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July 23, 2021

NFTs Explained: What are they? Why are they valuable? What are the regulations surrounding them?

NFTs Explained: What are they? Why are they valuable? What are the regulations surrounding them?

What’s the deal with NFTs? We’ve had many artists and creators approach us with this very question, so our IP attorney, Sharon Kahn is here with answers.

NFTs-explained

What is an NFT?

NFT stands for Non-Fungible Token. A Non-Fungible Token is a digital asset that cannot be broken down or divided.

This is the main difference between NFTs and Bitcoin. In the crypto world, Bitcoin (or other tokens) are fungible, meaning they can be broken down, and many individuals or entities can own a percentage of one Bitcoin.

What about blockchain?

A blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.

A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. NFTs run on blockchain networks, most popularly, the Ethereum blockchain.

Where are NFTs sold?

NFTs are sold on an online marketplace. You can either create your own or use one of the already established marketplaces (Nifty Gateway, Rarible, OpenSea, etc).

One important caveat is that you need a crypto wallet in order to access and buy or sell NFTs.

What is the cost of creating one?

As an artist, you need to put up a transaction fee (a gas fee) this is essentially the cost of administering the token (you pay at the initial start and every sale thereafter). The price is determined based on the value of Ether which is constantly changing.

The gas fee is very democratic. It doesn’t matter what you’re putting up (first time artist vs. big time artist), it’s the same fee for everyone at that point in time and can range anywhere from $30 - $500 depending on the marketplace, hours, etc.

Are there any laws regulating NFTs?

There is currently no legislation or regulations regarding NFTs.

Intellectual property attorneys are utilizing skills and protocols from what we already know from the traditional transactional mediums we use for other forms of intellectual property.

Why are NFTs so valuable?

When you own an NFT, you are the only person who has the rights to that particular piece of work. You can license it or sell it just like you would with traditional intellectual property.

There is a value in owning the original piece of work. For example, the original Mona Lisa is a priceless piece of art, and while you can probably buy a post card with a copy of the Mona Lisa on it, the postcard will never have the same value as the original.

What's in it for the artists?

Creating smart contracts can allow for your NFTs to have perpetual royalties. Traditionally, artists don’t continue to make money after the initial sale, which is why this is so appealing.

Here's an example: I am an unknown artist and sell a piece of work to person X for $500. I put a royalty clause of 10% on the NFT. That means that every single time the NFT is sold, the artist collects 10%. If it sells thereafter for $1,000 then $100,000 then $1M, the artist continues making 10% off of every single sale.

nft-artists

What about video games?

The video game world is another opportunity, as players often spend money on additional features such as having unique outfits in the particular game world.

Here's an example: You create an NFT train track and players have to buy it to take the train to a different part of the virtual world and every time this resells, you continue to make a percentage from those residual sales.

nft-video-games

What are some other examples?

The most commonly used cases for NFTs have been in the creative world with artwork, music, and games. This covers any artwork from fine art to digital art such as stickers or graphics. However, there are no limitations.

➤ Twitter co-founder Jack Dorsey listed his first tweet for sale.

➤ Kings of Leon release their latest album as an NFT.

➤ Animated gif of the nyan cat & a video clip of LeBron James dunking.


Sharon Kahn

Sharon Kahn focuses her practice on Trademarks, Copyrights, and Commercial & Entertainment-related contracts. She has worked with small businesses, startups and well-established brands to protect their intellectual property.

Sharon earned her J.D. from the University at Buffalo School of Law with a concentration in Intellectual Property & Privacy Law. During her time in law school, Sharon served as the Editor-in-Chief of Buffalo’s Intellectual Property Law Journal and as Vice President of the Sports & Entertainment Law Society.

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