FinTech

What is an NFT: speculative bubble or next digital revolution?

What is an NFT, why is there so much discussion on the topic, why have they acquired so much value, and what legal issues they hide.

You’ve probably already heard about NFTs, considering that in the last months these non-fungible tokens have been the object of growing attention, influencing and capturing the interest not only of the art market but also of many other industries.

Since the sale of “Everydays: the First 5000 days” – a digital Beeple collage of 5,000 pieces – for $ 69.3 million, the NFT phenomenon has literally exploded.  A few months after that event, there are those who question the long-term reliability of the phenomenon, given that the market has recently taken a downward turn, but there are also those who argue with conviction that NFTs will take over the information society.

But what are NFTs?  What exactly is it all about?  And most importantly, is it just another bubble, or do NFTs represent the next big revolution?  And what are the legal issues surrounding the use of NFTs and how should they be resolved?

NFT stands for Non-Fungible Token.  As such, they cannot be exchanged for another object because they are unique.  For example, one piece of art is not the same as another.  Both have unique properties.  NFTs are tokens that live on a blockchain and represent ownership of unique objects, they are therefore certificates of ownership related to digital objects.

NFTs are validated units of information, connected to a blockchain, that allow digital copies of real or digital works to be transformed into unique, verifiable assets that are easy to exchange on the blockchain.  Unlike a bitcoin, which is fungible just like fiat currency (in other words, one bitcoin can be exchanged for another bitcoin and you will have exactly the same thing), NFTs are not interchangeable.  Instead, such tokens are inextricably associated with a single, unique and specific object, in a way that allows said object to be tracked on the blockchain to provide the buyer with proof of ownership of a unique asset.

Why are NFTs useful?  Well, tracking who owns a digital file is difficult because it can be copied and distributed effortlessly.  So how can you prove who the original owner is when everyone has an identical copy of the file?  NFTs solve this problem.

Imagine that you have created a digital work of art on your computer. You can create or mint an NFT from it.  The NFT representing your artwork contains a bit of information about it, such as a unique fingerprint of the file, a token name, and a symbol.  This token is then stored on a blockchain, and you, the artist, become the owner.

Now you can sell that token by creating a transaction on the blockchain.  The blockchain makes sure that this information can never be tampered with.  It also allows you to track who the current owner of a token is and how much it has been sold for in the past.

It is important to note that the work itself is not stored within the NFT or the blockchain.  Only its attributes such as the fingerprint or hash of the file, the token name, and symbol, and optionally a link to a file hosted on IPFS.

When you buy an NFT that represents a work of art, you don’t get a physical copy.  Most of the time, anyone can download a free copy of a digital file.  The NFT represents only the certificate of ownership, which is recorded in a blockchain so no one can tamper with it.

And to make it, even more, unusual: while the owner of the token owns the original digital artwork, the creator of the NFT retains the copyright and reproduction rights. So an artist can sell their original artwork as an NFT, but they can still sell prints, but we’ll discuss that in future articles in this series on the legal issues of NFTs.

Essentially, any digital object – including an image, a video, a song, even part of a code – can be purchased as an NFT, with complex and not entirely predictable consequences for the industries involved in this change.  For example, digital assets such as GIFs and videos can be copied and pasted.  Although blockchain technology prevents tokens from being altered or tampered with, the underlying digital assets can still be spread across the Internet.

In addition to digital art, NFTs can also be used to sell any object and even physical assets by, for example, splitting the title to an asset.  You can read in the article available here about the TOKO project launched by DLA Piper, a fast, secure and convenient solution to buy and sell high-value assets using blockchain technology.

How are NFTs generated?  Minting is defined as the computerized process of validating and recording certain information in a blockchain, through the creation of new “blocks”.  Imagine the blockchain as a kind of digital book: digital pages can only store a limited amount of data, just like paper pages. Therefore, new pages are regularly created to store more information, thus generating “new blocks” in the blockchain.

Why are some NFTs worth millions? Well, their value is determined by how much people are willing to pay.  If I’m willing to pay a hundred euros for a particular token, then it’s worth a hundred euros. Prices are determined by demand, so be careful because an expensive NFT becomes worthless if no one wants to buy it.

Over the next few weeks, we will take you on a journey through the vast landscape of the legal implications of NFTs for the art world, the music industry, and fashion in a series of articles. So we recommend you follow us.

On a similar topic, you may find interesting the article “The legal implications of the Blockchain and how to deal with them“.

Image Credit Marco Verch

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Giulio Coraggio

I am the location head of the Italian Intellectual Property & Technology department and the global co-head of the IoT and Gaming and Gambling groups at the world-leading law firm DLA Piper. IoT and artificial intelligence influencer and FinTech and blockchain expert, finding solutions to what's next for our client's success.

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