Never Fear Technology: NFTs are Here To Stay

“The First 5,000 Days,” a compilation of 5,000 digital works created by artist Beeple over thirteen years, sold at Christie’s for $69,346,250 on March 11, 2021.

If you looked at your phone, computer, or television in 2021, you probably heard the term “NFT” or “Non-Fungible Token.” Simply put, NFTs are unique (or “non-fungible”) digital assets (or “tokens”) stored on a blockchain. A blockchain is simply a database where blocks of information are chained together to create a single source of truth for the public. Blockchains are distributed across thousands of computers and update constantly, making it impossible for bad actors to manipulate data. They’re also accessible to anyone with an internet connection.

Throughout the year, staggering sales of NFTs, including Beeple’s $69 million collage and this picture of a rock that sold for $1.3 million, made national headlines. Meanwhile, public endorsements from household names like Mark Cuban, Paris Hilton, and Jay-Z — not to mention Gary Vee — along with global brands like Visa, Nike, and McDonald’s, helped bring this nascent technology to the forefront.

Thanks to online platforms like OpenSea and auction houses like Sotheby’s, the NFT market generated over $27 billion in cryptocurrency transactions in 2021, dwarfing 2020’s total of $250 million. The hot commodity last year? Computer-generated collectible avatars known as “PFPs” (or profile pictures) such as CryptoPunks, Cool Cats, and the Bored Ape Yacht Club.

16 CryptoPunks (of 10,000). After being released for free in 2017, individual CryptoPunks have been sold for upwards of $10,000,000 in 2021. Image credit: Larva Labs larvalabs.com/cryptopunks

While critics race to dismiss the success of PFPs and other NFTs as “money laundering,” those who understand the psychology of collecting recognize that, in a word where humans spend more time and money online than ever before, pricey NFTs are replacing physical luxury items as status symbols.

When it comes to NFTs, though, there’s more than meets the eye. NFTs provide holders with a sense of community and togetherness (usually on apps like twitter and discord) in a world where social distancing and isolation have become the norm. They empower people to create digital identities untethered from real-world politics.

Additionally, depending on the collection, NFT ownership comes with varying amounts of utility, such as commercial rights to intellectual property, access to star-studded parties, and even passive income. Like traditional art, NFTs can also bring substantial returns on investment.

Bored Ape Yacht Club’s Brooklyn Warehouse Party, November 3, 2021. Performers included Chris Rock, Aziz Ansari, Questlove, Lil Baby, and The Strokes. Image credit: Beeple (@beeple on twitter)

More importantly, NFTs have begun to disrupt a wide range of industries including art, fashion, gaming, music, and real estate. Briefly, here’s how they’re doing it and why they’re here to stay long past the PFP craze (lovingly referred to by collectors as “jpeg summer”).

Art:

“Art” is a $50 billion industry. One major problem with purchasing digital art or photography has been that, because it’s so easy to copy pictures online, it’s impossible to identify the original work. Although you can still duplicate the image associated with an NFT, once that image is minted on a blockchain (or turned into a crypto asset), there is a permanent, unchangeable, public record verifying its authenticity, date of creation, and history of ownership. In short, NFTs allow people to know whether the art they’re buying online actually came from their favorite artist like Damien Hirst or Takashi Murakami.

Digital art is indestructible, and can be viewed by anyone, anywhere, at any time. Virtual galleries have become increasingly popular and might supplant social media pages like facebook and instagram as people find new ways to express who they are and what they like online. Artists and photographers can also choose to send their NFT holders physical or higher quality digital versions of the images they purchase.

Creators benefit immensely from NFTs because of the blockchain’s underlying smart contract (or agreement written in code). Historically, artists sold their work for a one-time payment to someone they met in person, and that work became more valuable (for the buyer) as their fame grew. Now, through smart contracts, artists (and their estates) can automatically receive a portion of sale proceeds every time their NFT is resold.

Moreover, the buyer and seller, who can be anywhere in the world, never need to interact. Once an NFT is listed for sale, the smart contract functions like a vending machine to ensure that assets change hands only (and immediately) when a buyer approves and transfers the purchase price.

