From one clueless 30-something millennial who had no idea either.

NFTs have been around since 2014, but last year was when it really hit the mainstream media and picked up momentum. You probably came across NFTs for the first time in 2021 when you were scrolling though Instagram and saw something about a JPEG file selling for $69 million. 😳

Meh okay interesting but not as interesting as Bennifer getting back together, and lets not forget we were trying to free Britney – so you kept scrolling.

Then this NFT thing shows up again on SNL and you start to hear more buzz about celebrities buying profile pictures of punks and cats and apes for hundreds of thousands of dollars.

Now you’re kinda curious and Instagram knows this all too well so it ensures anything NFTs will keep showing up on your explore page. Let’s not forget all the bots sliding through your DMs. They all play into your FOMO to jump in on the latest and hottest NFT project or you’ll miss the boat like you did with cryptocurrency before it blew up. Point taken, but no thank you spammy crypto bro. 

That was 2021 you – 2022 you is starting to listen but you’re still not totally convinced. Although you start to feel there might be something behind all that noise. 🤔

And YOU’RE RIGHT – there’s something there at the heart of the movement – something big enough to possibly disrupt entire creative economies for artists, musicians, content creators, and businesses (with the right infrastructure and execution). My guess is that it will reshape the entire future of what “work” means as we know it. Which we’ll bookmark for another post.  

We’re living in a time when digital disruption in entire industries feels like a regular occurrence. We are all too well aware of how the world’s largest companies don’t “physically” own anything.

“UBER, the world’s largest taxi company, owns no vehicles. FACEBOOK, the world’s most popular media owner, creates no content. ALIBABA, the most valuable retailer, has no inventory. And AIRBNB, the world’s largest accommodation provider, owns no real estate.”

–Tom Goodwin

Amazon started out with just books and now has evolved into a retail giant. Proponents believe NFTs are merely just getting their feet wet in the art world. It’s still in its infancy phase and I’m excited to watch this baby grow up.

Before we proceed – let’s address the skeptics in the room. With any new technology that enters the scene, there will be plenty of pushback and polarizing view. Everyone’s right and everyone’s wrong.  

Will NFTs be the largest ponzi scheme scam of all time?

The Beeple’s “Everydays” NFT was sold for an insane amount of money, followed by  celebrities and the media building on the hype.

We see people buying and pushing up the price due to investment speculation or even FOMO – we don’t want to be the fool that missed out but we don’t want to be the fool left with nothing to show for at the end of a gold rush.

Then there’s the aforementioned crypto scammers that came out of the woodworks and exploded onto the scene targeting the layperson with get-rich-quick schemes. We hear about the few success stories, but then there’s a trail of unsuccessful horror stories of pump and dump schemes, of people losing their life savings because their crypto wallet was compromised, the list goes on. Anything that can only survive when new buyers enter the market to push up its value, smells like a pyramid.

A proportionate amount of people are skeptical – and as they should be. Gary Vaynerchuck said 98% of NFT projects will fail after the gold rush fades. No one really knows for certain how this will all pan out – and bubbles will burst – it’s just a matter of when. There are always going to be scammers. We saw it during the dot-com era, but the internet still came out on top.

It’s when the dust settles and the market matures is what I’m keeping my eyes on – the evolution of NFTs.

With any new technology, there are people that are bearish or bullish. I like to think I’m currently somewhere in between – bulldog-ish (all bark no bite- yet).

I’m not here for the hype and investment speculation, I’m here for the potential it has for the future of creative communities.

Ok so with that long introduction let’s get into the meat of what it is – hopefully high level enough where I don’t lose you because the average adult attention span in this social media day and age is like a couple seconds.

*Your instagram scroll break*

WTF is an NFT?

I’ll try to break it down so we don’t get lost in the crypto jargon it can get all too easily shrouded in.

I find it easier to understand what an NFT is by understanding what it’s not. Cryptocurrencies, like Bitcoin or Ethereum, are “coins” that operate on their own respective “blockchain”. These coins are fungible – meaning they are freely exchangeable and replaceable as their value is interchangeable, like money. Say you give me a bill and later replace it with another bill – I’m cool with that, it has the same value to us both.

This is not the same with an NFT.

An NFT is non-fungible meaning it’s unique and cannot be exchanged – it’s irreplaceable. Unlike that ex whose box you left to the left.

An NFT is not a coin but is a Token. Tokens don’t have their own blockchain but must utilize another coin’s blockchain. Currently most NFTs are operating on the Ethereum blockchain.

If you hear the word blockchain thrown around but still don’t know what it is.

This is how I picture it:

Each time a cryptocurrency transaction is performed– I imagine a cute little minion (each with their own unique identity) scurrying into a big block. There’s no gatekeeper. It just enters into a block full of other minions. Once the block is full of minions (a batch of them) and reaches its storage capacity, the block closes and goes through a security scan of sorts to verify the identity of these minions. Once this block is full with verified minions, the gate officially and forever closes. It’s time stamped and immutable. No take backs, no returns. The block floats into space and appends to other existing blocks, creating a continuous chain = a blockchain. A long, continuous, digital accounting ledger.

