Non-fungible token insurance is in demand because of record sales of NFT artwork and blockchain-based collectibles, such as Beeple’s “Everydays: The First 5,000 Days” NFT to Metakovan for $69,000,000, NBA Top Shots for hundreds of thousands of dollars.
However, the technical structure of NFTs – and their intangibility – runs afoul of standard property insurance language today.
Until NFT insurance is developed that provides good coverage, prospective NFT buyers should educate themselves about the technical risks and NFT owners should take steps to properly self-insure their NFTs.
Non-fungible tokens are a new class of “one of a kind” blockchain-based cryptographic tokens representing unique, digital or physical assets.
Each NFT has a unique identifier for an online or offline item such as artwork, photography, games, music, domain names, etc. or real world collectibles including wine, clothing, real estate, baseball cards, or vehicles.
An NFT is minted by deploying a smart contract to a blockchain platform, such as Ethereum and connecting it to the private key in your crypto wallet.
The NFT is a unique instance of a smart contract on a blockchain that references cryptographic hashes, wallet keys and metadata in a token uniform resource identifier (URI).
However, the NFT itself is not the artwork… The NFT points to the artwork (such as a JPEG or other media) that lives elsewhere, on the Internet.
Minting an NFT requires linking the artwork to a smart contract and connecting it to your personal wallet:
1) Digital Artwork: An artist creates a media file that may be a JPG image, music file, video, or any other digital file or collectible. In the example above, the artwork is a JPG of me with “laser eyes”.
2) Cryptographic Hash Function: The JPG or media file is converted to a hash using a cryptographic algorithm hash function that creates a unique fingerprint of the file. Running a piece of text or media through a SHA-256 hash function will always return the same result (a “uniform resource identifier” or URI) from the same text or media file. This means you can create a unique digital signature to represent any digital media file.
3) Token Created Contains Hash: The hash, along with any metadata, is added to a block on the blockchain by executing a software program called a smart contract. The most common blockchain platform for smart contracts is Ethereum which uses a native smart contract standard called ERC-721. The ERC-721 standard is the most popular smart contract standard for minting NFTs today.[note]However there are other blockchains such as Flow and Solana that can also be used to create NFTs and more are being developed. Indeed, it is even possible to create NFTs using the Bitcoin blockchain using Clarity smart contracts on Stacks.[/note]
4) Smart Contract: The NFT is a unique instance of a smart contract and is linked to a wallet address. The smart contract determines the terms and conditions for how the NFT may be used. The NFT data is stored on a public blockchain representing digital property rights.
5) Wallet: Your wallet holds the private and public keys to secure your digital assets. Your private key and public key are associated with the minting of your NFT and its ownership history. Your wallet’s public key is visible to anyone and is used to receive digital assets.
Your private key is like the password to your email account that you do not share with anyone. Your private key is used to send your digital assets to someone else. If someone has your private key they can send your NFT to another address, such as their own.