What to Know about Nonfungible Tokens

Posted on: April 29th, 2022

A nonfungible token (NFT) is a unique digital code that represents a digital item such as art or music, as well as a growing number of physical items, that runs on the blockchain (a secure, decentralized, and cryptography-backed online ledger) and provides proof of ownership of virtual collectibles. That explanation may cause confusion, and when it comes to NFTs, confusion and excitement are present in equal parts.

The sale of multimillion dollar NFTs over the last year has prompted growing interest in them—and plenty of questions. Namely, what exactly are NFTs, how are they used, and why would anyone be interested in them?

NFTs can generate new streams of revenue for creators and be a store of value for collectors. If you own NFTs or plan to invest in them, you should update your estate plan accordingly. Handing down an NFT is more complicated than passing on a physical item or other traditional asset. But with buzz building around NFTs, they could end up being among the most valuable items in your estate.

What Is an NFT?

As the name indicates, the token is nonfungible. In other words, it is unique and cannot be directly replaced by, or exchanged one-for-one for, another token.

Fungible assets are mutually interchangeable. They include things such as the US dollar and Bitcoin. One dollar bill can be exchanged for any other dollar bill; one Bitcoin is always equal to another Bitcoin. You can also break fungible assets down into smaller denominations, such as four quarters in exchange for one dollar.

No two NFTs are the same; they cannot be replicated. Each token is one of a kind. But here is where things can get tricky: NFTs do not necessarily derive their worth from their uniqueness, even though that is part of their value.

Typically, an NFT is linked to a specific digital item and serves as a sort of certificate of authenticity for that item. Tokenizing assets and putting them on the blockchain makes buying, selling, and trading the assets safer and more efficient.[1]

NFTs represent and are used to sell the following types of digital collectibles and assets, among others:

  • collectible sports cards (e.g., NBA Top Shot)
  • digital art, such as music, videos, and images
  • tokenized version of tweets and GIFs
  • trading games (e.g., CryptoKitties)
  • in-game items
  • rarities and collectibles
  • virtual real estate (e.g., Decentraland)

NFTs can also represent unique real world items that require provable ownership, such as event tickets, unique fashion items, and legal documents such as property deeds and car titles. However, the tokenization of physical items is not yet as developed as the tokenization of digital items.

How Do I Buy an NFT?

Most NFTs are sold in online marketplaces. Some of the more popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, Rarible, and Zora.

NFTs must be purchased with cryptocurrency (crypto). The most popular crypto for buying NFTs is Ethereum. To get started, you will need a cryptocurrency wallet, which is an application that allows you to send and receive cryptos and make purchases. Once you are on an NFT marketplace site, connect your wallet. You can then search for and buy NFTs, but you will be bidding against other buyers, as in an auction.

What Do I Do With an NFT?

Congratulations, you are the owner of an NFT. Now what?

You are never going to be able to hold an NFT in your hand or hang it on your wall to impress your friends. What you can do with an NFT depends on what it is. If it is digital artwork, you can display it on a monitor or inside a virtual world (known as a metaverse) such as Decentraland. With NFTs, you can also own virtual real estate and other unique items in the metaverse. In fact, the full potential of NFTs seems inextricably tied to the development of the metaverse’s 3D digital environment.

You might want to just hold on to your NFT as an investment. If its value goes up over time, you can sell an NFT for a profit. Last year, a collector who bought a $66,000 NFT digital artwork from artist Beeple sold it four months later for one hundred times the amount paid. Another work from the same artist sold for nearly $70 million at Christie’s auction house.

While you may not be able to physically possess an NFT, it can be worth very real money. That NFT you buy today could end up being worth more than any of your traditional accounts and property.

Transferring an NFT and Estate Planning

Each NFT can have only one owner at a time. NFTs are stored in a wallet, similar to a crypto wallet. Although the NFT is stored on the decentralized blockchain—and not actually in your wallet—the wallet has digital keys that give you access to your NFT. The wallet must be compatible with the type of blockchain on which the NFT is built (usually Ethereum).

During your lifetime, transferring an NFT can be done in a matter of minutes. You select the NFT you want to transfer from your wallet, enter the recipient’s wallet address, and send the token. You also have to pay a transaction fee.

Access to your digital wallets should be part of your estate plan. Without a detailed plan that ensures access to your cryptocurrency, NFTs, and other digital assets, they could be lost forever once you are no longer around to personally transfer them to someone else. In your estate plan, you can include instructions about whom the assets should pass to, when they should be transferred, and how to log into your digital wallets (i.e., your wallet ID, password, and any two-factor authentication you have enabled).

Do you need help setting up an estate plan that covers traditional accounts and property and nontraditional digital assets such as NFTs? Do you have questions about your digital legacy? Reach out to our office and schedule an appointment with an estate planning attorney.

 

[1] Matt Hussey, What Is Blockchain and What Is It Used For?, DECRYPT (Jan. 22, 2019), https://decrypt.co/resources/blockchain-basics-what-is-blockchain.

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