Updated: Dec 13, 2021
The Basics On NFTs: The Newest Cryptoverse Craze
This past week I took advantage of living in Miami Beach to experience and appreciate all the amazing art and events that took place. This year my goal was to learn more about the NFT space and I attended several talks and networking events at Scope, the Bass and Bit Basel at the Sagamore to name a few. After attending a few of these, I began to understand what a major impact these "things" called NFTs will have on our future. So what may you ask is an NFT? These “non-fungible tokens,” are the latest sensation in the cryptocurrency universe.
So what is an NFT?
As CEO Bill Barhydt, of Abra, said this past Friday in a talk hosted at Scope Miami Beach, it is the selling of ideas instead of things, it is a selling of rights to something instead of the object. In the most basic terms, an NFT is a cryptographic token that exists on a blockchain and is used to establish proof of ownership of digital artwork, videos, GIFs, collectibles, and other digital assets. While NFTs use the same blockchain technology that underpins cryptocurrency, NFTs themselves are not a traditional currency, though they can operate similarly to currency. Some people call them JPGs because they are literally graphic images, but they represent much more than just a simple JPG file.
NFTs have been generating a major buzz in the tech and art sectors for years now but after Christie’s auction house sold a single NFT collage from the digital artist Beeple, for a staggering $69.3 million this March, NFTs have begun making mainstream headlines. In fact, I was fortunate to attend a talk featuring Mike Winkelmann (AKA Beeple) at the Bass Museum this past week. It was interesting to learn how he had been creating digital art for over 20 years and had started doing so just from a webcam. It was over this time period he had built a community and it arose from this passion for all things digital, which has now evolved into this modern, very lucrative enterprise, with the evolution of his work in the NFT space. Since then, a number of other big-money NFT sales have made the news, including Twitter co-founder Jack Dorsey’s first-ever tweet made into an NFT, which sold for $2.9 million; a video clip of a LeBron James slam dunk sold for more than $200,000; and a GIF of Nyan Cat (a flying cat with a Pop Tart for a body) went for $600,000.
At this point, you might be wondering why anyone would spend such vast sums on digital images ? Here, we’ll answer that question and explain the basics of what you need to know about NFTs, including how they work; what makes them so valuable; where you can get them; and why they have the potential to revolutionize the way in which we own, exchange, and consume both digital and real-world assets—along with how to ensure your estate plan covers them if you happen to own one.
What’s the Difference Between Cryptocurrency and NFTs?
While NFTs and cryptocurrencies like Bitcoin and Ethereum are all part of the "Cryptoverse", cryptocurrency is a “fungible” asset, meaning it can be traded or exchanged with another identical unit of the same value. For example, one Bitcoin is equal in value and can be exchanged for another Bitcoin, just like one dollar is always worth the same as another dollar. In explaining the term fungible versus non-fungible. Barhydt in his talk at Scope used an example of the difference between exchanging a dollar for a dollar, which is "fungible" or equal, versus selling a concert ticket for Row 2, versus a concert ticket in Row 50, which are not of equal value and not the same hence non-fungible.
NFTs are “non-fungible,” meaning each NFT is unique and not mutually interchangeable. Given this, no two NFTs are ever the same, and they cannot be replicated. Think of it in terms of traditional artwork: anyone can buy a Mona Lisa print, but only one person can own the original artwork.
How Did NFTs Get Started?
Although primitive versions of NFTs, such as Colored Coins, have existed since 2012, the first NFTs to really become popular were CryptoKitties. Launched in 2017, CryptoKitties is a virtual game that allows players to adopt, raise, and trade virtual cats on the Ethereum blockchain.
Each CryptoKitty has unique attributes, and they can even reproduce to generate entirely new offspring, which have different attributes and valuations compared to their parent kitties. CryptoKitties became immensely popular, and within a few weeks, fans of the virtual cats had spent $20 million worth of ETH (Ethereum token) on the game, with some virtual cats selling for over $100,000.
How Do NFTs Work?
As with cryptocurrency, a record of who owns each NFT is stored on a blockchain ledger. The vast majority of NFTs reside on the Ethereum blockchain, though other blockchains also support them as the "gas" fees and costs on Ethereum are high and not as energy efficient as other blockchains. Whenever a new NFT transaction is verified, it’s added to the blockchain, where it cannot be changed, replicated, or forged.
