The ABCs of NFTs
NFTs (Non-Fungible Tokens) are making headlines throughout the entertainment industry, with musicians and sports teams releasing unique content in this format for a premium price. So how exactly do NFTs work, and what are their broader implications for the music business?
Guest post from the Wallace Collins Entertainment Law Blog
NFTs are suddenly headline news! Artists and musicians are using NFTs as a new way to release their products into the marketplace. NPR reports that the artist Grimes recently sold several NFTs for over $5 million and an NFT video clip of LeBron James making a historic dunk for the LA Lakers earned more than $200,000. Rolling Stone reports that the rock band Kings of Leon is releasing its new album in the form of an NFT. At the auction house Christie’s, bids on an NFT by the artist Beeple are already reaching into the millions. It appears that what started as an online hobby among a certain group of tech and finance geeks is now being catapulted into the mainstream.
The best way to try to understand an NFT is to break it down to its essentials. The term NFT stands for non-fungible token. It is “non-fungible” meaning you cannot exchange it for another item of equal value. The “token” refers to a unit of currency on the blockchain, which is how cryptocurrency like Bitcoin is bought and sold. In other words, unlike monetary currency or other items which you can exchange, swap or trade, an NFT is unique and one of a kind.
However, even if you think you can understand how to define an NFT, understanding the valuation of an NFT can be even more evasive and nebulous. To wit, an NFT is a type of cryptocurrency that, instead of holding money, can hold assets such as art, tickets and music. NFTs operate on a blockchain which is a publicly accessible and transparent network. In other words, anyone can see the details of any NFT transaction. Each computer involved in the transaction becomes a part of the network, which keeps updating and cannot be hacked due to its inherent nature as a multi-part system. The bottom line is that an NFT, by its nature, has a value that is subjective and fluctuates much like a share of stock on Wall Street.
Therefore, when you purchase an NFT you are essentially purchasing a kind of bar code, a form of certificate of authenticity that serves as proof that a certain version of something unique belongs to you. What you purchase is a unique code that manifests as art or music, but in a different format. However, when you buy an NFT in most cases you are not getting the copyright or the trademark to the item, you simply own a piece of code in a blockchain that the marketplace deems to be a valuable item.
Not to over-simplify, but it might help to think of procuring an NFT as somewhat akin to acquiring a collectible. However, not all NFTs are originals, many are the digital equivalent of a reprint. In the case of an NFT, however, even the reprint has what is essentially a unique barcode or token on the blockchain. Keep in mind, the blockchain is a type of decentralized record keeping so that, instead of one institution like a bank having a ledger of all transactions, the blockchain uses a vast network of computers that all hold each other accountable on a shared public record. That makes it hard to remove an NFT from the internet entirely, and it also means that there is a way to trace an NFTs origin and transaction history – reinforcing the uniqueness and value of a given NFT.
With millions of dollars pouring into NFT transactions, many enthusiasts believe NFTs will soon expand beyond trading art, memes, music and video clips. There is an expectation that NFTs could be used as collateral for loans in the not too distant future. Silicon Valley investors, of course, believe the NFT possibilities are limitless. Then again, there is always the risk that this tech frenzy is just a passing fad or another speculative bubble. Although many NFT backers believe the system’s built-in scarcity will keep values up, that is only true as long as the surge of interest persists. If you bid on and pay for an NFT but enthusiasm then plummets, so will the value.
It seems that every day some newfangled invention arrives to bedazzle us, but whether it is the next big thing, an iPhone-like quantum leap forward, or just another snake oil salesman’s charade remains to be seen. As for me, I will watch how NFTs perform in the marketplace while I enjoy the artwork that hangs on my wall and vibe to the music I play on my sound systems – I understand how to measure the value of that experience.
Wallace Collins is an entertainment lawyer with 30+ years’ experience specializing in entertainment, copyright, trademark and internet law. He was a recording artist for Epic Records before attending Fordham Law School. T: (212)661-3656 www.wallacecollins.com