FAQ (about NFTs in general)
Most frequent questions and answers
A non-fungible token (NFT) is a unit of data on a blockchain (a digital ledger), where each NFT is unique and can represent an item, digital or physical.
NFTs, to date, have typically served as a “digital receipt” or proof of ownership which records all previous transactions of the item and can be seen by the public.
NFTs can be bought and sold on any NFT marketplace. NFTs so far have been used to represent ownership of digital items such as items in video games, art, music videos, and other forms of digital creative work.
NFTs started in video games, where only the holder of the NFT (which say represents a sword in a game) would be able to use it. But with NFTs for digital media like artwork, music or meme, which come in the form of a file, keep in mind that access to any copy of that file, is not restricted to the owner of the NFT. This means that if you buy an NFT for digital media, you don’t have any more ability to do something with that digital asset than anyone else!
Why? The NFT acts as “digital receipt” for the asset, not the asset itself.
Digital files themselves are infinitely reproducible assets but the NFTs representing them are unique “receipts” on a blockchain that can serve as proof of ownership, just like how a regular receipt can serve as proof of ownership of something you just bought. This gets confusing when the asset is a digital one because the receipt itself can contain a copy of the asset. But again, the NFT is not the asset.
As they expand outside digital assets and into “real” assets, NFTs will be increasingly used as contracts, certificates of authenticity and product labels for physical items, and tickets/vouchers for services.
A big misconception about NFTs is that it IS the asset it represents. This cannot be farther from the truth and thinking about NFTs this way leads people down the wrong route.
Instead, think of the relationship between an asset and the NFT representing that asset in terms of a shirt and the receipt of a shirt. When you buy a shirt from a store, you also receive a receipt for the shirt. These are two separate assets that serve different functions. What happens to one is completely separate from the other!
This relationship between the NFT and the asset applies whether the asset is digital or physical. Digital assets make establishing a distinction difficult because there is no physical side. In the digital world, especially in digital art, the NFT or the receipt can itself contain a copy of the very asset it represents, but again, the receipt is not the asset itself. Unfortunately, because NFTs found their beginning in digital assets, this confusion will likely persist.
The utility of the shirt is obvious – it can be worn, thrown away, resold or turned into something else. The receipt of the shirt also has utility, most often determined by the rights provided by the store where you bought it i.e. return or exchange the item, earn loyalty points, get a manufacturer’s warranty, etc.
In a way, NFTs and assets can be seen as the perfect couple, each serving complementary purposes. Each has value independently, but work best as a pair.
The value of an NFT is the value of the rights granted to the holder of the NFT by a counterparty, typically the seller in the case of a resale or the creator in the case of a primary sale.
In the case of real estate, this counterparty is typically the seller, not the builder. If the seller uses an NFT to represent all the ownership rights of a property, then selling that NFT grants the buyer all the ownership rights and therefore the value of the NFT is the value of the property itself.
Using the example of the shirt/shirt receipt, the value of the shirt receipt is in the rights granted to owner of the receipt by the store — usually the right to return or exchange. If the store also had a policy of giving away 1 shirt for every 10 shirts purchased, provable with a receipt, then the value of the shirt receipt would be 1/10 of the shirt + the value of any other rights granted. If the manufacturer has a rebate, then the receipt has additional value from the manufacturer. If the store and/or the manufacturer closes down, the value of your receipt is reduced or becomes 0.
The earliest applications of NFTs were in video games, where rights are granted to NFT owners by the game. Cryptokitties was one of the first applications of NFTs, where each NFT represented a unique cat. The value of the NFTs came from their ability to grant owners the right to abilities in the game, namely to breed more cats using the one they own. Cryptokitties became valuable because of scarcity and functionality programmed into the game, not merely in the ownership of a picture of a cat, a notion falsely popularized by headlines.
Moving to digital assets like digital art and tweets, the value of NFTs become trickier and more susceptible to exploitation. Many assume an NFT for a digital asset confers some kind of copyright. This is not true, unless the owner of the digital asset explicitly states it. For most digital art NFTs being sold today, there is no right conferred to the holder by any party! Therefore any buyer of digital art NFTs should consider this distinction when valuing it.
Interestingly, platforms like Rarible.com now allow NFT sellers to check off a box saying the NFT comes with copyrights. The NFT marketplace is still evolving and people need to be aware of what they are buying.
Remember, the value of an NFT in is the rights granted, not in value of the asset it represents. Just like how the value of a shirt receipt isn’t in the value of the shirt itself but in the rights granted by the store and manufacturer.
Despite starting in the digital realm, NFTs in many regards are better designed to represent real world assets, especially real estate assets. Whereas digital and even IP-based assets can be replicated infinitely, NFTs and real world items are unique.
We believe that digital assets simply marks the start of NFT application and act as an incubator for disrupted services for almost every type of asset.
As NFT marketplaces develop, they can replace or be an alternative for many current services. NFTs for homes, for example, can replace your town clerk’s office, your realtor, MLS and all home listing sites, Airbnb and all home rental sites. NFTs for cars can replace Zipcar, Uber/Lyft.
NFTs also make it easier for an Airbnb or Uber to exist for any asset, say jewelry or coins.
In short, no. That’s because an NFT can be used to represent anything about an asset – whether it be full ownership, partial ownership, usage rights, copyrights, authenticity, or simply as a description.
In practice, there are differences because what you can do with physical or real assets are different from what you can do with digital ones. You can rent your house but you can’t rent a GIF. Similarly you can grant copyrights to a digital piece of art, but not a house.
The relationship between the NFT and an asset comes simply from the seller and buyer agreeing that a particular NFT represents a particular right to an asset.
When you create an NFT, its linkage to your asset is simply your decision to use that NFT as a representation of your asset.
At its simplest, an NFT consists simply a token (a unique record on the blockchain) and wallet address that the NFT is currently owned by. It doesn’t need to describe or include or link to the asset it represents in any tangible way, making it a rather abstract concept.