NFT Ownership Explained
It’s almost impossible to surf the internet without reading about NFTs. A recent Forbes article estimates over 37 billion dollars spent on NFT marketplaces in the first 5 months of 2022 alone. With money like that being spent, it’s even more surprising that many don’t realize what they are really purchasing. Before you rush off to start a collection you should know exactly what you’re getting yourself into.
As NFTs are a relatively new phenomenon, there is a lot of confusion. It doesn’t help that different sources on the internet claim different things. The reality is that there are specific licensing agreements to take into consideration. It’s also important to have a grasp of the related copyright and intellectual property rights.
A New Way to Collect
NFTs have emerged as a new way of collecting. Understanding how they differ from traditional art will help you as you move forward in the buying process.
NFTs are intended to prove origin and provide transparency. This is especially important in the creation of digital assets. Consider Da Vinci’s Mona Lisa; it’s an original and for the most part we can track its journey throughout history. However, this “tracking” system is dependent upon the honesty of people along the way. It takes a lot of time, energy and resources to safeguard the authenticity of physical artworks. You see this often when debate rages over the authenticity of a newly uncovered piece.
A piece of digital art that has never existed in the physical world has a more reliable tracking system if we assign a NFT to it. No matter how many times it’s shared on the internet, we can always point to the “authentic” copy. This is a major benefit to the creator and subsequent owners.
A recent Financial Times article touts the advantages of NFTs, stating:
A selling point of NFT(s) is the reassurance they give to those investors who are prepared to trust blockchain… encrypted, and thus essentially indelible, they cannot themselves be lost.
NFTs are still in the infancy phase and a lot of questions and legalities still need to be worked out. It’s easy for NFTs to be faked. Imagine Da Vinci created a digital Mona Lisa and after he put it online and five people took the image and minted it, claiming to be the creator. Then, all 5 people sold a NFT associated with the image. Things can, and do, get messy quickly.
Certificate of Ownership
NFTs are essentially a unique certificate of ownership which points to an image, song, or other asset (most often digital). It’s the only certificate of its kind, and its uniqueness is what makes it special. Instead of a physical piece of paper stored in some governmental building, it’s stored on the blockchain.
NFTs are essentially a unique certificate of ownership which points to an image, song, or other asset… Instead of a physical piece of paper stored in some governmental building it’s stored on the blockchain.
Let’s consider a digital image. Many people are confused because they think they own the image shown in the NFT they bought. However, that’s typically not true. You don’t own the image or even a copy of the image. The only thing you own is the unique digital token (i.e. certificate of ownership) that points to the image.
Now let’s consider the Mona Lisa again. Imagine you purchased an NFT that pointed to the Mona Lisa. The NFT would be the only digital token in the world pointing to what could be considered the most famous painting in the world. The association itself would make your NFT worth a fortune, you wouldn’t need the painting to hang in your house.
Now, this analogy ends there because some NFT purchases do actually allow you to do things with your digital image. Let’s dig in and see what this means.
What Rights or Benefits do You Have
What benefits you have and what you can do with your NFT depends greatly on the agreement you have between the seller and the buyer. It’s important to educate yourself before purchase.
There are three essential factors in determining what you get with your NFT.
- Terms of Service or Purchase Agreement: The specific terms laid out between the buyer and seller. The terms of service can forbid or allow commercial use of a NFT. For example: Can you print and sell merchandise with an image associated with your NFT.
- Underlying “smart contract” or underlying code: The smart contract is written into the code of the NFT and assigns ownership of the NFT. Smart contracts cannot be changed or destroyed after minted.To create customized smart contracts you will need specific software. You could specify royalties in the smart contract so as the NFT passes hands you would always be entitled to financial compensation.
- Copyright or trademark: A common legal term that refers to the core control, ownership and distribution rights of an artwork. A painting by Picasso can belong to the owner, while the right to distribute images of that artwork remains with the estate that owns the copyright.
Limited Edition vs. Open Edition NFTs?
NFTs are, by nature, one of a kind. That’s what separates them from cryptocurrencies. Any bitcoin is worth the same as any other bitcoin, but an NFT is completely unique, and its value is determined based on the amount people are willing to pay for it. However, it’s important to realize you can have more than one NFT associated with the same image or asset.
A limited edition NFT is what we normally associate with NFTs. This means that there is only one NFT associated with one asset. This creates rarity and is intended to show provenance on the blockchain.
Remember, you’re not buying the asset itself, you’re just buying the token associated with the asset. A creator could decide to create 10 NFTs associated with the same asset (i.e. image). This is the digital equivalent of Picasso creating limited-edition lithography. Because he was so famous, his prints would sell for an incredibly high price even if a completely unique painting was worth alone.
