The rise of NFTs
The rise of NFTs and their recent incursion into mainstream territory reveals just one of the many layers of disruptive potential brought by blockchain technology and smart contracts. In a similar way as “blockchain” and “crypto”, “NFT” is now officially a buzzword with all the implications that this brings in terms of conceptual clarity. Certain misconceptions have already formed when it comes to the alleged transfer of IP rights or the authorizations that are granted as part of an NFT transaction. Accordingly, this article will attempt to explain simply and in short form what an NFT is and what do you actually get when you purchase an NFT.
Let’s start with taking a look at the notion of a “token” and then elucidating the term “non-fungible”.
What is a token?
A token is a digital unit that represents value or certain utility. In the first case, the token is linked to an object that possesses inherent value and in the second, it provides permission to perform certain actions within an application. Blockchains that support smart contracts (such as Ethereum, Solana, Tezos, Binance Smart Chain, etc.) allow for the creation of tokens. This possibility has fueled a trend of asset tokenization – the process of creating digital representations of real world assets and their trade on a blockchain. This trend encompasses both tangible assets such as works of art, fashion items or real estate and also intangibles such as for example, voting rights or access rights (content subscription through tokens). In principle, anything that has value for someone can be represented as a token so that this value can change hands through transactions.
On a slightly different note, the notion of a token is a critically important concept in the paradigm shift behind the Web 3.0 phenomenon. On a conceptual level, the token is a basic primitive that provides for a mechanism allowing for value and control within a network to shift away from centralized authorities and go into the hands of network users, builders and creators. Tokens are also enablers of true digital private property on the Internet, something which is hardly possible as part of Web 2.0.
What does “non-fungible” mean?
Non-fungible is an economic term which denotes that an object is unique in terms of its characteristics and value and therefore, it cannot be replaced by another object. On the other hand, fungible objects are not unique but subject to standard characteristics and they can easily be replaced by another object with the same characteristics and hence, equal value. An example of a fungible object is a ten-dollar bill which is interchangeable for another ten-dollar bill or for two five-dollar bills or five two-dollar bills as all these exchanged assets have equal value. Fungible things, such as money and commodities, can be identical in their characteristics which makes them replaceable. On the other hand, a used car is not interchangeable for another used car as each of them has unique characteristics. The same would apply for your computer which also is not readily interchangeable for another computer as the contents of your hard drive and also the potential settings and modifications you have applied make your computer unique.
How are NFTs created?
NFTs are created through a process called “minting” that involves execution of code stored in smart contracts. The minting process involves three consecutive steps: i) the creation of a new block on the blockchain, ii) the validation of the information and iii) the recording of the information on the new block. Based on this, you can intuitively understand that an NFT is actually nothing more than a piece of metadata that is stored on the blockchain.
The easiest way to mint an NFT is to use the underlying functionality on NFT marketplaces. First, you will need to buy cryptocurrency (the type of cryptocurrency depends on the blockchain that you have chosen for your NFT – if you have chosen Ethereum you will naturally have to buy ETH) because there are transaction fees (gas fees) on the respective blockchain for the minting of the NFT. In addition to the gas fee, you may also be charged a service fee by the NFT marketplace. Secondly, you will have to store the cryptocurrency on a cryptowallet, such as Metamask, and connect the wallet to the NFT marketplace you have chosen. Then, you will have to upload the digital file that you want to tokenize (such as JPEG, PDF, MP3, GIF) on the marketplace, fill in a description field and then finally just click a box that will initiate the minting process.
What are the use cases of NFTs?
As NFTs are unique they can be used for proving ownership of digital files. It has to be underlined that the NFT is not the digital file or digital work itself but a separate small metadata file that points to the digital file and acts as a certificate of authenticity. At the same time, the NFT may contain a link to the digital file to which it relates as such files are usually stored off-chain (i.e. not on the blockchain but on external file storage systems). Importantly, the NFT contains unique attributes such as the Token ID and the address of the smart contract that was used to deploy the NFT on the blockchain. This pair of Token ID and contract address is unique on the blockchain where the NFT is stored. Both the transaction history of an NFT and its metadata (including Token ID and contract address) is publicly available and verifiable so that ownership can be easily proven.
