Making Sense of NFT’s

???????????It seems that everyone is talking about NFT’s and a lot of people are writing about it, but very few people seem to really understand it, including those who are writing about it.?This is my attempt to answer some fundamental questions about this new technology.?

???????????To begin, an NFT is a Non-Fungible Token.?That means it is like something of value (like a famous painting) but it can’t be traded at equal value (like money for things).?NFT’s are actually digital media stored in a block-chain technology, making ownership verifiable.?That’s a neat trick.?I mean, most artwork is now digital.?Think about it.?Most artwork comes out of the film industry.?You can make prints, either in video or still images, but you can’t touch an original version.?It’s virtual.?It only exists in a file as a bunch of 0’s and 1’s.?So how do you sell such a work of art??Pretty hard until now.?Of course, you could sell the original image file (like a JPEG image file for example) but since it can be copied endlessly, how could you prove you own the original file??There really is no original file… until now.?Enter the NFT.?Now you can create an image, store it on your computer, then sell it on a platform that enables NFT’s.?You can learn more about the pros and cons of specific services in this article that describes the Top NFT platforms to buy and sell NFTs.

???????????This all sounds pretty straight forward but it leaves a lot of questions unanswered.?I’ve spent a lot of time digging into these questions but since most everyone writing about this doesn’t understand digital technology or copyright law, they just explain what they understand and fail to answer many key questions.?Here are what I consider the most important questions about NFT’s and the answers based on my understanding of digital technology (from working in the industry for the last 20 plus years) and copyright law (I’m not an attorney but I did go to law school).

Can digital asset (the NFT) be of a real object?

Yes, but most NFT’s exist only as a digital object.?Some physical artwork is actually being destroyed by the original artist after creating an NFT, which would prevent the creation of multiple copies.?Be aware, individuals can take a photograph or video of a physical work of art (or a building or just about anything in the physical world) and create an NFT without destroying the object.?Destroying a physical work of art is done by some to make the digital version more valuable.

Can a digital asset (the NFT) exist only as a digital object?

Yes.?An artist can create an image or video using digital editing tools so that there is no physical asset.?Most NFT's currently exist only as digital assets.

Does the original artist retain the copyright?

Yes.?This answer complicates things as you can see below.

Does ownership of the NFT denote exclusive rights?

No. The copyright owner has the original rights (usually a copyright but physical objects can have additional rights, like land, buildings, motion pictures, music, etc.).?The NFT owner can display the digital asset but so can the original copyright holder.?Most likely, the copyright holder would not bother to do this since they sold the right to someone else.?Think of NFT ownership more like a license, granted by the copyright holder.

Can the copyright holder sell additional digital copies?

Yes, but in many cases, copies will differ from each other, at least slightly.?But in some cases, they may be virtually identical.?Often the original copyright holder will not do this, in part to protect their reputation as a good faith seller, so that they can continue to sell more NFT's.?But it is a risk to the buyer.?If the original seller makes additional copies, they can flood the market and dilute the value of your NFT.?So, buyer beware.?See below for more details on this issue.

What protects an NFT Owner from the issuing of addition digital NFTS?

Virtually nothing.?But the first NFT would at least be first.?Think of it as having a single copy out of 1,000 of a limited -dition print.?If the original copyright holder gives notice that he is offering a numbered, limited edition, it may not negatively affect the value of the NFT.?Most original copyright holders would be inhibited from engaging in the kinds of bad practices that would dilute the value of an NFT, if only to maintain their reputation as a good faith seller.

Then why would an original copyright holder issue multiple NFT's that are virtually identical?

Basically, for the same reason that some works of arts are sold as limited-edition prints.?But if they do this the right way, they would give notice at the first sale, that this is what they are doing, and they would also announce to all buyers, the total number of copies being sold as part of the limited edition [(the number of the copy should be included in the metadata (or physically appear on the image)].?The big risk is that they make additional copies at a later date and introduce them into the marketplace.?If they did this after selling a limited-edition series, it could be considered fraud. Note, fractional shares of an NFT are one solution to dealing with this issue (see below).

Why would I want to sell an NFT?

Primarily because platforms that allow you to buy and sell NFT's create a new market for digital objects allowing anyone to reach a larger market.?Obviously being famous helps but you don't have to have a lot of followers for someone to find a digital work of art placed for sale.?It is somewhat similar to how Airbnb or VBRO have created a marketplace for rental homes.?Using these online marketplaces makes it easy to rent a house for short term rentals, something that was nearly impossible to do before these platforms created a marketplace for these kinds of transactions.?NFT platforms create new marketplaces in a similar way.