Damien Hirst, the richest living artist in the United Kingdom, created a series of 10,000 NFTs collectively referred to as “The Currency.” In what he’s calling a “global art work experiment,” he’s giving collectors until July 27, 2022 to exchange their NFT for an identical physical counterpart; after that, he’s burning the paintings. Image credit: Artnet News news.artnet.com/art-world/damien-hirst-the-currency-1988535

Fashion:

Just as there is an undeniable psychology to art, humans have a special relationship with fashion, which allows us to stand out or blend in. People are constantly expressing themselves in the real world, on social media, and in video games with what they wear, and paying good money to do it. NFTs are a logical match for the $3 trillion fashion industry, which revolves largely around scarcity, authenticity, and creativity to drive value.

As people spend more time socially online (or in the “metaverse”), their virtual appearance becomes more important, and the demand for virtual fashion grows. Meanwhile, companies need a digital presence to keep our attention and stay desirable in the real world.

Now, brands and designers can offer a wide range of wearable NFTs, from in-game assets (like this Balenciaga Fortnite backpack) to augmented reality (AR) clothing and filters that can be used on social media apps and perceived in the real world through cell phones and AR glasses. Companies might even pay you to wear them. Like artists, brands and designers can also generate royalty fees every time an NFT (which lasts forever) is resold. Consumers can easily resell, trade, lend, or gift wearable NFTs through smart contracts. Similar to virtual museums, virtual closets filled with wearable NFTs will become their own form of social media and self-expression online.

NFTs can also bridge the gap between digital and physical fashion. Aside from exploring possibilities with AR, streetwear companies, luxury brands, and more will offer exclusive physical merchandise (like this Adidas tracksuit) to NFT holders that match their digital counterparts, making those items extremely (and provably) rare. Additionally, as Mr. Wonderful explains, designer-issued NFTs will serve as the certificate of authenticity for luxury goods like watches and diamonds, protecting buyers from fraud.

RTFKT (pronounced “artifact”), creators of virtual shoes and collectibles like Clone X NFT Avatars, demonstrate the power of AR fashion in a video announcing their acquisition by footwear/fashion giant, Nike. Media credit: RTFKT (@RTFKTstudios on twitter).

Gaming:

The global gaming market is expected to reach $268 billion by 2025. Approximately three billion people aged 13–45 play video games, and they’re spending $40 billion a year on in-game “skins” — downloadable content (DLC) that changes the appearance of avatars, weapons, vehicles, and the like. That DLC can’t be resold, but it can be revoked, and it exists (is trapped) within the ecosystem of a single game.

Because NFTs contain information (or metadata) stored on a decentralized ledger shared by thousands or millions of computers (rather than a single company’s private server), purchasing an NFT gives gamers total, irrevocable ownership over their digital assets, which can be easily traded, sold, rented, and, of course, authenticated. Plus, unlike traditional DLC, NFTs are interoperable, meaning buyers can transfer them across different games, apps, and consoles. Players can keep the NFTs that they purchase forever, regardless of whether a single game or developer gets shut down.

Even before NFTs found their way into the public discourse, popular games like Runescape created bustling real-world economies, and younger generations had their sights set on careers as professional gamers. NFTs are making this possible like never before through “play to earn” (P2E) games like Axie Infinity.

Essentially, in the P2E model, players are rewarded with transferrable in-game currency or other digital assets for putting time and energy into the game or competing with other players. By combining entertainment and the potential to make money, P2E games are likely to take the industry by storm and change the lives of devoted players. Assuming the games are fun, why “waste time” playing one for free when you can play to earn? Companies like Yield Guild Games have started to onboard people in developing economies like the Philippines, Indonesia, and Venezuela to P2E gaming.

Ubisoft rewarded a limited number of qualified players (including those who logged 100 hours of game time) with free “Digits” (NFTs) for Tom Clancy’s Ghost Recon Breakpoint. Those Digits can be resold, and their history of ownership remains public. Image credit: Ubisoft quartz.ubisoft.com/welcome/

Music:

Even casual music fans know that record deals are notoriously bad for artists, who typically give up 85% of music sale proceeds plus control over their work. They also earn under a penny per stream on digital music platforms.

