NFTs, or “non-fungible tokens”, are a unit of data stored on the ledger of a blockchain. The storage on the ledger coupled with the qualities of the data are what make the unit unique and “non-fungible.” NFTs contain metadata which describes the asset and, in certain circumstances, dictates the terms of present and future sales(IE Smart Contracts). Exactly… this is complicated, and no one has any idea what is going on or whether any current regulatory scheme, domestic or foreign, can cover NFTs. NFTs are a baby boomer’s nightmare; they are convoluted and they combine already technical terms into a novel configuration (IE metadata forming smart contracts).
NFTs are commonly referred to as tokens. A “token” being a digital asset stored on a secure, but transparent blockchain ledger. The process of creating an NFT (digital asset) is referred to as minting. As the internet of assets era evolves, NFTs on the Ethereum network (and a growing number of other networks such as EOS, Cardano, Flow, and Tron blockchains) are solving more problems than they are creating. This is also the second statement in this post that is entirely debatable, complicated and potentially subject to change.
NFTs were born with scarcity, uniqueness, and proof of ownership in mind. Thus far, they represent a customer facing extension and opportunity for non-fungible asset holders who previously lacked the legal and tangible rights to monetize their units of data.
NFTs are non-fungible, whereas, Bitcoin or a dollar bill is fungible. For example, If I lend you a dollar, it does not matter to me whether you give me the same dollar I gave you, or 4 quarters, in fact, I would assume you used the dollar I gave you and are paying me back with a different dollar. On the other hand, if I lend you an NFT, lets say a Cryptokitty (one of the more famous NFT projects), there is no way for you to satisfy the loan by giving me anything other than the Cryptokitty I lent you pursuant to the unique code on the blockchain representing the Cryptokitty I sold you. Unlike the dollar-for-dollar example, you can’t draw your own Crpytokitty and give it tome or attempt to return 2 NFTs that equal the value of the Cryptokitty I gave you. The divisibility of a fungible asset is one of many distinguishing factors between fungible versus non-fungible. NFTs are indivisible and can store significant amounts of data, including unique information.
NFTs have only just begun. There are many skeptics, but it is undeniable that NFTs provide a novel store of value. The laws and regulations surrounding NFTs will evolve with the industry and there will be a need for everyone from lobbyists to contract lawyers. If you need guidance regarding the laws behind NFTs, please do not hesitate to call my office.