‘Where does all that potential actually end?’NFTs appear to be all about pushing boundaries and making headlines. How to make sense of this NFT boom?
For a brief overview of the nature of NFTs and the legal challenges of these assets, see our previous article “In the public eye - NFTs” here.
The Blockchain continuum
Blockchain is the backbone of all recent technological, financial and now artistic innovations. Gradually, but still at rapid terms, usage upgrades of this technology followed – DeFi and stablecoins, and the blockchain-nascent NFTs. These all are part of the so-called blockchain continuum - a coherent whole that keeps on going.
NFTs potential unleashed
1.Generative artwork & Art Blocks
The early use of NFTs relates to the art space. A recent trend is the NFT Generative Artwork Movement where art is created in and via digitally native medium. The leading generative art marketplace platform is currently Art Blocks. Thousands of collectors buy NFTs created by generative algorithms like the flow field algorithm in the Tyler Hobbs’ Fidenza project, which all makes us recall that ‘Beauty is in the eye of the beholder.’
2. Celebrities & big brands
NFTs’ potential to generate and sustain revenue streams is particularly attractive for celebrities & big brands. Taco Bell, Coca Cola, Asics, Nike, NBA, Formula 1, Marvel, Visa, etc., etc., have released and bought NFTs.
Why does that matter? It’s simple - because brand strength drives value.
On value: the Endowment effect
A curious case of the so-called endowment effect are NFTs.
It starts with the evergreen question: ‘When I buy an NFT, what do I actually get?’.
It is a connection, the ability to say that one is connected to a unique asset in a unique way. A sense of ownership or personal connection to a product is based on the endowment effect. It is about the assertion that if one feels a sense of psychological ownership to a product, they will be willing to pay more for it.
3. Fractionalized NFTs
CryptoPunks and BoredApes are blue-chip projects generating exorbitant sales. The so-called fractionalization, breaking an NFT up into multiple parts, makes the NFTs market more accessible, which is a good thing in terms of diversification. However, account must be taken of the legal and regulatory implications therein. The question ‘Who owns what?’ remains of paramount importance.
4. P2E Gaming, DAOs & Communities
A natural playfield for unleashing the NFTs potential today is the gaming industry. With tokenizing in-game assets, the ability to share them across applications (cross-game interoperability) and rewarding players’ skills and game progression with real value, gaming is steadily entering the blockchain continuum where to benefit from decentralized coordination and financing methods.
DAOs (decentralized autonomous organizations) are trending as a much-preferred form for organizing NFT projects, including in gaming where it is all about community building, which is one of the core features of DAOs.
5. No regulation against NFTs
The NFT market is still developing and thus in need of regulatory clarity. Purchaser Due Diligence is needed to establish what rights and obligations are being acquired and what their impact on the value of the NFT and the underlying asset may be. Usually, NFTs projects are cross-border, therefore multi-jurisdictional analysis is also needed. Checking the terms and limitations of the various NFT marketplaces and platforms is packed in the Purchase Due Diligence as well. Although NFTs are not expressly regulated yet, compliance with existing legislation is required.
6. NFTs, digital identity & the Metaverse
Is Metaverse the endgame? Is it the ultimate game-changer in terms of who we are and how we interact?
Many close followers of the NFTs evolution claim that NFTs are the key to the Metaverse by being capable of unlocking its potential. Despite being in its infancy as of yet, the Metaverse is becoming part of our reality and surely opens up new ways for great next experiments and revenues.
Tame the NFT craze: simply ask the right questions!
Subject to ongoing theoretical and practical debates are questions like ‘Can anyone mint and/or sell NFTs?’, ‘What is the token representing?’, ‘What rights do I acquire when buying an NFT?, ‘What are my obligations?’, ‘How are my rights enforceable?’, ‘What’s the actual value of my NFT?, ‘What are the risks involved when minting/purchasing an NFT?’, ‘Do NFTs qualify as financial instruments, for example securities?’, etc.
The answers will eventually lead to regulation or vice versa. Hence, every potential investor in NFTs must be aware of the fact that there are quite a few legal concerns surrounding NFTs as well as risks involved in any NFT-related activity.
The solution starts with the right question.
*This analysis is not exhaustive and does not constitute legal or financial advice. For legal advice and assistance in connection with NFT projects do not hesitate to contact us here
Pavla Tsvetkova
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