A murder of crows. A pride of lions. A school of fish. A conundrum of NFTs. At least that’s how it feels when faced with the ever-growing craze for non-fungible tokens. Here are five things about NFTs that may surprise you.
They’re just another type of blockchain token.
As with anything tokenized on blockchain, it is the functions and features of the NFT that determine what it is, as well as its legal and regulatory classification. In this respect, there is no difference between fungible and non-fungible tokens. They are both a form of digital representation of an asset or item on a blockchain database. As such, an understanding of the rights and entitlements inherent in the token, including those programmed into the blockchain and smart contract as well as any associated written terms and conditions, is necessary to properly classify it. This is true regardless of its fungible or non-fungible nature. In fact, the same applies to representations of assets on other types of databases or in other forms. Just like frequent flyer miles and other loyalty points are governed by terms and conditions, when you approach an NFT, read as much as you can (text and code) about the rights and entitlements associated with it.
NFTs fulfill the promise of digital uniqueness.
Blockchain solved the double-spend problem for digital assets. Through cryptography and transparency, among other things, a blockchain database ensures that a digital item can be spent to only one counterparty at a time, rather than being sold or transferred simultaneously to an infinite number of people. NFTs take this advance one step further by allowing true uniqueness of a digital item. Non-fungibility and digital uniqueness are synonyms for these purposes and mean that there is only one of the item. Now, just because an item is unique or non-fungible does not mean that there cannot be other versions of the thing. Each orange is unique but there are lots of oranges in the world. The same is true of any NFT; lots of versions, each unique, can exist.
NBA Top Shots are going to be regulated.
Pretty much all NFT trading venues operated by a central party will be subject to regulation as a result of how anti-money laundering requirements keep ramping up when it comes to blockchain and blockchain-based assets. NFTs are no exception and the recent draft guidance from FATF, an inter-governmental organization, will result in all trading platforms for NFTs trade being regulated. NBA Top Shots operates such a trading platform and it is not the only one. As a result, everyone trading NFTs can expect to go through “know your customer” due diligence that the trading platforms will administer to meet the coming regulations. All trades will be monitored by the platforms and, in certain situations, by government agencies. Governments will have access to all this information upon request. There will be little true privacy. Fortunately, there is still time to influence the breadth of these requirements so that maybe trading basketball cards will not be a regulated activity simply because it takes place in the digital world.
You can use the same wallet. Sometimes.
Storing and accessing your NFTs requires knowing which platform they are created and maintained on. For example, an NFT created and maintained on Ethereum, like Cryptokitties or Cryptopunks, can comfortably use the same wallet as any other Ethereum-based token. For NFTs on other platforms, the wallet may be different. Certain NFT platforms like NBA Top Shots are privately maintained blockchains and the NFTs created on them are difficult or impossible to move off-platform. As with fungible tokens, it’s important to know as much as possible about the platform and the transportability of the particular NFT. If you want a custodian to hold your NFTs, you will want to ensure that they have the right type(s) of wallet(s).
Unique, programmable tokens mean personalized experiences.
One feature of blockchain that mainstream watchers often miss is the programmability of tokens. Because they are computer code, a token can be incorporated as part of a computer program or application so that it has particular features or functions. With fungible tokens, the programming generally cannot be targeted at a particular token; the program sees all the tokens as interchangeable and will operate for any of them. NFTs change that, allowing an application to recognize only that particular one. This capability opens up some really cool possibilities. Imagine graduating from high school with your NFT diploma that, as you walk around town, opens up special events at restaurants, stores, and friends’ homes just for you. Your NFT diploma also follows you through whatever virtual worlds you hang out in, giving you access to unique in-game experiences. Of course, it might be best if your friends, not your high school principal, are picking all this cool stuff for you.
Unraveling the conundrum of NFTs starts with understanding blockchain and tokenization of assets. It also requires an in-depth analysis of the functions and features of each NFT and the blockchain it is built on plus the terms and conditions of its existence. Perhaps then your conundrum of NFTs will become a gallery of NFTs that expands the physical and virtual worlds you inhabit.
Lee A. Schneider is a financial services and technology lawyer with extensive experience in blockchain. Lee co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners FinTech Practice Guide. He co-founded Global Blockchain Convergence and is active with a number of other organizations. Lee serves as General Counsel for the block.one and is the father of two wonderful college students. He learns about Japanese art history from his wife.