What you should know about blockchain, crypto and NFT

It is difficult to read an article, surf the internet or watch TV without encountering the words “blockchain”, “cryptocurrency” or “NFT”. There are countless advertisements for new products and services that promise the use of the blockchain to offer existing service offerings in a new and innovative way. You’ve probably seen TV commercials featuring famous athletes and actors telling you to buy cryptocurrencies and watching stories on the news about people buying or selling NFTs, increasingly for unimaginable amounts. Many of your favorite companies and brands may also now have NFT offers. But what do these terms mean, and how do these technologies work? This brief overview seeks to answer these questions in simple and relatable terms. As this primer seeks to simplify complex technologies and systems, it should be noted that some degree of detail has been sacrificed for the sake of understanding. In the same way, these technologies are evolving rapidly, so the market situation today may not be the market situation next week or next month. In the meantime, this overview will allow you to discuss these topics in an intelligent way with your company, clients, family and friends when they come up in conversation.

What is Blockchain?

Blockchain is a system for secure registration and storage of information and transactions in a database that is duplicated and distributed over a network of computer systems. The blockchain database is referred to as a “ledger”, and for this reason the blockchain is also referred to as “distributed ledger technology.” Blockchain ledgers can be made either public (like Bitcoin) or private (similar to a closed corporate intranet network). Unlike a traditional database that usually structures its data into tables, the blockchain book collects information into groupings or entities known as “blocks” that contain sets of information or data. The type of transaction and the amount of data that can be captured in a block depends on the relevant block chain. When a transaction is entered into the blockchain system, it is transmitted to a network of peer-to-peer computers that can be anywhere in the world. There are various protocols available to validate transactions on the blockchain. Bitcoin, for example, relies on Proof of Work, where blockchain computers use their processing power to solve equations to verify the validity of the transaction. Other blockchains may use other transaction validation protocols. Once the transactions are confirmed to be legitimate, they are linked together in blocks that are given an exact timestamp and a cryptographic signature called a hash. The blocks form the general ledger to create a long history of all transactions that are permanent and generally immutable, ie it can not be changed. Immutability is an important function, because it means that if a block in a chain changes, then the block fails. This makes it difficult (but not impossible) to change, hack or cheat the system. For example, if hackers wanted to destroy a blockchain system, they would have to modify every block in the chain, across all distributed versions of the chain, which is highly unlikely from a technical perspective.

What is cryptocurrency?

Cryptocurrency or “crypto” (also referred to as virtual or digital currency) is a digitized form of currency or token that is transmitted on a blockchain. While each cryptocurrency could not initially be transferred from the blockchain it was created to another blockchain without converting it through cryptocurrency exchange, there are now protocols like Polkadot that enable transfers across blockchains. Some of the most well-known cryptocurrencies are Bitcoin (BCH) and Ether (ETH), but there are many others, including Litecoin (LYC), Cardano (ADA), Polkadot (DOT) and Dogecoin (DOGE). The number of cryptocurrencies is constantly increasing, and blockchain technology allows anyone to set up their own blockchain and a unique cryptocurrency or token. Bitcoin, Ethereum and other cryptocurrencies are usually purchased through cryptocurrency exchanges, which are analogous to traditional electronic trading exchanges that allow users to place orders for financial products such as stocks, bonds, currencies, commodities and derivatives through a financial intermediary. Depending on the stock exchange, you can usually buy cryptocurrency with a debit card or bank transfer. Many of the popular exchanges do not allow credit card purchases. Those who charge for the privilege, and in some cases can add 3% or more to your transaction. In addition, although the exchange allows the use of a credit card, most major card companies have banned the purchase of cryptocurrency.

What are Non-Fungible Tokens (NFTs)?

An NFT is a unit of digital data stored on the blockchain, but differs from cryptocurrency, which is interchangeable and interchangeable (ie one is not different from another, as each dollar bill is not different from another dollar bill in value or meaning). NFTs are unique and non-replaceable. NFTs use blockchain technology to provide verifiable proof of ownership of the product NFT is associated with. Essentially, an NFT is a digital certificate of authenticity. NFTs can be associated with easily reproducible objects such as images, videos, audio and other types of digital files, but have even been associated with more volatile things such as a subtitle moment in time, such as the NBA Top Shot, which sells NFTs for epic player in NBA games, or Jack Dorsey, who sold an NFT for the first tweet. Just as the purchase of a limited edition signed and numbered printout of a photograph does not transfer the copyright of the photograph to the buyer, the purchase of an NFT does not necessarily necessarily give any of the underlying intellectual property rights (eg copyright) to the subject matter of NFT. The underlying intellectual property rights (or any subgroup) can be transferred by a smart contract related to NFT, but care should be taken here to ensure that there is no conflict between what is in the smart contract and what is in the terms of the website or platform from which NFT was created or purchased.

NFTs can be created, or “embossed”, on different blockchains, Ethereum and Solana are currently the most common. As discussed above, Ether is a cryptocurrency, but the blockchain, Ethereum, also supports NFTs, which store additional information related to the digital file or other unique element they are associated with. This makes them work differently than ETH cryptocurrencies where only the amount, transaction date, sender and recipient are stored on the blockchain. Like cryptocurrency, however, NFT is controlled by a private encryption key. If that key is lost or stolen, so are the rights to the cryptocurrency or NFT. There are many aspects of NFTs that many find desirable, including the potential to generate additional revenue streams from an image, audio or other digital file, and also the ability of the creator of NFT to receive royalties on all subsequent sales of the NFT. which generally does not exist in the sale of unique goods using other traditional methods. There are also potential disadvantages to NFTs, such as the fact that the cost of making them (referred to as “minting”) fluctuates drastically – in some cases it costs more than the value of NFT. In addition, there may be a lack of clarity regarding which rights are associated with an NFT, as well as questions regarding the authenticity of certain NFTs. In particular, there have already been a number of high-profile legal challenges regarding whether an NFT coin actually had the necessary rights (such as licenses or personal rights) to create the NFT in the first place. So, as with all other transactions, be careful and do your due diligence when considering embossing, buying or selling an NFT.

Finally, as mentioned above, the current regulatory environment in the United States associated with digital assets is highly uncertain. Significant attention is paid to this industry by the Biden administration, Congress, state regulators, the Department of Justice, the Securities and Exchange Commission and the Commodities Futures Trading Commission, among others. Before pursuing any activities in this area, readers are advised to consult their tax advisors, legal and other professional advisers for guidance.