What is an NFT?

An NFT is a non-fungible token - a non-interchangeable digital identifier recorded on a blockchain via a smart contract, representing exclusive ownership of an asset. They tend to represent items or assets that are unique or collectible.

Fungible means interchangeable. One bag of sugar is the same as another - I don't mind which one I pick from the shelf. In contrast, non-fungible refers to something that is unique or collectible such as a painting.

Unlike fungible tokens, an NFT has a unique identification code and metadata that makes it unique. A fungible token can be exchanged with another token of the same kind, whereas non-fungible tokens cannot be exchanged with anything else. Non-fungible tokens, however, can be traded.

NFTs have been largely adopted by artists and digital creators. By selling their music, paintings, performances or any other kind of art expression through NFTs on the blockchain, creators can earn direct revenue from buyers with no intermediary agent, no underlying fees, and no license restrictions. NFTs are also used in gaming and in sports as a form of collectible.

NFTs introduce two fundamental innovations to the online world:

Firstly, they provide a certified, immutable form of digital ownership. The owner of an NFT may or may not actually possess the asset that it represents, but they do own the right to claim ownership of its digital representation and dispute any other claims of ownership. As ownership is recorded on the blockchain, it cannot be disputed, modified, or concealed by any third party.

Secondly, NFTs offer a perfect example of creating value through digital scarcity. Just like a Picasso painting can be copied a million times but still remain the only original, ownership of an asset can be traded (via a token), but cannot be duplicated.

NFTs present a series of unresolved issues in terms of intellectual property. The creation or transfer of an NFTs does not involve, by default, the transfer of any other right besides ownership, such as the right to reproduce, distribute or display. Where the NFT represents a physical asset, it may be unclear whether a purchase is buying ownership of the physical asset itself - or just its digital certification. In the absence of precise rules on transfer of rights established within the blockchain, authorities run the risk of creating a patchwork of local regulations that try to capture a borderless internet phenomenon within geographical boundaries.

Due to the increasing success of NFT-trading platforms, NFTs also incur the risk of being broadly defined as financial instruments. Although NFTs can be used as collateral for lending and are often used as an investment opportunity, this is only an example of the wide array of potential applications.

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At Owl Explains, we collaborate with trade associations, think tanks, policymakers, and industry partners to further understanding of blockchain, crypto, and Web3.

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