A nonfungible token (NFT) is a unique digital code that represents a digital item such as art or music, as well as a growing number of physical items, that runs on the blockchain (a secure, decentralized, and cryptography-backed online ledger) and provides proof of ownership of virtual collectibles. That explanation is likely to cause confusion, and when it comes to NFTs, confusion (along with excitement) is built directly into the product.
The sale of multimillion dollar NFTs over the last year has prompted growing interest in them—and plenty of questions. Starting with, what exactly are NFTs, how are they used, and why would anyone be interested in them?
NFTs have the potential to be new streams of revenue for creators and a store of value for collectors. If you own NFTs or plan to invest in them, you should update your estate plan accordingly. Handing down an NFT is more complicated than passing on a physical item or other traditional asset. But with buzz building around NFTs, they’re clearly becoming a part of the asset landscape.
What Is an NFT?
As the name indicates, the token is nonfungible. In other words, it is unique. The token cannot be directly replaced by, or exchanged one-for-one, for another token.
Fungible assets are mutually interchangeable. They include things such as the US dollar and Bitcoin. One dollar bill can be exchanged for any other dollar bill; one Bitcoin is always equal to another Bitcoin. You can also break fungible assets down into smaller denominations, such as four quarters in exchange for one dollar.
No two NFTs are the same; they cannot be replicated. Each token is one of a kind. But here is where things can get tricky: NFTs do not necessarily derive their worth from their uniqueness, even though that is part of their value. Tokenizing assets and putting them on the blockchain makes buying, selling, and trading the assets safer and more efficient.
NFTs represent and are used to sell the following types of digital collectibles and assets, among others:
- collectible sports cards (e.g., NBA Top Shot)
- digital art, such as music, videos, and images
- tokenized version of tweets and GIFs
- trading games (e.g., CryptoKitties)
- in-game items
- rarities and collectibles
- virtual real estate (e.g., Decentraland)
NFTs can also represent unique real world items that require provable ownership, such as event tickets, unique fashion items, and legal documents such as property deeds and car titles. However, the tokenization of physical items is not yet as developed as the tokenization of digital items.
How Do I Buy an NFT?
Most NFTs are sold in online marketplaces, and must be purchased with cryptocurrency (crypto). The most popular crypto for buying NFTs is Ethereum. To get started, you will need a cryptocurrency wallet, which is an application that allows you to send and receive cryptos and make purchases. Once you are on an NFT marketplace site, connect your wallet. You can then search for and buy NFTs, but you will be bidding against other buyers, as in an auction.
What Do I Do With an NFT?
Congratulations, you are the owner of an NFT. Now what?
You are never going to be able to hold an NFT in your hand or hang it on your wall to impress your friends. What you can do with an NFT depends on what it is. If it is digital artwork, you can display it on a monitor or inside a virtual world (known as a metaverse) such as Decentraland. With NFTs, you can also own virtual real estate and other unique items in the metaverse. In fact, the full potential of NFTs seems inextricably tied to the development of the metaverse’s 3D digital environment. You might want to just hold on to your NFT as an investment. If its value goes up over time, you can sell an NFT for a profit.
Transferring an NFT and Estate Planning
Each NFT can have only one owner at a time. NFTs are stored in a wallet, similar to a crypto wallet. Although the NFT is stored on the decentralized blockchain—and not actually in your wallet—the wallet has digital keys that give you access to your NFT. The wallet must be compatible with the type of blockchain on which the NFT is built (usually Ethereum).
During your lifetime, transferring an NFT can be done in a matter of minutes. You select the NFT you want to transfer from your wallet, enter the recipient’s wallet address, and send the token. You also have to pay a transaction fee.
Access to your digital wallets should be part of your estate plan. Without a detailed plan that ensures access to your these digital assets, they have the potential to be lost forever once you are no longer around to personally transfer them to someone else. In your estate plan, you can include instructions about whom the assets should pass to, when they should be transferred, and how to log into your digital wallets (i.e., your wallet ID, password, and any two-factor authentication you have enabled).
You’ve invested in your digital assets, make sure your plan includes passing that as well. If you have an estate plan that may not cover your digital assets (including crypto), or if you don’t have an estate plan and want to make sure your digital assets don’t disappear, reach out to our office and schedule an appointment with an estate planning attorney. Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.