Industry players and regulators work to build standards to encourage innovation while keeping everyone protected.
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NFT means “non-fungible token.” A fungible item can be replaced with another one with the exact characteristics, such as fiat currency. If you were to give someone a loan of $10, it wouldn’t matter if the person gives you the exact 10 dollar note back when returning the money, as long as the currency coins or notes add up to $10.
An NFT, on the other hand, cannot be replaced in that manner. It is minted on a blockchain network with code that includes unique identifiers. That code works similarly to a signature which is then assigned to a specific asset outside the blockchain, usually as a link containing art or documents on a server. In effect, the token serves as a certificate identifying the holder as the owner of the original asset. When anyone buys it subsequently, they can verify the status of the token on the blockchain and see its entire history, thus removing the risk of fraud.
NFTs and art
The Mona Lisa is likely the most popular artwork worldwide, but most people would be hard-pressed to distinguish the painting from a replica. Despite that, absolutely no one would be willing to pay the $850 million that the painting is reputed to be worth for a replica. That indicates that the value of art is not in its physical form but in its perceived value as a result of its provenance and scarcity. To put it simply, people like to own original or at least limited-edition items.
As more artists have begun to produce digital art, NFTs have become popular as a way to grant one buyer ownership of an artwork. With the ownership registered on the blockchain, that ownership is visible to and can be verified by everyone, even though the artwork may be freely available on the internet. The most popular NFT artist, Mike Winkelmann, sold one work for $69 Million at a Christie’s auction. Even established brands like the NBA have gotten into the game with collectible video cards.
Even though art is the field in which NFTs are thriving the most now, technology holds a lot more potential across various industries. There’s another category of NFTs referred to as “actual value” NFTs because they have their value tied to specific off-chain assets. These NFTs could represent ownership of any unique thing, such as a contract conveying ownership and royalty rights of a song, or anything else that can be contractually transferred. By tying the existing world of contract law to the blockchain, “actual value” NFTs bridge the gap between the blockchain space and traditional business in much the same way as so-called stablecoins. Because stablecoins are backed by actual U.S. Dollars held by the issuing company, their value is relatively stable, hence the name. When a person buys any amount of stablecoins on an online exchange, the ownership of the corresponding sum of U.S. Dollars switches to the new owner automatically, thus saving time and eliminating the risk of fraud.
The same concept is being applied to ownership of other assets such as cars, real estate, and other properties. Although implementation is currently hampered by laws that require paperwork to change ownership of such properties, many companies are currently working to build the requisite technology. Apart from physical property, NFTs are also being used to provide investment opportunities, such as allowing people to buy revenue shares of a music artist’s royalty payments.
For all its benefits, the explosion of interest in NFTs has also created a slew of issues that entrepreneurs and investors in the space must bear in mind. The first one is that for NFTs linked to art, there is the possibility of the asset being deleted from the server on which it was hosted, whether deliberately or inadvertently. In some cases, the company issuing an NFT could fail and close down their servers, leaving the NFT holders with an expensive blockchain link pointing to nowhere. Thankfully, as platforms consolidate, more secure solutions such as PRüF have begun to emerge. Using that protocol, token issuers can create standards-compliant tokens that include permanent blockchain media storage and permit platform migration, decreasing risks for NFT holders.
In addition, there have been many cases of people infringing on the intellectual property rights of others by passing off stolen work as theirs. These cases often go to court and could result in a loss of the token buyer’s investment. There’s also the problem of the lack of a comprehensive legal structure to enforce smart contracts. For instance, while most NFT platforms allow the seller to insert a clause entitling them to royalty payments on each subsequent sale, U.S. law does not recognize resale rights concerning paintings or other creative works, as is the case in about 70 other jurisdictions, such as the UK and the EU.
Ultimately, it’s clear that the NFT boom is disrupting how we transact, and there’s still a lot of disruption to come as industry players and regulators work to build standards and regulations to encourage innovation while keeping everyone protected.