In recent months we’ve seen many digital artworks tokenized and sold as NFTs, or “Non Fungible Tokens”. In layperson’s terms, this just means that the item is unique. Any one bitcoin is the same as any other bitcoin. But an NFT, in in theory, can not be replicated, and is not interchangeable with any other.
The NFT market rose to a crescendo this week with Beeple’s “First 5000 days” being sold for the equivalent of $69 million.
I’m in favor of any experimentation and innovation using blockchain tech. I think Bitcoin has the store-of-value problem covered, but I’m still looking forward to seeing which other projects in the blockchain space succeed to the same degree Bitcoin has, and which projects turn out to be more short-lived.
So I don’t have any particular objection per se to the wave of NFT sales we’ve been seeing; a free market is a free market after all, and without the same kind of early speculation, Bitcoin would never have grown the market it has today.
But I do have questions that I think need to be answered about how NFTs fundamentally work, before I’d personally venture into that space.
- What legal rights do you get?
If you purchase some physical artwork, typically it will be signed by the artist, the artwork will be authentic and verifiable by experts, and there will usually be some chain of custody you can trace back to the original artist.
NFTs solve the same problem for digital artwork in an interesting way, by transferring a hashed version of the artwork on a blockchain. That removes the human element from the equation. You don’t need an expert to verify that this is indeed the same NFT created and signed by the original artist. That is proved beyond doubt by the blockchain.
With a physical piece of art, you get legal rights over it after a sale; like being able to re-sell the artwork, display it publicly for a profit, and so on. Just like any property, it’s yours to do with as you wish, within the bounds of the law.
What rights do NFTs give you? Sure, you can re-sell the NFT itself, but do you have any actual rights over the original artwork? So far, I haven’t heard any evidence to say you do, nor are the people buying NFTs vocally asking for any rights over the original artworks.
This is great for artists; I can sell a digital representation of the artwork, and I also get to keep the original, with which I can do whatever I like. The purchaser of the NFT gets, essentially, my signature, and little else.
It seems to me like NFT sales could easily come with an attached signed contract of sale, or licensing contract, which gives the buyer some legal rights over the original piece. If that digital contract can be upheld in the courts, that would be a fantastic use-case for blockchain tech.
But right now? If you’re buying an NFT and it’s not explicitly stated or agreed upon, you should assume you’re not getting the rights to anything except that digital signature.
2. What stops the artist from tokenizing on multiple blockchains?
This ties in to the first point. There are many blockchains with some form of smart contracts on which NFTs can be implemented. It’s even trivial to imagine how NFTs could be implemented in a round-about way on traditional blockchains, like that of Bitcoin.
So my question is: if the NFT doesn’t grant you the legal rights over the original, what prevents the artist from tokenizing their artwork on multiple blockchains, hoping to hedge against one chain falling from grace in future? How do buyers protect themselves from that possibility? Moreover, how would a buyer even know for sure they’re buying the first or only tokenized version of the artwork?
3. What stops the artist from tokenizing the same artwork multiple times on the same blockchain?
Let’s say Ethereum retains control of the majority of smart-contract use-cases until the end of time, and overshadows all other blockchains on which NFTs might be implemented.
What’s stopping an unscrupulous artist from tokenizing the same artwork multiple times on the same chain, as multiple NFTs, and selling it multiple times?
Sure, the artwork is hashed before it’s placed on the chain, which you might think makes it a unique signature. But in reality, changing a single pixel to a slightly different shade of color, or a single dimension, or even a single piece of metadata in the image file, will change the resulting hash.
Traditional blockchains which focus on storing and transmitting value do not have this problem. The value comes from inside the network. You can’t create a Bitcoin, then hash it onto the Bitcoin network, then sell it on. The same is not true of digital artworks which can be hashed and tokenized a potentially infinite number of times.
This also means there’s no easy way to check if the artwork has been hashed and tokenized previously. The best you can hope for is googling it and trying to find some prior record of the sale. Now you’re relying on off-chain sources of truth to help you decide whether the on-chain artwork you’re buying is authentic or not. At which point, what value is the blockchain bringing to the table?
How do NFTs solve this problem in the long term? Is the answer just to rely on the good will of the artist?
4. How do pieces retain value with potentially infinite supply?
Typical blockchains have a finite store of tokens or coins. Even with inflationary chains like Dogecoin, the supply of newly minted coins is decreasing annually as a percentage of the overall existing supply.
Given the imminent frenzy around buying NFTs, what will the secondary market look like once the buzz has cooled off a little?
Of course creating digital artwork isn’t zero cost, and many of the artists are extremely talented. But over time, the potentially limitless supply is likely to drive prices down, no matter what the demand ends up being.
In the real world, with physical artwork, that means that highly sought-after artists can sell their work for insanely large amounts of money — but there’s an extremely long tail of physical artworks that are either never sold, or barely allow the artist to break even.
My question is, how long will the demand for NFTs keep pace with the supply, and what will this market look like in a year, or five, or ten?
5. What does it mean to buy a tweet?
As of this time the bidding on Jack Dorsey’s NFT tweet is up to the equivalent of $2.5 million dollars.
What does it mean to buy an NFT of a tweet? Do you own the words used? What happens if and when the tweet is deleted or Twitter is replaced with some other platform in future?
6. Why blockchain?
Digitally signing a piece of digital artwork, or really any other file or data, is nothing new.
The real innovation of blockchain technology is in preventing the ‘double spend’ problem. For example, if I send you a bitcoin, you can be sure I haven’t sent the same bitcoin to someone else and spent it twice.
With NFTs, the same principle does work: you can be sure I haven’t sold or transferred the same NFT to multiple people. But you can’t be sure I haven’t created multiple NFTs from the same artwork.
So in reality, you need some centralized registry of which NFTs have been minted, to solve the problem of artists ‘double-tokenizing’ the same artwork multiple times.
If you have such a centralized registry, doesn’t that make the blockchain redundant? Couldn’t you just track the digital signature on that centralized website, and the current owner? And doesn’t the requirement for that centralized registry mean that all of the advantages of blockchain (avoiding double spend, being censorship resistant, and having decentralized security) are all moot?
I think the idea of an NFT is pretty cool. But I think the ambiguity around the above questions is really concerning. I would like to see NFTs exist on a platform where:
- Buying the NFT gives you a specific legal right over the original piece; either ownership, or a specific set of licensed rights.
- There is some legal precedent for those rights being held up in courts, both in the US and internationally.
- Artists can be sued for selling an NFT the same artwork multiple times on the same or different blockchains.
- There is a better way to protect against the ‘double tokenization’ problem, equivalent to the ‘double spend’ problem on traditional blockchains.
NFTs could be a really neat solve for digital rights, ownership, licensing, and transfer of digital property. Right now though… I’m just not sure what they are.
Watching this space!