What is an NFT ? Fungible vs. Non-fungible Token

NFT: The urge to boost efficiency and create value is pushing the digitalization of all sectors. Digitization is the process of turning information into a computer-readable format, allowing data extraction and analysis as well as automating manual procedures.

 Among the technologies that help with digitalization is distributed ledger technology (DLT). DLT may be used to immutably record transaction information, exchange it with numerous parties, and verify stakeholders. DLT supports commercial transactions by providing a single source of truth.

Tokenization is a DLT-related topic. Tokens are digital representations of assets that may be traded. All documents pertaining to an asset’s acquisition, sale, transfer, and settlement may be connected with a token and recorded on the DLT platform. Smart contracts conduct the operations that automate and enforce the legal framework. Importantly, the DLT’s immutability decreases the possibility of fraud. Tokenized assets include securities, commodities, and real estate, to name a few. In certain circumstances, a DLT reflects the tokenization of tangible assets like as fine art, music, and so on.

 

Fungible vs. Non-fungible (NFT)

Tokens might be fungible or inert. Because fungible tokens, such as cryptocurrencies, are interchangeable, they may be utilized as a medium for business transactions. The market valuation for fungible tokens is very variable, yet it has topped $2 trillion at times. Bitcoin and Ethereum are the market leaders, with valuations of $617 billion and $210 billion, respectively. 1 In contrast, the market capitalization of the S&P 500 is around $37.475 trillion2, the bond market is approximately $128.3 trillion3, and the gold market is approximately $11 trillion. 4

Non-fungible tokens (NFTs) are unique asset representations whose legitimacy is verified on a DLT platform. Creating and selling non-fungible NFTs has lately become considerably more frequent. According to NonFungible.com, NFT sales climbed to more than $2 billion in the first quarter of 2021, more than double the previous quarter’s volume.

Examples of NFT

For years, video gamers have employed NFTs. Notably, CryptoKitties allows gamers to acquire and sell digital kittens using NFTs. Some of the more recent advancements include the creation of NFTs from drawings, music, artwork, and even tweets. Christie’s $69 million auction of an NFT portraying a work by a digital artist known as Beeple in March 2021 was a massive media phenomenon. 6 In the same month, the American rock band Kings of Leon made an album accessible as an NFT on the YellowHeart NFT platform for a two-week period. 7 The band also provided NFTs depicting “golden ticket” events such as front-row performance seats. Proponents argue that NFTs might assist musicians dealing with digital piracy, poor streaming royalty rates, and a lack of touring.

Furthermore, sites such as Super farm, Ethernity, and OpenSea make it possible to swap millions of dollars for digital assets such as trading cards and digital memorabilia. 8 They use royalty downstreaming, in which the original creator earns royalties every time the piece is resold.

NFTs have the potential to play a significant role in mainstream trade. An NFT for a product would make it simpler for multiple supply chain players to communicate with it and trace its provenance, manufacturing, and sale throughout the whole process.

Intellectual Property (IP) Implications

Before selling their tokenized assets, NFT creators must consider a number of considerations. Some types of art, in particular, can be an IP minefield in general, and this also applies to NFTs. Understanding all terms and conditions, as well as ownership and copyright issues, is critical for both buyers and sellers.

While it is feasible to mint an NFT without expressly addressing IP problems, persons concerned with IP can distinguish between ownership of a specific NFT and ownership of the copyright rights encoded in that NFT.

9 Even if the person purchasing the NFT has purchased the original work, ownership does not necessarily confer the right to manufacture and sell further copies.

For example, whether the collage is a physical piece or a digital work, the author of a collage work may encounter copyright concerns depending on the underlying copyrights of the source material. Minting the collage as an NFT has no effect on the applicable IP laws, and infringement analysis would continue in most aspects in the same way as if the work were in physical form. Another consideration with NFTs is that once anything is minted as an NFT, it may be difficult to remove the NFT, depending on how the minting is done and the nature of DLT technology. In such circumstances, the NFT owner may face significant liability issues.

Opportunities for Marketplaces

The emergence of DLT and the capacity to digitally tokenize and trade any asset has created new prospects for exchanges and startup marketplaces. Legacy manual procedures may be transformed into efficient digital workflows, and product coverage can be increased to enable capital creation and price discovery outside of traditional financial asset classes. We are looking forward to seeing how this field develops and assisting our clients as they innovate through tokenization.