**4. Approach to the legal and economic consequences of NFT trading in PDLs. Particular reference to public-permissioned networks (PPDLs)**

DLT, in its blockchain version, facilitates the creation of markets built on decentralized applications (DApps) and platforms wherein token marketplaces can be installed and open to the public for the online confluence of investors seeking high returns operating from any blockchain-associated (operating or regular) node, directly or through representatives—cryptoasset or cryptotoken brokers or market specialists.

As mentioned supra (section 2), in PPDL blockchain networks like Ethereum, token transactions use to be executed using specific protocols of permissioning like PoA. In the case of NFTs, each token is autonomous, identifiable in the ledger and separable to be examined for efficient traceability and proper exercise of holders' rights. Its API interface, available on the upper layer of a PDL network architecture, facilitates traffic and exchange of tokens in accordance with market legal requirements and economic constraints of the business model settled by the issuer, with no quantitative boundaries within the issuing process, as a consequence of the PDL structure of protocols.

Frequently, the ERC 20 protocol is used in PDL Ethereum networks to represent and transmit fungible assets (typically, of a financial nature, such as fixed or variable income products, and derivatives on these); while others such as ERC 721, the first in use chronologically, and also others of later construction, such as ERC 1155, are used to represent and assign or transfer rights over infungible cryptoassets like NFTs.

The substantial content of the ERC 721 protocol is specified in a standard smart contract of Solidity, on whose original code the creators of open or free software (developers) can write lines or scripts of new smart contracts (Smart Contracts, SCs) or clauses compatible with the ERC 721 standard itself in order to adapt it to new uses, by means of transcription and import from a virtual library or code library called OpenZeppelin. The ERC 721 SC standard itself implements application programming interfaces (APIs) also designated as ERC 721 or, under certain conditions, APIs under another compatible protocol designated as ERC 165, which facilitate specific interaction between API and SC for traceability and transmission of NFTs on the PDL.

Regardless of the PDL ledger registration of NFT transactions on blocks, each NFT is virtually maintained, possessed and (under private-law full compliance conditions present in each competent jurisdiction) owned virtually in digital wallets. The NFT may also be transferred individually to a singular purchaser, or eventually be traded by speculative investors or their authorized representatives from nodes, directly or through brokers or auctioneers specialized in operating with these wallets.

Each NFT token can represent new born virtual or digital non-fungible individualized assets such as artistic or ludic representations (like the famous recreational "cryptokitties" from Axiom ZEN, coded in 2017 to ERC 721 and identified by their respective unique set of "genes" of appearance, passable onto offspring by "breeding" with one another; or the 2021 Bored Ape Yatch Club –BAYC- pics and drawings); preexisting goods or physical assets (art works or linked intellectual property of authors – IP); specific commodities; individuated or isolated credit rights on any asset, e.g., music fragments; or even offline services.

The referred or underlying asset, financial (credits) or nonfinancial, will normally be non-fungible, and such non-fungibility justifies the issuance of such kind of token. But since the token individuation is independent from the degree of fungibility of the physical underlying (property, work of art, collectibles, ....), NFT can be issued on groups of fungible assets functioning unitarily or characterized by convention with unicity, or on identified parts of such fungible assets, parts, or fractions of them. Thus, a PDL platform manager or DApp programmer (NFT issuer or not) can also create and involve the trading of rights over prefigured new financial assets derived from the NFT, or on the NFT itself, or create guarantee contracts or other kind of guarantees or akin securities also recordable on the ledger, and offchain as well.

PDLs permit the negotiation of an unlimited number of NFTs, as was already the case of the ERC 20 fungible token standard created in 2016, from which NFT-suitable ERC 721 itself derives, unlike the Bitcoin system where the cryptocurrency resulting from the mining or composition of transactions is quantitatively limited.

Ethereum PDLs have also enlighten the factual NFT-trading utility of other ERC protocols like the ERC 1155 standard, generated in 2017 and officially deployed in permissioned systems since 2019. This much more evolved ERC, wherein a record number of developers have participated, allows the issuance of both fungible tokens and NFTs, all of them under a more flexible smart contract modality (SC ), unlike the precedent ERC 20 and 721, which require a new SC per token. Under ERC 1155, the investor or broker uses a secure interface and the SC allows to adapt a menu of unique features, such as, in the case of war games, different weapons, defense modes, or battle scenarios; if they are connected to a metaverse, it is possible to introduce unique parameters and conditions by NFT, and similarly individualized replicas from the real world. On the other hand, the ERC 1155 standard makes it easy to send multiple tokens in a single block transaction (even more than a thousand), shortening the wait for block closures and therefore increasing the speed of DeFi operations. Likewise, this standard allows the exchange of tokens in a safe and disintermediated way, enhancing the construction of atomized financial products (e.g., "atomic" derivatives like swaps and other).

In summary, each NFT token can relvolve around fungible or non-fungible goods or rights, irrespective of its own non-fungibility or full individuation as a standalone asset, that prevents its massive or impersonal exchangeability that exempts its issuance from primary-market public or administrative control applicable to MiFID, MiCA DLT, or DeFi regulated trading (cf. again art. 4 MiCA).

Regardless of the concurrence and level of legal control of token issuances, it should be borne in mind that, in any virtual space of a DeFi platform on the upper DApp (decentralized application) layer of a PDL network, a permissioned (previously authorized) mechanism for representing the rights of the parties contracting NFTs is always created. Such authorization is made under private-law boundaries. Smart contracts (SCs) required to execute NFT contracts are also previously authorized and deployed on the service layer of the PDL. And before SC authorization, PDL PoA or similar protocol to execute transactions has been implemented.

Such chain of permissions is prior to the provision of investment or exchange services for NFTs, within a PDL context. The NFT contract for the transfer of the underlying property or connected services or investment is concluded autonomously, prior to the technical (and legal) birth of the token. In the case of NFT tokenization or minting of nonexpendable property or rights (for example, real estate, art, or copyright), the ERC standard allows for the subdivision, not of the tokenized sole or indivisible property, but of a representation of property (*in rem*) rights or credit rights

#### *NFT Legal and Market Challenges in Permissioned Blockchain Networks DOI: http://dx.doi.org/10.5772/intechopen.106460*

of investors in a public offer made by an offeror, against the issuer of the tokens, which may or may not be that offeror. In case of initial token offering (ITO), the rights have been "fungibilized," which does not imply a reconversion of the non-fungible asset into a fungible one, but rather a substitution or a subdivision or fractioning of the object of investment to allow massive or market negotiation. In the case of real estate tokenization, for example, virtual fungible goods (real estate tokens) are created to represent credit rights on properties that can be registered using Ethereum ERC 20 tokens, or to provide an alternative for the transmission of full or limited real rights.

We have emphasized [5] [132, 218–221] that the token fungibility does not impede the existence in the real world of the tokenized represented underlying assets (services or goods) nor the possibility of contracting on it also in the real world. The link between an NFT and the real asset through annotations in a public registry privileges and prioritizes the legal position of the token holder to the point of "establishing it as a means of representation deserving of a regime analogous to that of negotiable securities (including nonfinancial assets such as listed merchandise), for the purposes of recognition of ownership transferred in a market" – ibidem.

Summarizing, PDL networks, in particular public-permissioned DLT networks like Alastria's, facilitate the legal compliance with private-law contractual issues related to the identification of NFTs and their underlying asset or property, and also with public-law issues concerning the supervision of node protocols and activity in contract registration and authorization of DeFi platform managers and issuers. Hereinafter, we deal with particular conditions of compliance that challenge the NFT trading activity in such DLT permissioned spaces.
