What Are NFTs and Why Should I Care About Them?

Published: Portsmouth Herald
February 24, 2022

I believe it is fair to say that NFTs (we’ll dissect the initials shortly) are mainstream.  By now, many of us have at least heard the term “NFT.”  Maybe you saw one of the crypto commercials during the Super Bowl, and a friend or family member said, “I think it’s an ad for one of those NFTs people are talking about.”  Or maybe a client or intermediary has mentioned NFTs, looking for your thoughts on them as a potential investment asset class.  Let’s cover the basics and consider some applications you may encounter even if you don’t dive headfirst into the NFT world yourself.

“NFT” stands for non-fungible token.  An NFT is a unique (“non-fungible”) digital asset (“token”) that cannot be directly replaced by another digital asset.  Some people hear or see the phrase “digital asset” or the word “token” and think NFTs are a kind of cryptocurrency.  That’s understandable to a certain extent as NFTs and cryptocurrencies (such as Bitcoin) are based on blockchain technology.  However, Bitcoin and other cryptocurrencies are fungible, just like cash.  A dollar is a dollar is a dollar, right?  Your dollar bill is worth the same as mine, and it doesn’t matter which specific dollar bill each of us holds.  The same goes for Bitcoin.  In contrast, each NFT is not directly replaceable.  The exact token you possess matters.

Blockchain technology serves as the foundation for NFTs (many of which are based on the Ethereum blockchain network currently).  A blockchain is one kind of ledger shared among multiple nodes of a computer network.  Data is organized into a chain of blocks, resulting in a database that is recorded, unalterable, and distributed across various network points.  These characteristics combine to make blockchain secure and therefore useful for tracking transactions and authenticating ownership of assets.

NFTs have existed for a number of years but have experienced a major surge in popularity over the past 12 to 24 months.  In fact, the NFT marketplace was a billion dollar industry in 2021 as NFT sales volume topped out anywhere from $14 billion to $25 billion, depending on your preferred source.  The recent explosion of NFTs into mainstream consciousness can be attributed in large part to high-profile digital art transactions.  In March 2021, Christie’s sold Everydays: the First 5000 Days – a piece created by digital artist Beeple (real name:  Michael Winkelmann) – for $69.4 million as an NFT at auction.  Beeple and Christie’s made news again in November 2021 with the sale of Human One.  That piece and its corresponding token fetched a price of nearly $29 million.  Non-fungible.com, which monitors digital asset markets, estimates that NFT sales volume exceeded $500 million for multiple rolling 7-day periods as we moved into early 2022.  Many brands, including Nike, Coca-Cola, and Ray-Ban, have jumped into NFT waters.  Even the Associated Press is getting in on the action, having announced its own NFT marketplace focused on photojournalists’ works.

Despite their popularity surge, NFTs are predominantly a speculative asset class for many people, at least for now.  Some commentators claim that the NFT market is a bubble waiting to pop.  That may prove true for NFTs tied to digital art and other collectibles, the value of which can be highly subjective.  However, NFT use cases are not, and will not be, necessarily restricted to the digital world.  NFTs can be applied to what many people would consider to be more traditional assets, and it’s worth paying attention to NFTs for that reason.  Imagine a future in which vehicle or real estate titles in paper format have been replaced by NFTs, or a world in which an NFT proves your professional membership or holdings of a company’s stock.

The foregoing applications make sense given they all involve the need for accurate records of ownership information for a corresponding asset.  While I don’t expect all these applications will suddenly become widespread (though it may feel that way), you should expect to hear more about NFTs and watch them continue to play a greater role in traditional business landscapes.  For example, companies may consider deploying NFTs, whether independently or in partnership with others, as part of their business models or marketing initiatives.  Doing so implicates a host of legal considerations, including contractual rights, intellectual property issues, and even regulatory concerns.

Of course, it’s possible that you’ll have a client seeking advice on a potentially lucrative digital art investment, too.  I suggest that individuals or entities interested in business- or investment-focused NFT applications consult with their legal, financial, and other advisors for guidance.