There has been a tremendous amount of hype and misinformation about nonfungible tokens (NFTs) since they came on the scene in 2014, especially as the total market for them surpassed $24 billion. You cannot open a news feed without an article about non-replaceable tokens. These inevitably include the mandatory ‘An NFT is one’ section for newbies… and for readers who have read a dozen similar articles but still don’t understand. If you’re one of the latter, you’ve come to the right place.
NFTs can be really important and useful, and they are evolving to become that. But NFT evangelists and skeptics tend to cover things up, whip things up, and sometimes just do things wrong. Here are a few statements you may have read about NFTs – both pros and cons:
NFTs are a scam. You can make your art an NFT to prevent it from being copied. NFTs are just a fad. Each NFT is proof of authenticity for a “unique” item. NFTs are bad for the environment.
First off, no – NFTs are not a scam. Scammers use email, but we’re not saying email is a scam. Second, no – NFTs are not a fad, but whether a particular set of digital collectibles turns out to be an enduring set of cultural artifacts or a short-lived fever dream of techno-social groupthink remains to be seen. Third, while some current blockchains currently have energy consumption issues, anyone who cares about this probably doesn’t know what they’re talking about. And finally, beware of anyone who says you can turn your art into an NFT or that NFTs can prevent your art from being copied, or that they prove a work of art is authentic “one of a kind”. This language was invented by people who know how to manipulate the mass perception, and none of it is true.
Related: Entering NFTs: Understanding the Environmental Impact of Digital Collectibles
Are NFTs Digital Assets? Yes. Because the definition of an asset is “something considered valuable,” an NFT is a digital asset if people are willing to buy it. Much like the art collector’s decision to buy a Monet painting—or a Maurizio Cattelan “Banana” taped to a wall with duct tape (for a cool $120,000)—willingness to buy doesn’t have to be based on are on any form of objective reality.
This is what it is about. When an art collector buys a rotting banana taped to a wall with duct tape, they know it’s a banana taped to the wall with duct tape. So if you’re going to buy a digital banana that has been virtually duct taped onto a public blockchain by an NFT, it’s best to have a good understanding of what you do and don’t get for your money.
This is usually the point where you can read all about non-replaceability. Boil away the jargon and an NFT is simply a record of something: a claim of ownership, a time stamped proof of payment, an agreement. Just as we agree that only the ticket holder for seat 24A of a sporting event may sit there, we agree that NFTs are not universally interchangeable. And we agree that there are (or should be) no duplicate records that make the same claims about the same thing. That’s all “non-fungible” is about.
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 derives its value from its claim to something that is not controlled by the blockchain itself: a digital photo file, the deed of a house, an access pass to a exclusive club. Consequently, the owner of an NFT must grapple with the tenuous relationship between the ownership record on the blockchain and the thing he supposedly owns, which is not on the blockchain.
Consider this: Would you buy an NFT just for itself, a record on the blockchain with only a unique set of data, without any reference to a digital or real asset? Not interested? What if we told you it’s one-of-a-kind, or that Beyoncé once owned it, or that others are queuing up to buy it for more soon?
What do you own when you “own” an NFT? Almost all legal descriptions of ownership involve the concepts of possession and control over something. If an NFT is used as a ticket for seat 24A, you have the agreed right to take that seat. No one else can sit there, and if someone tries, you can wave your ticket at them and tell them to fuck off.
In the case of an NFT representing a digital artwork, things get tricky. In this case, the NFT usually contains a link to a public media file on the Internet, a file that anyone can open and copy. In any case, with physical art it is difficult to make fakes. But in the world of ones and zeros, it’s trivial to make perfect replicas. Consequently, the only thing you can own and control in this case is the transaction receipt itself: only you can decide to convince someone else to pay you money to write their ID in the owner’s field of the NFT record. But what’s that worth? In many cases you do not own or control the art. You can’t stop someone from copying it. You can’t stop them from doing something that you or the artist wouldn’t want, like writing a hateful word about it. And you can’t even stop them from creating a separate NFT record, referencing it to the same art, and claiming the same property claim that your NFT makes.
