?
The future is very uncertain. Although at first glance NFTs appear as a stock market of untapped potential, the reality is that NFTs are the financial boon of someone saying ‘Jump!’ and several millions of people jumping. Many people are getting on the NFT bandwagon of purchasing and selling digital art for obscene amounts of money based on an optimistic investment model. NFTs are an attractive commodity to investors because they can be bought and sold for a profit on an NFT market if the value rises. They are conveniently digitalized records of virtual and real-world assets and are easily obtainable for the right price. Moreover, the exchange of ownership is documented and recorded in a convenient place.
The issue arises with regulation – mainly because at the moment there is no centralized form of regulation with NFTs. People that purchase NFTs purchase the right to claim ownership of the NFT and the right to exclude others from claiming ownership. This does not give owners a right to the digital asset or the actual artwork – and ownership does not necessarily mean intellectual property rights. There are also a lot of issues as to owners of NFTs profiting off the tokens and much of that depends on the distinctive terms of use that accompany each purchase. NFTs are ripe for opportunity but the market for them is currently an organized form of chaos – or a “Wild West” as Mark Cuban described it.
Another big issue with NFTs is their massive carbon footprint. Cryptocurrencies and the crypto infrastructure rely predominantly on fossil fuels. [10] One artist calculated that six NFTs roughly translated to two years of energy consumption for running a studio. This is not an insignificant amount, and with carbon emissions still plaguing the world, NFTs are not a progressive solution to the problems.
With the online world we currently live in, it is not likely that NFTs will go away any time soon. Critics view NFTs as a crypto fad, even with NFT collectors like WhaleShark stating, “I think that 99% of the projects that are in the space today might not exist two or three years later, very similar to the ICO boom.”
Regardless of whether the NFT market will go down with a blaze or continue thriving and seeping into the online market, it is undeniable that NFTs have created a new playing field for content creators and connoisseurs thereof to make a name for themselves. More importantly, NFTs raise the importance of digital content creation, the sheer lack of regulation, and the need for greater protection and recognition of artists.
[1] Werner Vermaak, What is a Non-Fungible Token (NFT)?, Alexandria (Jan. 30, 2021), https://coinmarketcap.com/alexandria/article/what-is-a-non-fungible-token-nft.
[2] Luke Conway, Blockchain Explained, Investopedia (Nov. 17, 2020),https://www.investopedia.com/terms/b/blockchain.asp.
[3] What is Blockchain Technology?, CBInsights (Aug. 20, 2020), https://www.cbinsights.com/research/what-is-blockchain-technology/.
[4] Andrew Steinwold, The History of Non-Fungible Tokens (NFTs), The Medium (Oct. 7, 2019), https://medium.com/@Andrew.Steinwold/the-history-of-non-fungible-tokens-nfts-f362ca57ae10.
[5] Lawrence Wintermeyer, Non-Fungible-Token Market Booms as Big Names Join Crpyto’s Newest Craze, Forbes (Feb. 12, 2021), https://www.forbes.com/sites/lawrencewintermeyer/2021/02/12/non-fungible-token-market-booms-as-big-names-join-cryptos-newest-craze/?sh=51328d74460a.
[6] Jessica Bursztynsky, Jack Dorsey is Offering to Sell the First Tweet as an NFT and the Highest Bid is $2.5 Million, CNBC (Mar. 6, 2021), https://www.cnbc.com/2021/03/06/jack-dorsey-is-offering-to-sell-the-first-tweet-as-an-nft.html.
[7] Jordan Lyanchev, Famous Actor William Shatner Sold 125,000 Blockchain-based NFTs, CryptoPotato (Jul. 31, 2020), https://cryptopotato.com/famous-actor-william-shatner-sold-125000-blockchain-based-nfts/.
[8] Scott Chipolina, Legendary NFT Artwork Gets Resold for $6.6 Million, Decrypt (Feb. 25, 2021), https://decrypt.co/59405/legendary-nft-artwork-gets-resold-for-6-6-million.
[9] Mina Krzisnik, Non-Fungible Tokens – From a Legal Perspective, The Medium (Feb. 26, 2019), https://medium.com/the-capital/non-fungible-tokens-from-a-legal-perspective-51de03ea0b06.
[10] Joanie Lemercier, The Problem of CryptoArt, Studio Joanie Lemercier (Feb. 17, 2021), https://joanielemercier.com/the-problem-of-cryptoart/.
About the author:
Natalie Elizaroff is a 2L at UIC John Marshall Law School. She is the President of the Video Game Law Society and Secretary of the Intellectual Property Law Society. Prior to law school, Natalie graduated with a B.S. in Molecular Biology from Loyola University Chicago. Natalie plans to take courses in U.S. Trademark Law and U.S. Patent Law and hopes to work in the Patent Clinic in the upcoming year.