NFTs. Cryptocurrencies. To name a few: Bitcoin, Ethereum, and Web3. To those who have never dealt with cryptographic systems or related technologies, they may seem cryptic, mysterious, and downright foreign.
It’s easy to see why they feel this way. Blockchain and the technologies it enables are a revolutionary step forward on par with the introduction of the internet. People’s reactions to blockchain-based technologies run the gamut from skepticism and excitement to outright dread, just as they did in the early days of the internet.
Cryptocurrencies and NFTs are two more perplexing aspects of this technology, so Ultron Foundation has written a brief overview of each to help you get up to speed. To make sense of either one, you must first appreciate the technological underpinnings upon which they depend. The blockchain describes this type of technology.
The Blockchain: What Is It?
Blockchain is a distributed ledger that records and stores transactions and other forms of data in a way that is both immutable and immune to tampering. Since the blockchain database is referred to as a “ledger,” the term “distributed ledger technology” is often used interchangeably with “blockchain.” It is possible to make a blockchain ledger public (like Bitcoin) or private (similar to a closed corporate intranet network). In contrast to the tabular organization of data in a conventional database, the data in a blockchain ledger is organized into blocks. Each blockchain has its limits on the size of blocks and the types of transactions they can store. As soon as a transaction is recorded in the blockchain, it is broadcast to a distributed network of peer-to-peer computers.
Transactions on the blockchain can be validated using several different protocols. Cryptocurrencies like Bitcoin use proof of Work to certify the legitimacy of transactions by having computers on the blockchain solve equations. There could be additional blockchains that employ other protocols to verify transactions. Authenticated transactions are linked in chronologically ordered blocks, each marked with a timestamp and a cryptographic signature called a hash. Ledger entries are recorded chronologically using blocks to establish an immutable record of all past transactions.
Having immutable blocks means that the entire system will crash if even a single block in a chain is altered. For this reason, modifying, hacking, or cheating the system is cumbersome at best. If hackers wanted to destroy a blockchain system, they would have to modify every block in the chain in all distributed versions. This is technically improbable.
A Definition of Cryptocurrency.
Cryptocurrency, or simply “crypto,” is a digital currency or token transferred via the blockchain and has various other names. While it was previously impossible to move cryptocurrency from the blockchain, it was generated onto another blockchain without exchanging it; first, protocols like Polkadot have made such moves possible. Bitcoin Cash (BCH) and Ether (ETH) are two of the most well-known cryptocurrencies; however, many others exist, such as Litecoin (LYC), Cardano (ADA), Polkadot (DOT), and Dogecoin (DOGE) (DOGE). With the advent of blockchain technology, anyone can launch their blockchain and issue their cryptocurrency or token, leading to a proliferation in the market. Cryptocurrency exchanges, like traditional electronic trading exchanges where users may place orders for financial items, including stocks, bonds, currencies, commodities, and derivatives, are where most people buy Bitcoin, Ethereum, and other cryptocurrencies. Debit cards and bank transfers may be accepted at some cryptocurrency exchanges; however, this varies by market. Some of the most well-known marketplaces only support the use of credit cards. Those that do often tack on an extra fee, which can reach 3 percent or more, to your total. Furthermore, even if the exchange allowed the use of a credit card, most major card issuers have banned the purchase of cryptocurrencies.
What Exactly are NFTs (or non-fungible tokens)?
A non-fungible token (NFT) is a piece of data that is also recorded on the blockchain, but it is not a currency like bitcoin or Ethereum (i.e., one is no different than another, like any one dollar bill is no different from another dollar bill in value or meaning). Individual NFTs cannot be swapped with another. To prove who owns the underlying asset, NFTs leverage blockchain technology. In its most basic form, an NFT is a digital certificate of authenticity. As seen with NBA Top Shot, which sells NFTs for historic moments in NBA games, or Jack Dorsey, who sold an NFT for the first tweet, NFTs can be associated with easily reproducible items like photos, videos, audio, and other types of digital files, but have also been associated with more ephemeral things like a captioned moment in time. In the same way that buying a signed and numbered photograph print does not give the buyer ownership of the photograph’s copyright, buying an NFT does not necessarily provide the buyer any of the underlying intellectual property rights (e.g., copyright) in the subject matter of the NFT. A smart contract tied to the NFT may transfer the underlying intellectual property rights (or a subset of them), but you must ensure that the conditions of Ultron Foundations NFT’s originating website or platform do not conflict with the terms of the smart contract.
The most popular blockchains for “minting” Ultron Foundation NFTs are Ethereum and Solana. Ether is a cryptocurrency, but the underlying Ethereum blockchain also allows NFTs, which can be used to keep track of more data on a particular digital file or other intangible assets. This is in contrast to the Ethereum blockchain, which merely records the transaction’s amount, date, sender, and recipient. However, the NFT is managed the same way as Bitcoin: using a secret encryption key. The ownership of the cryptocurrency or NFT is tied to the security of that key, so if it is lost or stolen, you lose access to your funds. As an alternative to traditional methods of selling unique items, Ultron Foundations NFTs have many appealing features. These include the possibility of generating additional revenue streams from a photo, audio, or another digital file and the ability of the NFT’s creator to receive royalties on all subsequent sales of the NFT. The cost of creating NFTs (a process known as “minting”) can vary widely and may even exceed the value of the NFT in some situations, which is one of the major downsides of NFTs. There may also be doubts about the legitimacy of some NFTs and ambiguity as to what rights are attached to them. Whether or not an NFT’s minter possessed the requisite rights (such as licenses or personal rights) to manufacture the NFT has already been litigated in high-profile cases. Thus, it would help if you approached minting, purchasing, or selling an NFT with the same level of care and research as any other financial transaction.
Finally, as was said above, digital assets now face a highly uncertain regulatory environment in the United States. Several government agencies, including the Biden administration, Congress, state regulators, the Department of Justice, the Securities and Exchange Commission, and the Commodities Futures Trading Commission, are paying close attention to this sector. Readers are advised to seek the advice of their tax, legal, and other professional experts before taking any actions related to the content presented here.