Before we dive into the key things you need to know before jumping into NFTs, let’s do some housekeeping and define some concepts that’ll come up as we explore this topic.
First, what are NFTs? NFT literally stands for “non-fungible token.” Non-fungible tokens are unique and can’t be replaced or exchanged with something else. For example, a bitcoin is fungible — you can trade one for another bitcoin, and you’ll get the exact same thing. But with NFTs, they are unique digital assets traded on a blockchain with unique identifying codes. No two NFTs are the same.
Next up, let’s define the blockchain. According to the Oxford Dictionary, a blockchain is a system in which a record of transactions made in bitcoin or another cryptocurrency is maintained across several computers linked in a peer-to-peer network.
Finally, what are smart contracts? Wikipedia defines smart contracts as a computer program or a transaction protocol intended to automatically execute, control, or document legally relevant events and actions according to a contract or an agreement. Smart contracts are supposed to reduce the need for intermediates, arbitrations, enforcement costs, fraud losses, and malicious or accidental exceptions.
Now that we’ve gotten these out of the way, let’s dive into what you need to know.
What Does Buying an NFT Mean?
Although they’ve been around since 2014, NFTs are now increasingly popular since they’ve become the new way to buy and sell digital artwork. The global NFT market size is expected to grow by $147.24 billion from 2021 to 2026. The market is anticipated to witness healthy growth at a CAGR of 35.27% during the forecast period.
An NFT in itself is simply a reference inside the blockchain and doesn’t actually represent anything. Digital art sellers have been minting NFTs, pointing that reference to something of their property in the physical world — this is what makes them so valuable. NFTs can be minted from digital objects representing tangible and intangible items, including graphic art, GIFs, videos and sports highlights, collectibles, designer sneakers, music, and even tweets. Essentially, NFTs are like physical collector’s items, only digital and sold on marketplaces like OpenSea, Rarible, or Foundation. So instead of getting an actual oil painting to hang on the wall, the buyer gets a reference to a digital file instead.
Trust in the NFT minters, who are usually companies and artists, is what gives consumers the motivation to buy the reference in the blockchain that points to their trademark or work of art. When you buy an NFT of an image, you only own the reference inside the blockchain; nothing stops the minter from creating more NFTs referencing the same work of art. Buying an NFT also doesn’t give you legal ownership of the work of art. It’s important to note that you are purchasing a reference stored in a public ledger – the blockchain platform.
However, buying an NFT means you get exclusive ownership rights of that reference in the blockchain. NFTs can have only one owner at a time, and blockchain technology makes it easy to verify ownership and transfer tokens between owners. The creator can also store specific information in an NFT’s metadata. For instance, artists can sign their artwork by including their signature in the file.
Legal Clauses for NFT Ownership
An owner of an NFT will have evidence to demonstrate that they own the token and have the benefit of any rights granted in the smart contract. Some NFTs correspond to real-world assets, such as artist Damien Hirst’s NFT collection, in which each of the 10,000 NFTs corresponds to a unique physical piece of art that is locked in a secure secret vault in London. The physical artwork will only be transferred to the buyers if they “cash in” their NFT with Hirst, who will destroy it and give them the physical artwork. Other buyers can unlock rewards and free items once they purchase an NFT.
While ownership of the NFT can be bought and sold, ownership of the intellectual property rights in the digital asset associated with the NFT will not be transferred from the owner of those rights to the buyer unless this transfer is explicitly set out in the smart contract encoded into the NFT. It is highly uncommon for a smart contract to include ownership or any rights to the intellectual property in the digital asset. This means that the buyer will have no right to copy the assets except as permitted by law and certainly wouldn’t have the right to sell copies of the work to others.
Since the reference is just a record in the blockchain ledger, that is all the consumer is purchasing. Awareness of the basic functionality of the transaction and what the purchaser will actually own is necessary for people not to be misled or cheated.
NFTs, The Metaverse & The Enterprise
With increased interest and adoption amongst customers, we’re seeing huge moves from brands like Coca-Cola, Nike, and Samsung flooding the NFT space with their own digital assets. These businesses are looking to NFTs as the new way to boost revenue, increase customer engagement, and incentivize consumers through innovative gifts, exclusive access, and more.
Businesses tend to follow trends to produce buzz and grow revenue, and the metaverse is no exception. Large amounts of people already spend several hours in virtual worlds daily, and those numbers will continue to increase. This is why brands see the benefits of expanding their presence into the metaverse and are adopting new blockchain technologies to enable the move.
At Wizeline, our teams have contributed to conversations and projects around top metaverse technologies, and we’re always ready for more! We’d love to chat if you’re ready to explore how your brand can leverage the metaverse. Contact us today at firstname.lastname@example.org to start the conversation!