The code embedded in NFTs can include specific information about the asset and its creator. For example, an artist can sign their digital artwork by including their signature in the NFT’s metadata. The unique information related to an NFT is stored in what’s known as a smart contract, which is one of the most unique and powerful features underpinning NFT technology.
A smart contract is a digital contract in which the terms of the agreement are set in code. A smart contract can be programmed to execute a specific action when a set of predefined conditions are fulfilled. For example, a smart contact can be programmed to make royalty payments to an NFT’s creator whenever their digital art is sold to a new owner. This is changing the landscape of how creators can interact and connect with their customers and/or collectors.
Why Do NFTs Have Value?
Traditional pieces of art like paintings are valuable precisely because they are one of a kind, yet digital art can be easily duplicated an infinite number of times. With NFTs, digital art and other assets can be tokenized, which creates a digital certificate of ownership that allows the buyer to own the original item. It also allows the creator to receive royalties/payments for each time the NFT is traded/sold and the terms are determined and designed by the creator putting the control back in the artist's hands.
The value of NFTs comes from both the scarcity and collectibility of the asset, as well as its potential for future sale. NFTs work like any other speculative asset, in that you buy it and hope that the asset’s value increases over time, so you can sell it for a profit.
NFTs typically increase in value for three reasons: 1) they are part of a series that gives you access to an exclusive club or community, 2) if they include licensable or brandable content that could be used to increase the value of the intellectual property, and 3) they can be used to “flex” or signal for status purposes (aka bragging rights).
Essentially, NFTs transform, or “tokenize,” digital art, videos, and other collectibles into one-of-a-kind, verifiable assets, which allows them to be easily bought, sold, or traded on the blockchain. NFTs are basically like any other collector's item, such as a painting or a vintage baseball trading card, but instead of buying a physical item, you're instead paying for a digital file and proof that you own the original copy.
Yet it’s the intellectual property (IP) aspect of NFTs that make them most interesting. Once you own an NFT, you have ownership of the IP representing the content of the NFT. As the owner of this now licensable content, you can use the content for branding, or you can even develop an entire persona or creative pursuit around your NFT.
You can see this in action with some of the owners of NFTs from the Bored Ape Yacht Club (#BAYC) NFT Collection. Universal Music Group bought 4 Bored Apes, and has begun branding them as the newest band they’ll promote, called KINGSHIP. KINGSHIP will release music and products, building a fan base around this collection of four digital apes. Adidas also bought a Bored Ape Yacht Club NFT, GMoney and Punks Comic too.
Building upon the success of the BAYC series of NFTs (a collection of 107 Bored Apes recently sold for $24.4M in a Sotheby’s auction), other creators have begun to release sets of 10,000 NFTs with hopes of mimicking the success of the BAYC series.
What Else Are NFTs Being Used For?
Currently, the majority of the NFT market is focused on collectibles, such as digital artwork, GIFs, virtual trading cards, videos of sports highlights, digital music, virtual avatars, and video game skins. However, NFTs are now even attracting the attention of major brands, and we’re seeing a number of big-name companies capitalizing on the trend.
For example, Nike has patented its own blockchain-based NFT sneakers, which it calls CryptoKicks. Marvel Comics has released its own NFT collectibles based on Spider Man and Captain America. Even Taco Bell has jumped on the NFT bandwagon with a collection of taco-themed images and GIFs. In collaboration with the NFT marketplace VeVe, Disney released its Golden Moments NFT collection, which features digital statues inspired by some of the most beloved characters and moments from Disney, Pixar, Marvel, Star Wars, and other Disney franchises. And in September 2021, Hollywood got in on the action, when the film Zero Contact became the first feature-length movie to be released as an NFT.
Musicians have also been releasing NFT-based songs, albums, and other music-related items with major success. For example, pop stars like Kings of Leon, Grimes, and Steve Aoki have all created NFTs. Moreover, Rolling Stone reports that NFTs could revolutionize how musicians connect and market their music to fans by including not only songs and albums as NFTs, but also videos, artwork, 3D avatars, wearable accessories, and even tickets that give fans a chance to have a virtual meet-and-greet with the artist.
How Can You Buy An NFT?