Why would I want to buy an NFT?

There are several reasons why you might want to buy an NFT. You would have the right to post it or use it in a publication (think of this as an exclusive royalty free work of art).?You also have bragging rights (“I own Michael Jordan's 1995 basketball sneakers”… I don’t… it’s just an example… but I wish I did!).?And for many people, they simply want to trade in digital art. with the expectation certain objects will increase in value.

Can an NFT be stolen?

Yes, but it is very rare because the block chain is specifically designed to protect the original transaction.?Some hacks have occurred but it's harder to break a blockchain than it is to break into a real bank.

Can an NFT be destroyed?

Yes. Theoretically an NFT could be destroyed by a hacker, instead of stealing it… but either way, it would be lost to the NFT owner.

Can an NFT be lost?

While an NFT could be stolen or destroyed, it is unlikely it could be lost, unless the server on which is stored is lost or destroyed, and there are no other backup copies.?Multiple backups are common in any database for just that reason.?Theoretically, data banks are more secure than real banks (or museums) because of complex backup solutions, sometimes even using blockchain technology.?See Using the blockchain to secure to create Secure backups.

Can you buy partial shares of an NFT the same way you can now buy partial shares of stock?

Yes, you can.?Fraktal, Opulous, Masterworks and are examples of platforms that sell fractional shares of artwork.?Fraktal focuses on music, so they are really selling interests in royalty rights.?That’s an interesting twist.?You can own a right in the original work, but you also own a paying interest in the royalty revenue!?It is possible to build a platform that could do something similar with anything that generates revenue, like films, concert tours, plays, and anything else that generates revenue. Opulous does the same thing with works of art in general.?Any artist can use these platforms to sell fractional interest in their art.?Masterworks is not up and running yet, but it plans to offer securitized artwork (by filing circulars for individual works of art with the SEC), making this one of the safest ways to buy a fractional interest in artwork.?Masterworks buys famous paintings, holds them until they increase in value, then sells them at auction.?After the sale, the revenue from the sale is shared with the fractional owners.

Particle is a nonprofit organization that also sells interests (NFT’s) in famous works of art.??Particle will sell shares in physical artwork (not digital assets).?The number of shares can vary from one work of art to the next.?The first work of art will be sold in 10,000 shares. In addition to not being fungible, this is not even a digital asset.?It is a real asset, like a famous painting.?So, what’s digital about it??The digital part is the ownership in a fractional piece of the artwork.?The Particle Foundation will hold the artwork along with 1% of the asset, ensuring that no one will ever own or acquire 100% of the physical art (which would give them the right to demand transfer of the physical art).?The first painting (Love is in the Air, aka the Flower Thrower) will be auctioned off Jan 10-14, 2022.?Thus, they are preserving original artwork in contrast to other NFT platforms that really don’t care if physical art is destroyed.?An interesting twist to the Particle model allows partial owners to sell and trade their shares directly on the Particle platform.?See the Particle Website for more information.

Will an NFT last forever?

Forever is a long time.?Digital assets exist on physical servers, as a series of bytes stored on computer chips, which decay, as do all physical objects.?Backup solutions require that the data be copied onto multiple servers, but mistakes can occur.?Over time, mistakes, and data losses (due to decay of the storage chips) cause the original digital asset to decay over time.

Which lasts longer, a real painting in a museum or a digital image stored in a database?

Good question.?It depends.?Paintings do fade but it is possible to restore many paintings.?Historically, data has not fared well in databases, but improvements in technology and backup strategies are constantly improving.?Digital assets may one day outlast physical works of art if we have organic nanobots constantly cleaning and repairing physical computer chips.?It is worth knowing that organic robots have already been created and they even reproduce, blurring the line between robots and living organisms. Alas, the future never stops changing!

Conclusion

All of the examples of NFT platforms come with their own rules for buying, selling, and sharing revenue from NFT’s, illustrating the amazing creativity that has gone into innovating around NFT marketplaces and blockchain technology.?Undoubtedly, they will greatly enlarge the size and value of virtual marketplaces into the future, expanding total, worldwide wealth dramatically.?They also open the door to democratizing these markets so that anyone can participate, either as an artist or an owner, but do so with caution and educate yourself about the benefits and the pitfalls of each type of platform.?After all, you wouldn’t buy a used car from just anyone!