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Ifrah Law on NFTs: What is an NFT?
Ifrah Law on NFTs: What is an NFT?
By: Jake Gray
It would be hard to over-exaggerate the hype that has grown around non-fungible tokens (“NFTs”) over the past year as a result of the meteoric rise of Bitcoin, cryptocurrencies, and other blockchain-based technologies. NFT sales skyrocketed in 2021 to $25 billion, a colossal increase from $94.9 million in 2020. [1] And the number of unique cryptocurrency wallets trading NFTs rose from 545,000 in 2020 to 28.6 million in 2021. [2]
The rush of attention and money to NFTs and the rest of the crypto industry has opened the doors to tremendous business opportunities—but those possibilities can come with significant legal pitfalls. So, starting with this post, Ifrah Law is launching a new series that will cover the basics of NFTs; the relationship between “Utility NFTs” and online gaming—in both gambling and video games; the application of the securities laws to digital asset offerings, and more.
The Conceptual Framework of NFTs
To start, those hoping to utilize these new offerings productively will need to understand the conceptual framework and technology underlying NFTs. NFTs are best understood as an attempt to endow digital objects—which are notoriously duplicable—with their own distinct identities that can be authenticated as such. NFT enthusiasts often cite Leonardo da Vinci’s Mona Lisa as an example of this concept: there is the original copy, which da Vinci himself painted, and millions of duplicates around the world. All of these are the Mona Lisa in a certain sense, but there is only one original—the original—which can be verified and authenticated as the original. In other words, the Mona Lisa is not interchangeable with any other; hence, it is “non-fungible.” To be considered non-fungible, the item doesn’t need to reach the status of the Mona Lisa, however: its value simply has to be proportionate to its uniqueness in some way, whether it be from literal exclusivity in the market or even sentimental reasons. The first half of this term—“non-fungible”—is important because it distinguishes NFTs from other tokens created through blockchain technology like cryptocurrencies, which are fungible (or interchangeable), as all currencies are. At their most basic, NFTs are an attempt to transfer the physical uniqueness of objects and the qualities therein over to a digital world.
Understanding the Technology
On a technical level, NFTs exist as such within a distributed network, which is known as blockchain technology. The blockchain is a ledger that exists on multiple devices and is accessible by all participants, rather than being controlled by one person or entity. This decentralized scheme is in contrast to centralized databases—like a personal computer or the web servers underlying most internet technologies—and all transactions are recorded on the “distributed ledger.” Lack of centralization is critical to the function of NFTs and other cryptocurrencies, because the public can easily access the distributed ledger and confirm the identity and uniqueness of each NFT, and no user can unilaterally falsify the characteristics of an NFT. From the moment an NFT is “minted,” which is the term for linking a digital file to the blockchain, its digital whereabouts are tracked.
The NFT Market
With this new digital proprietary scheme, competition between vendors of digital goods is high, as they rush to differentiate themselves in the nascent NFT market in novel ways. Some have capitalized on celebrity deals and endorsements, as demonstrated by the proliferation of celebrities and athletes from Serena Williams to Justin Bieber using their NFTs as profile pictures on social media. Jimmy Fallon even boasted a member of his own collection on his show. [3] And DraftKings has gone so far as to launch its own NFT marketplace, with exclusive drops from, as the company puts it, some of the “biggest icons in sports” like Tom Brady, Naomi Osaka, Derek Jeter, and Dale Earnhardt Jr. [4]
For other companies, the introduction of NFTs has flowed naturally from their existing business model. For example, large sneaker companies have long since begun offering limited-supply “drops” of new sneakers—the kind you can wear on your feet—which has fueled an expanding community of “sneakerhead” collectors. Now, several of those companies are using the same strategy to drop sneaker NFTs. For example, following the extremely successful virtual sneaker launches of companies like Nike and Under Armour, the Wall Street Journal reported that Adidas sold out $23 million worth of virtual sneaker NFTs in mere hours. [5] Originally sold for $765, some of Adidas’s virtual sneakers are up for resale on the NFT marketplace OpenSea for more than $2,000.
In addition to products that have flowed from endorsements and companies’ organic merchandise offerings, other companies have attempted to expand the application of NFTs from collectibles to products with “real-world utility” by launching so-called “Utility NFTs.” Utility NFTs move beyond mere artistic or collectible value of the digital item in a variety of different ways. One of the most popular ways to endow an NFT with utility is by making the NFT the functional equivalent to a ticket that provides the owner access to certain perks, like new NFT drops, revenue sharing, and other exclusive content. The most popular example of this kind of utility NFT is from the “Bored Ape Yacht Club,” which reached more than $1 billion in total sales since the project’s inception this January. [6] The Bored Ape NFTs provide their owners exclusive membership access to other NFTs and NFT drops, as well as a real-life yacht party. [7]
Another popular utility NFT model is what some have called “Gamified NFTs,” which is a broad name to describe NFTs that are used as items in Blockchain-based video games and those that are used for gambling games in some way. In a variety of cases, the NFT is used in both ways—in online video games and in gambling.
New Opportunities Related to NFTs
In granting unique properties to digital assets, NFTs offer a foundation for new opportunities for business and life on the internet. Still, it’s important to note that NFTs do not represent pure upside. This Ifrah Law blog series will address the legal complexities of NFTs in a variety of ways, with an eye toward facilitating the legal implementation of NFTs. The next article of the series will cover the relationship between Utility NFTs and gaming (in both senses of the term), as a number of projects and corporations have cropped up looking to propel this sub-market into the same growth as the broader NFT market.
*Jake Gray is a graduate of Columbia University and an established technology researcher, currently working in the betting and futures space as a consultant to a variety of operators.
[2] Ibid.
[3] https://www.latimes.com/business/technology/story/2022-01-26/jimmy-fallon-nft-ape-nbc
[4] https://dknation.draftkings.com/playbook/22619108/nft-drop-information-draftkings-marketplace-about
[5] https://www.wsj.com/articles/nike-adidas-nft-sneakers-11642160548
[6] https://www.theblockcrypto.com/linked/129084/bored-ape-yacht-club-crosses-1-billion-in-total-sales
[7] https://nftevening.com/baycs-first-annual-ape-fest-kicks-off-with-a-bang/
Part II — Ifrah Law on NFTs: Blockchain Gaming and Gambling Compliance
Part III — Ifrah on NFTs: New iGaming Tokens Raise Novel Securities Questions
