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Non-Fungible Tokens (NFTs)

CRS Report – Non-Fungible Tokens (NFTs), July 20, 2022 [24 pages]: “Non-fungible tokens (NFTs) have become popular as unique and non-interchangeable units of data that signify ownership of associated digital items, such as images, music, or videos. Token “ownership” is recorded and tracked on a blockchain (a digital database that records data on a decentralized network of computers without the use of a central authority). In the future, supporters believe NFTs will be used as digital representations of physical items, such as a deed to a house or title to a car. NFTs are commonly used to record and represent ownership of an item, verify authenticity, and enable exchange. However, they do not necessarily reflect the legal ownership of an asset or grant copyright to a digital or physical item. NFT owners purchase only the right to the NFT’s blockchain metadata or “token,” not the underlying asset, unless otherwise specified in external contracts or terms and conditions. NFTs share many similarities with cryptocurrencies, and they are commonly bought and traded using cryptocurrency. Both NFTs and cryptocurrencies are built and tracked on blockchains, and they share much of the same customer and community base. However, cryptocurrencies are fungible, meaning interchangeable, whereas NFTs are unique and therefore non-fungible. Most users create and buy NFTs on dedicated NFT marketplaces. For a typical NFT, it is created or “minted” on a blockchain, auctioned off or sold at a fixed price on an NFT marketplace, and “stored”in the buyer’s digital wallet. Smart contracts (self-executing contracts or lines of computer code on a blockchain) can mint NFTs or transfer them from one owner to another. In combination, blockchains and smart contracts are the backbone of the NFT ecosystem…”

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