Among the prominent use cases of NFTs are:
- transactions with digital art and collectibles
- in-game purchases in online games
- music projects and songs released with unique fan perks
- proving the authenticity of luxury items and fashion goods
- tokenizing tickets for concerts and sports events
- investment in real estate
- loan collaterals in DeFi
- tokenization of licenses and certificates
What do you actually get when you purchase an NFT?
There is a common misconception that when you purchase an NFT, there is always a transfer of copyright in the underlying work. In the majority of cases, such a premise would be false. While there is a transfer of ownership rights, it usually pertains only to the NFT (the metadata file) and not the digital work that is linked to the NFT and stored separately off-chain.
Nonetheless, you should still be aware that there are some rare cases of NFTs that link to a digital file that is stored as an on-chain asset. In such a scenario, usually special graphic formats and encoding techniques are used to make sure that the data size of the digital file is small enough so that the underlying asset represented by the NFT can also be stored on the blockchain.
The question – what do you actually get when you purchase an NFT, can be answered when the terms and conditions of the relevant NFT platform are checked or when you read the NFT description detailed by the seller.
For instance, when you check the Community Guidelines of the popular Foundation platform you can read the following in view of the rights of NFT collectors – “When you collect an NFT on Foundation: You own the NFT that represents the artwork on the blockchain. You can display and share the piece. You can exhibit the piece on any platform or in any virtual space. You can resell or trade it on a secondary market …
What you can’t do as a collector: You can’t claim legal ownership, copyrights, trademarks, or other intellectual property rights. You can’t use the artwork in a commercial context. You can’t make any changes to the artwork.”
The Community Guidelines spell out the following in view of the rights of NFT creators: “When you mint and sell an NFT on Foundation: You maintain all legal rights, including copyrights and trademarks of your original work. You can reproduce, distribute, exhibit, and make derivative work of your piece.”
Another popular marketplace, the OpenSea platform states the following in its Terms of Service: “NFTs may be subject to terms directly between buyers and sellers with respect to the use of the NFT content and benefits associated with a given NFT (“Purchase Terms”). For example, when you click to get more details about any of the NFTs visible on OpenSea, you may notice a third party link to the creator’s website. Such website may include Purchase Terms governing the use of the NFT that you will be required to comply with.”
Therefore, purchasing an NFT does not in itself result in a copyright transfer in view of the underlying work. And the fact of the matter is that such assignment of copyright would be a rare thing as most authors would certainly prefer to grant limited non-exclusive licenses for personal use.
It has to be mentioned that some NFT platforms allow through their graphic interface (usually by way of ticking a box) for the NFT creator to actually make a choice whether copyright in the original work will be assigned to the purchaser of the NFT. At the same time, it has to be underlined that in many jurisdictions copyright assignments and exclusive licenses require the use of a written form and also a signature. It is debatable to what extent an electronic file with metadata in source code form such as an NFT would satisfy these requirements, even though the NFT is in a way “signed” with the private key of its creator during the minting process. Until there is a stable and clearer legal position, a safer approach for an NFT creator would be to use a separate written document in natural language alongside the digital sale of an NFT. This document can formalize a copyright assignment or specifically outline the permissions granted to a licensee and the relevant conditions of the license.
While not common, it is still possible that some NFT projects may allow for commercial use of the underlying digital works linked to the purchased NFT. This is the case with the famous Bored Ape Yacht Club collection of 10 000 NFTs representing digital images of … bored apes 🙂 with specific traits. In this scenario, NFT buyers are granted an unlimited, worldwide license to use, copy, and display the digital art for the purpose of creating derivative works based on that art. One obvious example of a commercial application would be the use of the digital art to produce and sell merchandise products that display copies of the relevant art (such as prints, t-shirts, coffee mugs, etc). But in reality, there are many more creative avenues for successful commercialization of the digital art linked to an NFT.
You must be logged in to post a comment.