A Basic Guide to NFTs and What They Mean
Non-Fungible Tokens, or NFTs, have been around since 2014, but only recently have they gained popularity in the fields of digital and digitally held assets. Although this technological development has had a decade-long history, NFTs remain a mystery to many.
Recently, there has been a growing fascination over Non-Fungible Tokens, with a growing number of brands and companies that have filed applications to obtain trademarks. According to some reports, in 2020, 20 applications for trademarks for NFT brands were received by the U.S. Patent and Trademark Office. The following year, the number of applications received was over 1,400. While NFTs were previously regarded as collectibles and fine art, today, they are used for so much more.
What is a Non-Fungible Token (NFT)
Non-Fungible Tokens are digital assets that are based on blockchain technology, which is similar to cryptocurrencies, like Matic, Bitcoin, Ethereum, and Dogecoin. Unlike these, however, Non-Fungible Tokens are simply put: unique. These unique assets are not replaceable and they are also not interchangeable. Rather, they are composed of separate units, also known as “tokens”, which have individualistic software code that links them to underlying assets. This code is referred to as a “smart contract”, which outlines the details that are associated with the unique NFT. The contract will house the intellectual property rights that are associated with the NFT.
Once Non-Fungible Tokens are created, the NFTs would be permanently etched on the blockchain’s public ledger for everyone to see. Currently, most NFTs are built upon Ethereum’s blockchain, which is one of the largest blockchain systems in the world.
NFTs can virtually contain all things digital, including songs, animated GIFs, drawings, or things found on video games. They can also portray a variety of real property assets, like a portion of a song, art, a collectible, video, or real estate. Non-Fungible Tokens cannot be reproduced because their propriety is monitored with blockchain technology. The individuality of an NFT is what makes it so valuable.
What Does an NFT Do?
A Non-Fungible Token allows the owner to purchase or sell ownership of the digital item, including physical items at times. It also allows the owner to keep record of the asset using blockchain records, which cannot be falsified since they are regulated by many computers worldwide.
An NFT can only have a single owner at any given moment and with blockchain technology, the buyer ensures ownership over the NFT. With blockchain records, copying the digital asset becomes quite difficult. When copied, this reduces the marketability for the digital asset, so blockchain records protect the legitimacy of the unique properties to ensure they continue being one of a kind.
NFTs vs. Cryptocurrency
Non-Fungible Tokens are constructed on similar technology cryptocurrencies are, but these differ on one important aspect – interchangeability. NFTs cannot be swapped or exchanged, but cryptocurrencies are considered “fungible”, which means they can be interchangeable.
The simplest way to understand what a Non-Fungible Token is by using the analogy of the limited edition print of the artwork. In the art industry, the artist would make a limited number of prints, with his or her signature. The number printed on the art and the artist’s signature is not the art itself but a means to authenticate it. In the realm of an NFT, the NFT would represent the digital form of an artist’s signature and the number printed on the art, which is associated with the underlying asset. It also allows the artist to control and receive royalties automatically from every subsequent sale of that artwork in the secondary market, commonly through platforms like OpenSea and LooksRare.
Examples of Non-Fungible Tokens
In theory, an NFT may be utilized for any asset that is unique and requires provable ownership. An NFT, therefore, can be almost any virtual or physical property, such as the following:
- Debts,
- Essays,
- Tickets,
- Domain names,
- Digital artwork,
- Digital collectibles, and
- Limited collection of shoes and sneakers
How NFTs Are Being Used By Companies
Some of the most instantaneous uses for Non-Fungible Tokens are increased revenues, brand and company awareness, brand control, and enhancing authenticity.
- New Avenues of Revenue
Today, an increasing number of companies are establishing new revenue channels by authenticating their digital products through NFT packages and licensing their brands. For instance, music bands may license images or branding in order to release their exclusive digital content.
- Brand Awareness
There are many companies that are formulating brand awareness through NFT packages. Currently, Non-Fungible Tokens for bespoke clothing, footwear, and art pieces are being sold at auction houses at an increasing rate.
- Brand Protection
Trademark owners are the only parties allowed to use their trademark, which includes NFT trademarks. Once the name of a Non-Fungible Token is trademarked, only the registered owner can utilize the trademarked name for an NFT or crypto-property.
- Authentication
Most brands leverage NFT technology to establish a form of authentication system for their clients. For instance, many luxury brands issue serial numbers to their products and use Non-Fungible Tokens to provide authentication services. Complete trust in the authenticity of these high-end products is what protects the market for these items and their marketability.
The Monetization of an NFT
When it comes to NFTs, buyers must be aware of challenges that could arise. For instance, the obvious method by which a Non-Fungible Token can be monetized is by selling it. However, the reality of buying an NFT is unfortunately not as straightforward as it would be buying an actual, physical asset. Although owners of NFTs can prove that they own the asset, they do not necessarily own more than that.
NFTs are metadata about assets that are added to a blockchain, which means that although the asset is used to encode the NFT to establish the unique representation of that asset, the NFT is not the actual asset itself. Unless, of course, there are terms within the smart contract or in the associated terms of sale that state otherwise.
Like in the analogy used before regarding the limited edition artwork print, whenever a collector owns the numbered print, the collector will not own the proprietary rights to the original piece of art. It is a common misconception that the ownership of a Non-Fungible Token amounts to some sort of ownership of the underlying asset. NFT buyers do not necessarily have the right to sell copies of the art associated with the NFT, or to display images of the art on hats, T-shirts, or the like.
The attorneys at Milligan, Beswick, Levine & Knox, LLP have the knowledge and experience necessary to counsel you through intellectual property matters. Consider arranging a consultation with a proficient attorney from the law firm by completing the contact form found here.
Stephen Levine, is a Board Certified Specialist in Criminal Defense — an honor achieved by only the top criminal law attorneys in California. Mr. Levine has over 40 years of experience in criminal defense and family law serving Southern California, and is a highly regarded Super Lawyer as well as AV Rated attorney.