Just like when it entered the blocks, there was no authority present, once in this chain there’s no government running them either – they’re running themselves – aka it’s decentralized.

Is an NFT really just a jpeg?

An NFT could be digital art, collectibles, digital trading cards, digital real estate (land on the Metaverse), or event tickets. Embedded in each NFT is a code snippet representing a self-executing smart contract between buyer and seller, providing authenticity and ownership.

The smart contract has a built-in option for an ongoing royalty, which will set the stage to provide real solutions for creatives to put more money back into their pockets each time their work is distributed. The creator reaps the rewards on the first sale and will continue to get a percentage for every future transaction. This allows them to bypass the middleman altogether and get paid directly by their supporters in perpetuity, even as it circulates through the secondary market. If the community grows and the value goes up, early supporters will get rewarded.

What then creates value is not only the scarcity and exclusivity that are built into NFTs, but the creator’s own brand and community he/she has built. This can be mutually beneficial. Think of the meaningful change and endless opportunities for both the creators and community to get paid. NFTs will  surely disrupt the art and music world.

Greta Thunberg would be livid

With any new technology – there will be a ton of backlash raising ethical and environmental concerns. If you’re wondering how something that’s not tangible can leave a real carbon footprint. Just like mining for natural resources, cryptocurrency also requires “mining”.

Mining in the crypto sense requires a bunch of computers all around the world racing to solve a series of complex mathematical equations on the blockchain. The miners are real people mass collaborating to verify the blocks and are periodically rewarded with coins for their work. This method is called proof of work and the miners with the strongest computers will reap the majority of the rewards. These miners require electricity to power the computers that are doing the mining, which releases carbon emission, creating massive carbon footprints.

A 2021 study reported that Bitcoin mining each year uses almost as much electricity as the entire country of Argentina! At the rate blockchain technology is growing – there must be a more sustainable way.

Enter proof of stake which allegedly will use millions of times less energy. With this method, verification will be from a consensus. When verifying a transaction, miners won’t automatically receive coins but can choose to stake a number of coins or crypto they hold. A winner will randomly be chosen to validate a block. It’s like buying a raffle – the more they stake, the higher their chances of winning. If the block turns out to be bad, the miners would lose their stake – so this adds another layer of incentivizing valid outcomes. Ethereum has been trying to transition to a proof of stake with The Merge project. This doesn’t solve everything, but it’s a start.

The Boring Stuff 🥱

Disclaimer: this information is for informational purposes only, and should not be construed as legal or tax advice.

Legal and tax considerations – this section may most likely bore you, but should be on your radar.

As with everything related to NFTs – the law itself is uncertain about it too. Law firms are only now jumping on the bandwagon and creating entire specialized task forces to navigate this new “asset” that may be categorized as a work of art or collectible, but can get dangerously close to being a security – and no one wants to involve the SEC.

Lawmakers definitely never saw this coming and now it’s up to these lawyers to fit this new square block into an archaic round hole, until new regulations come out.

Say no more – on March 9, 2022, President Biden signed an executive order that directs federal agencies to address these digital assets.

Let’s not forget the host of intellectual property issues encompassing copyright, trademark, patent, trade secret laws, etc. Buyers beware that when you purchase an NFT, you are merely getting a license to use and display it for personal, and not commercial, purposes. You did not receive the copyright in that piece of work, aka you don’t have the right to distribute, sell copies, or make derivatives of that work – unless the smart contract specifies otherwise.

Then there’s the issues of taxes. Just because it’s on the decentralized blockchain doesn’t mean you don’t have to pay taxes on it. Ah taxes – “nothing is certain except death and taxes.” (B.Franklin) 

You may possibly be subject to capital gains tax, not only when you sell but when you buy NFTs. When you use cryptocurrency to buy an NFT, you’re technically disposing of a digital asset that changed in value itself.

For example, if you bought an NFT for 1 ETH (currently valued at say $3,000) but you got that 1 ETH for $1,000 over a year ago – you have realized a $2,000 gain and recognized it when you purchased that NFT. That transaction may be subject to a capital gains tax. If you later sell the NFT for 2 ETH (value at time of sale: $8,000). Possibly another capital gains tax on that $5,000 gain. Fun times for your accountant who may have already quit by now.

TAKEAWAY

It’s just the beginning for NFTs right now and even with the saturated hype, they still have little utility beyond investment speculation.

I wouldn’t necessarily jump in and throw your entire life savings into an NFT. If you’re going to buy, do your due diligence on the creator and invest wisely. NFTs – even the top trending ones – may at some point lose their value and end up worthless – but it doesn’t take away from the overall movement for more meaningful projects, which are happening behind the scenes as we speak – and that’s what I’m really excited about.