NFT’s Explained: What They Are & Why They Became So Popular.

Digital collectibles known as “NFTs” have exploded in popularity lately. People are paying millions for these digital collectibles. Here’s everything you need to know about this new digital asset.

What Are NFTs?

Non-fungible tokens, or NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. They can not be replicated. NFTs can represent intangible assets with intrinsic value – e.g. digitally signed electronic art, digitally signed electronic books & manuscripts, etc. It is the combination of the digital signature and the intrinsic value of the NFT itself which makes each NFT unique.

Cryptocurrency vs. NFT’s : What’s the Difference?

Cryptocurrencies are fungible, meaning they can be traded or exchanged for one another. This fungibility characteristic makes cryptocurrencies suitable for use as a secure medium of transaction in the digital economy.

Bitcoin is an intangible asset with no intrinsic value, which functions like a private payment mechanism akin to a currency.   However, unlike currencies, which are government backed, Bitcoin is not.   Also, while Bitcoin is viewed as being fungible and it is traded freely, since prior (and future) ownership of each coin can be established through tracing techniques, some bitcoin can be associated with illicit activity and its use can be stopped by financial institutions.  Therefore, not all bitcoin is equal!

NFTs differ from cryptocurrencies as they cannot be traded or exchanged at equivalency. This shift in the crypto paradigm makes each token unique and irreplaceable, making it impossible for one non-fungible token to be equal to another. NFT’s are commonly used to represent real-world items such as artwork and real-estate. Tokenizing these real-world tangible assets allows them to be bought, sold and traded more efficiently while reducing the probability of fraud.

Why Have They Become Popular?

NFTs aren’t a new thing, however those who stay connected to current internet trends have probably heard plenty of buzz about them in the recent weeks. The blockchain collectibles are gaining popularity thanks to high-profile sales of everything from original memes to albums and popular bands.

The first NFT was released in 2017, a project by Larva Labs known as Cryptokitties. The success of cryptokitties has continued into 2021 as it recently generated $444,454 in sales just in the past week, according to NonFungible.

Why have NFTs become so popular? Proponents of them say they fix a big problem with the internet, which is artists not getting paid for the distribution of their content online. For a sellers, NFTs make it not only possible to sell something today, but also to keep earning in the future. Artists in particular have struggled to earn rewards if their work appreciates in value. NFTs can be coded to allow the original creator to collect money each time the token move hands.

Another obvious benefit of NFTs is market efficiency, as the conversion of a physical asset into a digital one streamlines processes and removes intermediaries. With NFTs, sellers can connect directly with their audience and remove the need for agents.

Importance of Making Sure Ownership is Properly Tied to Asset

Just like Bitcoin, NFTs contain ownership details for easy identification and transfer. Owners have the ability to add metadata or attribute pertaining to the assets in NFTs.

Transferring ownership of an NFT requires a blockchain transaction that can be authorized only by the NFT owner’s private key, much like sending Bitcoin or any cryptocurrency. Of course, that introduces questions of how copyright would apply to NFTs. Given the recent entry into the market of NFTs, how intellectual property rights might be asserted or enforced for such digital assets and art remains to be seen.

If you are creating, buying, or selling an NFT, read the terms of sale of the marketplace that you’re using. You want to make sure that you know what you are actually buying. If you’re still not clear about the terms, and if there’s a significant financial investment or upside involved with the transaction, we highly recommend contact a blockchain legal consultant.

Exemplar Companies: Experts in NFT’s and Blockchain

As industry-leading legal consultants specializing in cryptocurrency and blockchain technology, Exemplar Companies is connected with the latest developments in the world of digital assets. We work diligently to help clients comply with federal and state regulations while protecting their interests through sound asset protection and intellectual property strategies. We can help in the following areas:

  1. Accounting & Taxation assistance with the issuance and sale of NFTs
  2. Legal & compliance due diligence associated with the issuance and purchase of NFTs
  3. Operational &Technology assistance – Access to tokenization platform providers for issuance of the NFTs and access to digital custodians to facilitate safekeeping and escrow / settlement services

Please contact us to learn more.

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