WHAT IS AN NFT IN THE CRYPTO SPACE?

A non-fungible token (“NFT”) is a class of token, generally built on a blockchain, unique to any other token. An example is a digital version of a baseball collectible card with a serial number of 1 out of 100. Although there are 100 cards displaying the same picture, each card has a unique serial number which allows it to be uniquely identifiable.

WHY ARE NFTS IMPORTANT?

Owing to blockchain technology, individuals are, for the first time, able to move digital assets or physical ownership of non-fungible physical assets via a digital network that does not require a third party to facilitate. This means that ownership of a digital asset, or a digital representation of a non-fungible physical asset, can pass between peers internationally and also seamlessly.

WHAT VALUE DO NFTS BRING?

DIGITAL ASSETS

The emergence of NFTs has the potential to create new asset classes in digital goods, as it allows individuals to obtain complete ownership rights and custody over their digital assets. Due to this, gaming skins within games such as Fortnite and Dota may be a tradeable asset similar to precious stones or art. As a result, substantial value and wealth creation can be established for both creators and purchasers of NFTs.

NON-FUNGIBLE PHYSICAL ASSETS

NFTs will also allow us as a society to trade ownership of non-fungible physical commodities on an international level, which in turn may create further liquidity for particular physical assets due the reduced barriers to entry for ownership. For example, if you want to invest in a piece of art, you may be able to do so online within minutes via an online NFT marketplace. The same goes for selling a piece of art you bought, and without the need for the physical piece of art to ever actually move.

WHAT DOES NON-FUNGIBLE MEAN?

Non-fungible means that the particular subject – in this case, crypto – cannot be stacked or mixed with other similar crypto. For example, if you have 1 Bitcoin and add another 3 Bitcoin to your holdings, you now have 4 Bitcoin, as Bitcoin is a fungible asset. However, if you have 1 NFT and add another 2 NFTs to your holding, you will have NFT X, NFT Y, and NFT Z as they do not mix, and are thus non-fungible in nature.

WHAT IS A CRYPTO NFT OR NON-FUNGIBLE TOKEN?

A NFT is a token generally created via a smart contract on a blockchain protocol – for example, the Ethereum protocol or the Binance Smart Chain Protocol. An NFT’s features are generally unique against any other token.

WHAT CAN AN NFT BE USED FOR?

An NFT can be applied in many different scenarios and have quite a few real-world use cases. They can be used where there is a need for both a digital representation as well as uniqueness.

• Collectibles – Digital collectibles are currently one of predominant use cases for NFTs. They give individuals the ability to create unique digital assets. NFT digital collectible tokens:
  • don’t require a grade;
  • cannot be counterfeited;
  • can be safely transferred via an international marketplace absent of third-party intermediaries; and
  • scarcity can be proved via the blockchain.

• Non-fungible physical assets – Non-fungible physical assets include items such as precious stones and physical art. Unlike gold and silver, precious stones vary in colour, clarity, cut, carat, and size, whereas gold and silver have purity percentages. So long as gold or silver maintains the relevant purity percentage, it can be stacked or combined together, whereas a diamond or a painting cannot.

Please Note: This does not include assets that require fractionalisation. Assets that require fractionalisation should be created with a new fungible token, as the units of the property will be fungible.  

NFT commodity tokens:

• can create ownership rights in a non-fungible commodity that may be safely stored in a vault;
• allow for the sale and purchase of ownership in a commodity without the need to physically move the commodity; and
• create an international trust-less commodity marketplace.

• In-game items – In-game items are items that have been created for the purpose of a particular game and to be used to enhance a user’s experience. Examples include cosmetic items such as skins, power-up items that enhance an accounts gaming experience, weapons, artifacts’, and armour. An in-game item NFT:
  • will allow game developers to create items that are provably rare and unique;
  • will allow players to receive actual ownership of an item in which they may move freely when they want where they want;
  • will allow interoperability between games and their items;
  • will allow for the sale and purchase of an item similar to any other asset; and
  • will allow for the lease of ease items to other players to generate relevant yields.

WHAT TO BUILD NFTS ON?

Although quite popular, the Ethereum main chain is not currently recommended to create NFTs on, the reason being the overwhelming gas fees on the Ethereum network. There are blockchains that are specifically built to build NFTs on, such as WAX and Flow, although adoption for these blockchains is quite low in comparison to others. It can be quite frustrating being required to hold multiple wallets for different blockchains. Thus, we recommend using either:

1. A layer 2 solution that has smart contract integration on the Ethereum network, which should reduce gas fees;
2. A side chain such as xDai; or
3. The Binance Smart Chain, which is EVM and BEP2 compatible.

LEGALITIES OF AN NFT

A collectible NFT or an in-game item NFT will likely be considered to be a sale of goods under Australian law – however, this is dependent on structure.

The sale of an NFT that represents ownership in an asset (non-fungible physical asset NFT) is a significantly more complex matter and will need the correct legal structuring. If you need help with such structuring, you can rest easy as the Neo Legal team is highly experienced in this area.

NEO LEGAL

Neo Legal is an Australian cryptocurrency law firm. We specialise in all things blockchain, cryptocurrency, technology, corporate, and start-up.