Do not write off NFTs – they will last a long time

Some commentators write off non-fungible tokens (NFTs) like a passing fad, only overpriced profile pictures for the crypto nouveau riche set whose long-term value and relevance are risky and unpredictable. There are definitely risks to navigating as you enter this incipient room. But NFTs will be important and will be with us for a very long time.

Digital cryptocurrencies such as Bitcoin and Ethereum were the first commercial application of blockchain technology. NFTs represent ownership interests in digital assets, also based on the decentralized general ledger technology, blockchain, is a second large-scale commercial application for blockchain.

NFTs allow everything to be digitally “tokenized”, ie represented in a digital record stored on the blockchain. This can include all types of digital files, including image files, music or audio files, video files and more.

What are the rules?

When a new NFT is “embossed” (ie created) on a blockchain, the special rules for that NFT and for transactions involving the NFT are recorded in software on a blockchain, referred to as “smart contracts.” These automatically enforced rules may include who can buy or sell the NFTs, how and to whom revenue streams are distributed to different parties’ digital wallets on a first sale or resale, and what commercial or intellectual property rights, if any, are transferred with NFT.

The rules coded in the smart contract for a given NFT are extremely important to study and understand in order to evaluate the value of that NFT. For example, these rules control which, if any, IP rights are transferred when a particular NFT is sold or purchased. In the art and collectibles area, IP rights to create derivative works or exclude others from using or accessing the IP are usually not included.

For example, a buyer of an “NBA Top Shot Moment” video highlight collection NFT by Golden State Warriors’ Stephan Curry who counts down a three-point three-pointer is not entitled to make a documentary about three-point shooting using the footage, and the buyer also has no right to stop others from watching the photo on the NBA’s YouTube! Channel.

On the other hand, an “IP-NFT” offered by a unit within the research area may give the buyer exclusive intellectual property rights.

Digital art, collectibles and “ownership”

Digital art and digital collectibles are a large and high-profile asset class, and the extremely high dollar value of NFT art sales such as Beeple’s “Everydays: The First 5000 Days” composite digital artwork (which sold for $ 69 million at a Christies auction), collectibles like the NBA Top Shot digital basketball “card” highlight videos ($ 1 billion in sales since its launch about two years ago), and cultural or historical markers like Jack Dorsey’s first tweet (which originally sold for $ 2.9 million), but has proved difficult to resell for anything close to it) has generated a lot of attention.

Admittedly, the lack of “digital art” is difficult to wrap your brain around, because digital things by their nature can often and are copied perfectly. (Think about finding an image you like on the internet, and right-clicking and saving it yourself).

But it is worth noting a few things at this point. First, ownership of “an original”, even when a substantially perfect copy is available – as may be the case with digital assets – can be meaningful. For example, with today’s digital printers, we could digitally print a perfect copy of the Mona Lisa, but I dare say no one will appreciate it as much as the Mona Lisa hanging in the Louvre.

Second, the value and appreciation of art in the real world is very subjective and often shockingly high. It should come as no surprise that the same is true of digital art.

When thinking about NFTs, however, it is important to think bigger than digital art and collectibles. As some commentators have noted, NFTs can be compared to data files, in the sense that their types and uses are extremely varied.

Now NFTs can include an incredibly wide and varied range of “digital things”, including assets in virtual space or in the game in the metaverse (where there are clothes, weapons, other assets and accessories, skills for your avatars or virtual real estate, buildings or vehicles) to mechanisms for more efficient tracking of real-world objects, such as property, car title, insurance claims.

And the most basic reason why people are excited about NFTs is because they provide a viable mechanism for making money on digital assets (which has always been very difficult to make money on).

Web3, the next generation of blockchain-based internet, has big promises to deliver decentralization of power away from big gatekeepers, more individual control over our data and our wallets, and greater democratization of market access for the little people – the artists, the creators, and creators.

In our hyper-capitalist big business reality, it is to some extent inevitable that some of the same big players and power structures will be transformed in this new frontier. But hopefully some of the promise can be realized. It is culturally critical for more vibrant artistic and technical innovation.

Cryptocurrency

Finally, a word about cryptocurrency. NFTs and cryptocurrencies are based on the same underlying decentralized ledger technology (blockchain) and are linked in that cryptocurrencies can be used to buy NFTs, but they are very different.

Cryptocurrencies such as Bitcoin, Ethereum and many other lesser known tokens are extremely volatile and are – at this time – unregulated and highly risky investments.

Right now, NFTs are linked to cryptocurrencies, but that does not always have to be the case. Mastercard has announced that they will enable the purchase of NFTs using credit cards, not cryptocurrencies. Do not make the mistake of ignoring the potential of NFTs because you doubt the long-term or current viability of crypto.

To write off Web3 and NFTs just because they are a newly developed space that goes through growing pains, shakeouts and volatility – characteristics that often accompany new technologies in periods of innovation and technological growth – would in my opinion be a big mistake.

This article does not necessarily reflect the intent of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Write for us: Author Guidelines

Author information

Michael Kasdan is a partner in the Intellectual Property Group of Wiggin and Dana in the New York office. He co-chairs the firm’s Blockchain and Digital Assets Group and collaborates with the firm’s Emerging Companies and Venture Capital Group to provide startup clients and entrepreneurs with legal services in the IP and business areas.