There’s been a tremendous amount of hype and misinformation about nonfungible tokens (NFTs) since they appeared on the scene in 2014, particularly since the total market for them passed $24 billion. A news feed is not complete without articles about nonfungible tokens. They will always contain the “AnNFT paragraph. This ” paragraph is for both newcomers and those who have read a few similar articles and still don’t understand it. You’re in the right place if you are among those who fall into the latter category.
NFTs really can be important and useful, and they’re evolving to become more so. NFT evangelists as well as skeptics can be a bit too nimble and hyped up, and sometimes they just do it wrong. Here are a few claims you might have read about NFTs — both pro and con:
- NFTs are a scam.
- You can turn your art into an NFT to prevent it from being copied.
- NFTs are just a fad.
- Each NFT is a proof of authenticity for a “one-of-a-kind” item.
- NFTs are bad for the environment.
First, no — NFTs aren’t a scam. Scammers may use email to scam you, but we don’t believe email is a fraud. Second, NFTs are not a fad. However, it remains to be seen if any particular digital collection is a long-lasting set of cultural artifacts, or a fever-dream of technosocial groupthink. The third issue is that some blockchains are currently prone to high energy consumption. However, anyone harping on this will likely not know what they’re talking. Beware of those who claim that you can transform your art into an NFT , that you can stop others from copying your work, or that NFTs can prove that a work is unique.
Are NFTs digital assets? Yes. Yes. Like the art collector’s decision to buy a Monet painting — or a Maurizio Cattelan “Banana” duct-taped to a wall (for a cool $120,000) — the willingness to purchase something doesn’t need to be based on any sort of objective reality.
Here’s the thing. An art collector will know that a banana duct taped to a wall is a banana duct taped to a wall when they buy a rotting banana. If you plan to purchase a digital banana duct-taped by an NFT to a public blockchain, it is important to be clear about what you are getting for your money.
This is usually the point where you get to read all about nonfungibility. Let go of the jargon. An NFT is a record of something. It can be a claim of ownership or a receipt for a transaction that was time stamped, or an agreement. Just as we agree that only the holder of the ticket to Seat 24A of a sporting event gets to sit there, we agree that NFTs aren’t universally interchangeable. We also agree that there should not be duplicate records making the same claims about the same thing. This is all there is to “nonfungible”.
The value of NFTs
What’s important to understand about NFTs is how they become valuable. Unlike a cryptocurrency such as Bitcoin (BTC) or Ether (ETH), an NFT usually gets its value from its claim over something that isn’t controlled by the blockchain itself: a digital picture file, the deed to a house, an entrance pass to an exclusive club. The owner of an NFT must deal with the tenuous relationship between their blockchain ownership record and the item they claim to own.
Think about this: Would you purchase an NFT for its own sake, with a single string of data on the blockchain, but without any reference to any digital or real-world assets? Are you not interested? Are you not interested?
What do you own when an NFT is “owned”? Nearly all legal descriptions regarding ownership include the notions of possession and control. If an NFT is used as a ticket to seat 24A, then you possess the agreed-upon right to sit in that seat. You are the only one allowed to use that seat. If someone else attempts to, you can wave your ticket at them, telling them to get off their feet.
An NFT is a digital work or art. This can make things more complicated. The NFT usually contains a link to a public file on the internet. This file can be accessed by anyone. It’s difficult to forge physical art. It’s impossible to create perfect copies in the world of 1s or 0s. Therefore, you cannot control or possess the transaction receipt. Only you can convince another person to pay you money to enter their ID in the owner field of the NFT records. What is this worth? In many cases, you don’t own the art or have control of it. It is impossible to stop someone copying the art. It is impossible to stop them from copying it. You can’t stop them from creating another NFT record and pointing it at the exact same art. This will allow them to claim the same ownership rights as your NFT.