If you are looking to get in on the NFT craze, you’ll need to access the proper technology—and load up on cryptocurrency to fund your purchase.
First, you’ll need to get a digital wallet that allows you to store your crypto and NFTs. Metamask is a popular software option and allows you to access your Ethereum wallet through a browser extension and can connect to decentralized applications and platforms, such as OpenSea, where you can buy and display your NFTs. However, there have been some issues with security with Metamask as a browser extension, so please use caution and learn about it before using. Youtube has numerous educational videos/stories on this wallet. Some NFTs can also be bought via the popular Coinbase Wallet as well.
Most NFTs still require purchase in cryptocurrency, and since the most popular blockchain for NFTs is currently Ethereum, your best bet is to get their version of digital coins, which are called ether (ETH).
From there, you’ll want to visit the NFT marketplace where the NFTs are sold. Some of the most popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, Axie Marketplace, and Rarible.
Additionally, there are also niche marketplaces for more specific types of NFTs, including NBA Top Shot for basketball video highlights; Valuables auctions off famous autographed Tweets like Dorsey's; and Autograph, which is a platform launched by NFL superstar Tom Brady that offers a variety of NFT collectibles from sports icons like Tiger Woods, Simone Biles, Wayne Gretzky, and Tony Hawk. Due to the high demand for certain NFTs, the tokens are often released in batches, known as “drops,” much like when batches of concert tickets are released at specific times. As with any other popular event, there’s often a rush of fans eager to snatch up the most in-demand NFTs when the drop starts, so you’ll need to pre-register and have your wallet full of crypto and ready to buy.
What Are the Future Potential For NFTs?
While buying a virtual cat may sound like an extremely trivial venture, the future potential for NFTs and how they can be used has more serious implications, especially in business and finance. For example, NFTs have already been used in a real estate transaction, in which a millennial from Silicon Valley purchased an NFT that gave him ownership of a studio apartment and a piece of art by the famous local street artist Chizz.
By allowing for the digital representation of physical assets, NFTs offer the potential to reinvent the way we own, exchange, and consume just about any asset. Perhaps the most obvious benefit of NFTs is increased market efficiency. The conversion of a physical asset into a digital asset streamlines the process of identifying IP, removes intermediaries, and creates entirely new markets.
Obviously, the digital representation of physical assets is not exactly new or novel. However, when you combine this concept with the benefits of the trustworthy and tamper-proof nature of blockchain-powered smart contracts, NFTs stand to become a potent force for change. While many see NFTs as merely another passing fad and expect the NFT bubble to burst any day now, skeptics said exactly the same thing about Bitcoin. With this in mind, we remain cautiously optimistic about the future of NFTs, and only time will tell how this new technology pans out as the future unfolds.
Safeguard Your Digital Assets
As with cryptocurrency, if you currently own or plan to acquire NFTs, the first and most important step in securing these assets is to let your family, trusted partners, and of course, your lawyer, know you own it. If no one knows you own these assets, they will be lost forever when you die. You can document ownership of these assets by including your NFTs and cryptocurrency in your Family Wealth Inventory (a key component of our Life & Legacy Planning Process) listing all of your assets and liabilities. Along with the amount of cryptocurrency and number of NFTs you own, you should also include detailed instructions about where these assets are located and how to find the instructions to access them, including the encrypted passcodes needed to unlock your account. Just make sure to keep these instructions in an absolutely secure location because anyone who has them can access and take your crypto and NFTs. As part of our Life & Legacy Planning Process, we’ll work with you to ensure that your cryptocurrency and NFTs are properly documented, as well as secure. This past week during Art Basel/Miami Art Week, I spoke to many people in the NFT and cryptocurrency space about this issue and I look forward to developing new ways to protect clients' digital assets in conjunction with the Web 3.0. I am very excited about the future application of NFTs in the legal space and look forward to keeping the community updated on what is happening IRL (in real life) and the Metaverse.
As technology continues to evolve and our lives become increasingly digitized, it’s vital that you adapt your estate planning strategies to keep pace with these changes. We can assist you in updating your estate plan to include not only your traditional wealth and property but all of your digital assets, as well. Contact us today to learn more and schedule your free consultation here at https://calendly.com/unconventionallawyer.
This article is a service of Meredith Weil, Esq., Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.