Now, with (or without) platforms like Royal, Songvest, and Royalty Exchange, artists can “tokenize” and sell royalty rights to their music, giving them greater ownership and control over their work and giving fans the opportunity to support them directly and profit when their careers take off. Imagine waking up to a check (or crypto transfer) every month because you bought your favorite artist’s NFT album before they were famous (and only 1,000 exist). Smart contracts can guarantee that everyone who contributes to any song gets paid their fair share for streams, sales, and secondary sales, without the need for intermediaries or risk of misappropriating funds.

Instead of or in addition to royalty rights, artists can offer their NFT holders (who are easy to verify) utility such as VIP access to shows, vinyl records, rights to use, remix, and commercialize their songs, voting rights on where to perform, who to work with, how merchandise should look, and beyond. Being able to engage in this way with the artists they love will change how fans consume music.

NFTs also allow musicians to easily combine digital art or videos with their music, giving fans more content than ever when purchasing songs. As artists like Tory Lanez and Kings of Leon demonstrated last year, musicians can make millions of dollars in seconds by selling NFT albums that come with digital art for as little as $1 (or a vinyl for $50). The most limited edition content, “1 of 1” albums that are available to a single NFT holder, will be highly valuable pieces of art and history. The Wu-Tang Clan’s one-of-a-kind album, Once Upon A Time in Shaolin, has already sold for millions of dollars twice.

People will likely have public catalogues of the music they own, similar to virtual closets and galleries. With NFTs, someone can prove on a blockchain exactly how long they’ve known about or supported an artist, which is often a source of pride for music fans.

Independent artist Spottie WiFi transformed his CryptoPunk (#5528) into a successful rap career. His first album “I’m Spottie,” limited to 2,000 copies and 7 songs about NFTs, sold out in 60 seconds, earning him over $190,000. Now, he’s collaborating with hip hop icons like Bun B. Image credit: Spottie WiFi spottiewifi.com/

Real Estate:

Today, ownership of real property is determined by and transferred through paper deeds that are susceptible to fraud, loss, and destruction. NFTs can be used instead of paper to represent ownership of real estate. Neither has any connection to physical land, but blockchains are a much more reliable way to access, process, and preserve public land records than a county recorder’s office.

Eventually, states and counties will have their own blockchains that keep a public, immutable record of every registered parcel of land as an NFT, containing all relevant documentation including land surveys, title deeds, ownership history, and more. In addition to saving people time on due diligence, this will allow them to transact without fear of fraud or bad title and without help from third parties.

Like anything else, real estate can be tokenized such that NFTs represent fractional ownership of the property, facilitating the distribution of (crypto) income for investors. NFTs can be used to effectuate leases or subleases by representing tenancy rights to specific units for a limited time. Smart contracts can be used to expedite countless other transactions in the real estate industry. In fact, last year, somebody sold an apartment in Ukraine as an NFT, and people have begun to sell properties like this $28 million Miami penthouse for cryptocurrency.

Michael Arrington, founder of TechCrunch, sold this apartment in Kyiv, Ukraine, as an NFT for 36 ETH ($93,000 at the time). According to Propy, the developers of the smart contract underlying the sale, Arrington signed “proprietary-developed legal papers” giving future NFT purchasers control over a US-based limited liability company that owns the property. Image credit: Propy propy.com/browse/propy-nft/

Just a fad?

NFTs have potential far beyond the use cases above. Given their efficiency, functionality, versatility, and appeal, it’s safe to say you’ll be hearing the word “fungible” again in 2022 and beyond. Rather than fight the inevitable progression of technology, consider how NFTs might benefit your profession, industry, or life as they become ubiquitous over the next few decades.

Not Legal Advice

Depending on how they’re used, NFTs implicate a wide range of legal issues including but not limited to tax, intellectual property, contract, securities, estate planning, anti-money laundering, gambling, property, entertainment, cybersecurity, data protection, and advertising law. Consult with an attorney if you are interested in creating an NFT or incorporating this technology into your business.

Attorney working at the intersection of blockchain, law, and culture