Shady Sales Techniques
What if a creator tells you that they are selling you a limited edition NFT and then mints other NFTs associated with the image? It can happen, that’s why it’s important to know who you are buying from. The difficulty is that NFTs are so new that it’s hard to rely on reputation.
The same thing can happen when buying photography. There is essentially nothing stopping a photographer from printing more prints of the same image after a “limited edition” has sold out. Often, a photographer will print off more photos with different sizing and call it a different series. Practices like these are why more people still invest in paintings more than photography.
The world of blockchain is intended to be more transparent and as people learn how to use the technology it may be possible to track shady sales techniques. It would benefit the entire industry, as value depends on rarity.
Do NFTs give you copyrights?
NFTs do not normally transfer any copyrights or intellectual property to the buyer. The copyright stays with the artist. This means you cannot buy an NFT associated with music and decide to use it in a car commercial. If that was your intention, you would still need to pursue traditional licensing agreements. This is no different than buying the only handwritten manuscript of The Lord of the Rings. It wouldn’t give you the rights to create your own major motion picture. You would own a rare manuscript worth a lot of money, but you wouldn’t own the story. Moreover, you cannot control other people selling, reading and distributing the story.
It is no different than buying the only handwritten manuscript of The Lord of the Rings. It wouldn’t give you the rights to create your own major motion picture.
It’s hard to talk about NFTs without mentioning OpenSea, the largest online marketplace connecting sellers and buyers of NFTs. It’s important to note that OpenSea does not take responsibility for licensing. They provide a platform for the transaction to take place, but the terms of the transaction are between the seller and buyer. This means their online system supports the sale of thousands of NFTs, all of which can have specific and differing licensing agreements.
You bear full responsibility for verifying the identity, legitimacy, and authenticity of NFTs that you purchase.
A Tale of Two Terms
To get a better idea of how significantly licensing can differ, let’s look at two popular NFT collections: Bored Apes Yacht Club and CryptoKitties. These two wildly popular NFT collections are selling for astronomical prices yet are offering different agreements.
The above terms are directly taken from the source of these two NFT providers but still leaves unanswered questions. Both give you rights to commercial use to your NFT but giving permission to use an image and owning a copyright are two different things. The language is often ambiguous. CryptoKitties website says “you get no rights to the associated image” while simultaneously saying you can make $100k revenue annually.
Another popular NFT collection, CryptoPunks, was recently bought by the makers of Bored Apes Yacht Club, Yunga Labs. The purchasers immediately enacted a different licensing policy. In this case, a more liberal policy. However, what if a more restrictive license was enforced? What happens to the previously bought NFTs?
What Can go Wrong
Knowing what can go wrong when buying an NFT can prevent you from making costly mistakes. If you were to buy a Van Gogh, you wouldn’t just throw it inside a closet and hope for the best. It’s important to know how to protect yourself and your purchases.
Luxury giant Hermès has brought a trademark infringement lawsuit against the creator of the NFT collection MetaBirkin. The NFT collection features digital images of bags similar to the fashion house’s famous Birkin bags.
Creator Mason Rothschild responded in an open letter and stated:
There are countless examples of artists who reference the world and the products and cultural artifacts in it.
The case will certainly set a precedent in these unchartered territories. It also brings up the question: what is your NFT worth if it’s shown to be a copyright infringement?
The image URL disappears
There is a clear difference between the NFT and the associated asset or artwork that it’s related to. You can easily control where you store your NFT (digital wallet), but it’s not as easy to ensure the associated asset is stored safely. Most NFTs point towards a URL where the image is stored. However, there is no guarantee that images will be stored there forever. What happens if the website associated with the URL is taken down?
Sellers are not protecting their products after sales
Artist Ryder Ripps set out to push the limits in an experiment to see what he could get away with. He purposefully re-minted Bored Apes and even sold t-shirts with the characters. His mission? To see how far Yunga Labs would go to protect their product. What he found was disheartening. After one feeble DMCA copyright notice (which he disputed) the creators seemed to give up. Don’t forget, these NFTs are selling for around $100k minimum.
This is the equivalent to expensive watch manufacturers making no attempts to limit the distribution of fake watches on the marketplace. It’s clear more needs to be done to protect the integrity of the product.
Are NFTs Worth Buying?
NFTs can be an excellent way of proving provenance (i.e. authenticity & history of ownership) and protecting the integrity of digitally created or distributed work. However, it’s still very early in the game and there are several issues that need to be sorted out before NFTs can live up to their potential.
There is nothing wrong with buying an NFT to support an artist you love or start a collection. Take precautions; read the fine print, and know who you are buying from. Hopefully time will offer solutions and create industry wide standards that bolster the integrity of NFTs.