Many digital collectibles dealers argue that not owning or controlling the actual property, the artwork, doesn’t matter. They suggest that – and you should give them points for daring – this lack of control over people making copies and distributing them over the internet is an advantage for the NFT owner. Let’s be clear about this. People who freely promote one’s work may be an advantage, but mass uncontrolled embezzlement, humiliation, and unauthorized commercial exploitation of other people’s intellectual endeavors certainly are not.
NFT evangelists have recently moved towards focusing on the virtues of the community and using NFTs as a gateway to a variety of online and in-real-life experiences. This ranges from exclusive clubs to virtual concerts in the metaverse to chat rooms where one can interact with creators, other enthusiasts and famous people. There’s nothing wrong with this. An NFT may be a complicated and expensive way to manage tickets right now, but it’s a legitimate and potentially useful way to do it, especially as they become cheaper and easier to use. NFTs can really tackle issues like ticket counterfeiting and scalping.
Related: NFTs and Social Capital: How Projects Work Together for the Mutual Benefit of the Whole Industry
The Evolution of NFTs
NFTs are under development. With the advent of emerging NFT standards such as Ethereum’s new EIP-4910 (a compatible extension of the ERC-721 standard that will form the backbone of most NFTs as of 2022), we can start making much more powerful claims than until now. was possible before. , claims conferring ownership and control enforceable by the NFT’s own smart contract.
To see how that might work, let’s turn the sporting event ticket example on its head. Instead of buying an NFT for seat 24A, what if the NFT represents an agreement that only you can offer that seat to others, not just for a particular game but for all games over time? As long as sales are only allowed through cryptocurrency transactions, the NFT’s smart contract can give the owner exclusive control over receiving payments in exchange for letting people sit in that seat. And here the seat owner doesn’t have to be the stadium or the league. The stadium could franchise any seat in this scenario and use the NFT’s smart contract to not only enforce that the holders of the NFTs are paid by every person sitting in 24A, but that the venue, league and possibly even the players one of those earnings off. This is license rights management, a pretty sensible use case for NFTs.
That is the point. NFTs can represent and help enforce rights: rights of artists. Collector’s rights. Rights to distribute, resell and collect royalties. And if the money trading in all of this is run on the same blockchain as the NFT itself, then this simple digital transaction receipt and the smart contract that runs it will gain real power and operational efficiency that could change the economy of the arts and entertainment industry, just for startups. .
Related: Empowering Female Creators with NFTs and Crypto
Now techniques like zero-knowledge cryptography, combined with new smart contracts like those based on EIP-4910, add scalability, privacy and functionality for developers to build useful services.
Using NFTs in this way lays the groundwork for artists to make a more reliable and consistent livelihood by signing up their fans as promoters and distributors, giving them skin in the game… a franchise, if you will . Rather than having to convince people that others will want to buy an NFT for more money later, people can buy the NFT as a right to make and distribute authorized reprints, which themselves represent a right to reprint and distribution. From ten first-generation digital prints, an artist and his collectors, influencers and promoters can receive passive income on royalties from more than 11,000 digital prints and the income they collect. Possession of such NFT confers real, enforceable ownership on holders.
New NFT standards also make it possible to do all this entirely on the blockchain without relying on external market exchanges or centralized services. Imagine being able to copy a simple embed code from your NFT to your own gallery website – as you could with a YouTube video, but without depending on YouTube to display the video – and sell it there (or now a work of art, a concert pass or a ticket to the big game) without any other platform.
Ultimately, the hyperbole used to describe NFTs is understandable, and there will be much of the same as they evolve. It’s part of the story you buy. And these days you buy a story, be it a new Tesla, a painting of a can of soup, or even a digital banana NFT glued to the wall of a blockchain. So maybe the hype peddlers got one thing right while doing everything else wrong. What a society comes to believe in can be the source of great value. After all, if we were able to convince you that an NFT is just a digital sales receipt captured on a public internet bulletin board – and not a useful tool for improving the financial lives of creators while enabling more inclusive and engaged digital communities grow – how much would you be willing to pay for one?
This article does not contain investment advice or recommendations. Every investment and trading move carries risks, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of Cointelegraph.
John Wolpert is 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 and protecting digital originals under zero-knowledge cryptography. Wolpert also co-chairs the Baseline Protocol Standards body, which uses zero-knowledge cryptography and blockchain technology to improve information security in multi-party IT workflows.