NFT or Non-Fungible Tokens are in the news almost every single day in the past couple of months. From 69 million dollars digital artwork to 2.5 million dollar tweets, everything under the sun seems to be ensnared by the lure of tokenization. Why is there such a sudden interest? What happens when the dust around NFT settles down? How to ensure our now expensive tokens remain priceless forever?
Why Is NFT Such Hype?
A Non-Fungible Token is nothing but a unique string of letters and numbers recorded on Blockchain. These characters represent or point to something that exists elsewhere – an oil painting in a gallery, a house on the hilltop, a tree in a forest, or even something that exists only in the digital world such as a tweet, crypto artwork, digital collectibles, or characters in the online gaming universe.
NFTs run exclusively on Blockchain. Their value is driven by their perceived scarcity. They have similar characteristics as the collectible items of the physical world. NFT, as the name indicates, is unique, thereby representing something equally distinctive. Furthermore, as a result of being underpinned by Blockchain, these unique tokens have a trustworthy proof of authenticity embedded within that makes them quite appealing to their patrons. It is easier to establish a chain of custody for every NFT. As a result, secondary markets for NFTs are as lucrative as the primary ones.
Additionally, the need for third parties to verify the authenticity of these assets is eliminated with Blockchain. Hence, costs are reduced, and efficiency is improved. Tokenization also opens up new direct sales channels for the artists who wish to sell their artwork without having to go through intermediaries. Moreover, unlike the traditional art world, these artists earn royalties every time their work gets resold in secondary markets. Yet another contentious benefit is the artists can sell the NFT representing the digital version of their painting or sculpture to one buyer, whereas selling the actual artwork to another, thereby giving the artist twice the revenue.
What Are the Common Pitfalls?
Tokenized digital collectibles immortalizing and commemorating moments in history are cherishable. Spending 6.9 million on a painting or 2.8 million for a tweet might sound whimsical to some and valor to others. Such vagaries can be a matter of pride to the owners of these tokens. Others might look at it as an opportunity to capitalize. But, looking beyond prosaic use cases such as tokening real-estate, intellectual property (IP) needs to be thought through more carefully and thoroughly.
When tokenizing a physical object, how would we ensure the same object is not tokenized elsewhere. What prevents anyone from tokenizing the same painting, the same tree, in Nifty Gateway, OpenSea, and several other platforms, all at the same time? If the artist or the work is obscure, establishing a legitimate origin trail becomes difficult. The same image can be copied over and over again by different people and sold as tokens on various platforms.
How to Take a Balanced Approach With NFT?
Know Your Rights
It is essential to remember that an NFT is only representing a physical object and is not the object itself. When an NFT is purchased, it is possible that all you are owning is a string of characters that point to a painting or a music album. In such a case, repurposing or reselling what you own is limited. It is equally vital to understand that holding an NFT does not necessarily prevent others from accessing or using the underlying asset. Alternatively, a token can also give you the IP rights for the song or possession rights of the house. Here, there is a broader scope of ownership. Hence, it is essential to delineate the entitlements that come with NFTs in a legally compliant way. Consequently, it will avoid any ambiguous and questionable use of the token rights.
At times, artists complain that their work is minted as an NFT and sold without their authorization. There are several instances where NFTs of artworks have been sold without consulting or informing the creator, who perhaps owns copyrights for the materials. Several marketplaces such as OpenSea and Nifty Gateway encourage copyright holders to report such violations. As an artist and as a buyer, it is prudent to trade only on compliant marketplaces.
The buyers need to ensure that they have similar coverage for their digital tokens as they would have for the physical equivalents. The digital assets have to be treated at par with real world entities without any exclusions. Given the novelty of the NFT ecosystem, the mechanism to be considered while determining the insurable value of the asset is still amorphous. Hence, it is essential to carefully tread the NFT insurance market.
NFTs are necessarily tradable commodities that can be bought and sold between parties anywhere in the world. It is, therefore, prudent to comply with the trade laws and regulatory requirements of the countries to avoid regulatory hurdles in the future. For instance, some countries might use NFTs to circumvent sanctions imposed on their nation. Or some governments ban trading with certain countries. Buying or selling NFTs to people of such nations might be in direct violation of the country’s laws.
Some countries’ tax laws might consider NFT – crypto trade, NFT – NFT exchange as taxable gains. If the expensive NFTs are categorized as collectibles, the owners might endure higher capital gain tax. Hence, it is essential to understand the tax obligations that come with NFT transactions.
Finally, a conservative approach is essential while minting the digital tokens. Many of these NFTs created today use the resource hogging Ethereum Blockchain. The resulting carbon footprint would have a dire impact on the environment. To address this concern, some of the NFT marketplaces are either pivoting to platforms that are less resource hogging or are buying carbon offsets and contributing to projects that offset the equivalent amount of greenhouse gases they emit.
In conclusion, there is a lot of speculation in the market today about the efficacy and sustainability of an NFT ecosystem. As with every other entity, NFTs will also stand the test of time for proving their true worth. Nevertheless, with a balanced, level-headed approach, NFTs can open a lot of previously untapped avenues in several markets.