Many digital collector traders believe that having no control or possession over the asset, the work, is irrelevant. These traders suggest that the NFT owner has a benefit because they don’t have control over copies being made and distributed all over the internet. Let’s not forget this. While it might be beneficial to promote someone else’s work, mass uncontrolled misappropriation of intellectual property, debasement, and unauthorized commercial exploitation are clearly not.
NFT evangelists recently shifted to focusing on community , and using NFTs to gain access to all kinds of online and real-life experiences. These include exclusive clubs, virtual concerts in the metaverse, chat rooms that allow one to connect with other enthusiasts, creators, and famous people. This is fine. Although an NFT may be a costly and complicated way to manage tickets at the moment, it can still be useful and legitimate. Especially as they become more affordable and easier to use. NFTs can solve problems like ticket scalping and ticket forging.
The evolution of NFTs
NFTs are evolving. With the advent of emerging NFT standards like Ethereum’s new EIP-4910 (a compatible extension to the ERC-721 standard that forms the backbone of most NFTs as of 2022), we can start to make far more powerful claims than have been possible so far, claims that grant possession and control that are enforceable by the NFT’s smart contract itself.
To see how that can work, let’s turn the sporting event ticket example upside down. Instead of you buying an NFT to seat 24A, what if the NFT represented an agreement that only you are able to offer that seat to others, not just for a particular game but for all games over time? The smart contract of the NFT can grant the owner complete control over the payments that are made in return for the right to let people use the seat. However, this is only possible if the transactions are done in cryptocurrency. The seat owner does not have to be the league or stadium. The stadium, in this scenario, could franchise each seat and use the NFT’s smart contract to enforce not only that the holders of the NFTs get paid by each person sitting in 24A but that the venue, the league, and potentially even the players get a cut of that revenue. This is the management and use of licensing rights.
That’s the main point. NFTs are able to represent and enforce rights: Artists’ rights. Collectors’ rights. The right to distribute, resell and collect royalties. If all the money is traded on the same blockchain that the NFT itself, then the lowly digital transaction receipt and the smart contract that governs them, have real power and operational efficiency that can transform the economy of the entertainment and arts industry.
Now, techniques such as zero-knowledge cryptography, combined with new smart contracts like the ones based on EIP-4910, are adding scalability, privacy and functionality for developers to build useful services.
Using NFTs in this way lays the foundation for artists to make a living more reliably and consistently by signing up their fans as promoters and distributors, granting them skin in the game…a franchise, if you will. People don’t have to convince others that they will buy an NFT to make more money. They can simply buy the NFT to be able to make authorized reproductions and distribute them. These rights also allow people to reprint and distribute them. From ten first-generation digital prints, an artist and their collectors, influencers and promoters can receive passive income on royalties from over 11,000 digital prints and the revenues they collect. Holders of such an NFT are granted real and enforceable ownership.
The new NFT standards make it possible to do this all on the blockchain, without having to rely on third-party exchanges or central services. Imagine being able copy and paste a code from your NFT to your gallery website. This is similar to how you would do with a YouTube video. However, YouTube does not serve the video. You can also sell the embed code directly on your gallery website (whether it’s a work or ticket to a big game, concert pass, or ticket).
The hyperbole used to describe NFTs can be understood, and they will continue to evolve. It is part of the story that you are buying. You’re buying a story, no matter if it’s a Tesla or a painting of a can. Maybe the hype peddlers have it all wrong . The source of great value can be what a society believes in. Were we able to convince you that an NFT is a digital receipt on an internet bulletin board and not a tool to improve the financial lives of creators and grow more inclusive digital communities, how much would it cost?
This article does not contain investment advice or recommendations. Each investment and trade involves risk. Readers should do their own research before making any decisions.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
John Wolpert is a co-founder of TreeTrunk.io, a ConsenSys Mesh company. TreeTrunk is the first to implement the EIP-4910 NFT smart contract, distributing royalties on-chain while protecting digital originals under zero-knowledge cryptography. Wolpert is also co-chair for the Baseline Protocol standards body. This uses zero-knowledge Cryptography and blockchain technology in order to improve information security within multi-party IT workflows.