A Washington Nationals’ baseball game was the gateway for my ten-year-old into the world of non-fungible tokens (NFTs). Everyone at the game received a free NFT in honor of a player whose jersey was retired that day – a player who happened to be my son’s favorite. Thus started a week of incessant requests to invest in NFTs. As any tough negotiator (e.g., any parent) knows, the best strategy is not to say “no.” Instead, I dived right into educating my son on the new technology that is NFT.
My little one quickly figured out why NFTs have been in the news lately – money, resulting from a large volume of trading. As of January 2023, the 24-hour trading volume for NFTs is nearly $57 billion and the overall market cap is $1 Trillion. A quick Google search will tell you that the most expensive NFT ever sold was “CryptoPunk #9998” by Larva Labs, which went for $529 million in October 2021. NFTs are selling for millions and trading in the trillions. I can see why my ten-year old was interested – he was looking to get rich!
As a nerdy eDiscovery professional, I have a different interest in NFTs. I want to understand their purpose and the problem the technology is attempting to solve. Our world is increasingly digital. But real-world properties of uniqueness, value, scarcity, and private ownership are not easy to replicate in the digital marketplace. In the real world, I can buy a print of a Van Gogh painting for $20 on Amazon or purchase the one and only original Van Gogh for millions of dollars. The two pieces of art look similar, but the latter is unique, highly valuable, scarce, and only one person can own it. However, in a digital environment, the copy and the original will look the same to most people. NFT technology attempts to solve this exact problem.
Broadly speaking, a blockchain creates a ledger of immutable records. The immutable record is the NFT, which can be diced up into portions. This means that the whole NFT or portions of the NFT can be used as currency (i.e., cryptocurrency) or tied to assets as a record of ownership.
Jigna Dalal
In the current evolution of the internet, Web 2.0, big companies curate their own content and publish that content on their own servers. On the other hand, individual content creators must use third-party platforms to create and distribute their own content. In this process, the individual content creator may have to give up control and the rights to their own creation, as well as any profits it may generate. Once the content is distributed, an exact duplicate digital copy of the content is the same as the original copy. Web 2.0 is a raw deal for these independent content creators.
NFT attempts to resolve the confusion created by Web 2.0. NFT stands for non-fungible token. Non-fungible is an economic term describing items that are not interchangeable due to their unique qualities, such as real estate, real property, songs, artworks, etc. In contrast, fungible items such as money are exchangeable because their value defines them rather than their uniqueness. Broadly speaking, a blockchain creates a ledger of immutable records. The immutable record is the NFT, which can be diced up into portions. This means that the whole NFT or portions of the NFT can be used as currency (i.e., cryptocurrency) or tied to assets as a record of ownership.
Essentially the digital marketplace consists of two roles: NFT-owner and NFT-buyer. An NFT-owner digitizes raw data and then stores it on a database. The owner then signs the transaction with a hash and sends the data to a smart contract. The smart contract processes the data, then mint or trades it on the blockchain as a transaction. The blockchain uses its magic, a.k.a. advance mathematical computation, to confirm the accuracy of the transaction. Once the transaction is confirmed, the NFT is linked permanently to the unique hash identifier and the distributed blockchain records. Now the NFT is immutable and has an original owner.
An NFT is a digital certificate of ownership of, or rights to, a unique asset, for which the ownership is recorded on a blockchain. NFTs represent digital art, photos, videos, audio files, collectibles, codes, game items, tickets, and other digital assets. Moreover, they can represent virtually any digital or physical asset as well as entitlements (e.g., tickets, subscriptions, exclusive access, etc.). Individual content creators – such as artists, authors, or film makers – using NFTs can raise money to create their work-product or find investors for their projects without giving up ownership or claim to resale royalties. NFTs have the potential for creating a digital bartering market. I like to think that someday I will trade my legal writings for a digital piece of art that is then traded for movie rights, all via proof of ownership shown by NFTs and hosted on a decentralized platform like IPFS (Interplanetary File System – more on this in future articles).
For now, I will let emerging companies like NFT Studios sell 10,000 NFTs to raise ten-million dollars to make the movie Wing and a Prayer or authors like Elle Griffin sell individual chapters of their novels as NFTs. As for my son, he quickly moved on from wanting to invest in NFTs to begging for a soccer video game. At least my kiddo has learned that specific video games are non-fungible!
