Why do you need to understand what the NFT means?

What is the NFT?

Contrary to traditional works whose authenticity can be verified through the analysis of handwriting or the analysis of the chemical composition of paints or surface, digital works have been deprived of effective protection against duplicating and distributing, yet. That entailed many threats both to authors and buyers: authors were deprived of their income and buyers were exposed to the risk of buying counterfeits.

The problem was solved with an NFT (non-fungible token). Due to the Ethereum blockchain technology, digital works can be subject to decentralisation and encryption, which, as a rule, guarantees data invariability, similarly to cryptocurrencies. This means that NFT digital works cannot be falsified and their history can be traced back to the author. The author’s public key is permanently embedded in the NFT work data and cannot be changed, which means that if you know the artist’s public key, you can verify whether the work comes from that artist or is just a copy created by someone else.

Each NFT is a unique token in the blockchain, but there can be just one piece of a given work, like Van Gogh’s painting, as well as hundreds of numbered copies of that work or collector cards. The author is the only person that can decide whether to produce one copy or thousand copies. The information concerning the number of copies of the work is open, generally accessible and impossible to counterfeit or replace by anyone.

Why are NFTs sold for million dollars?

In March 2021, the work of Mike Winkelmann (Beeple) entitled “Everydays – The First 5000 Days” was sold for 69 million dollars. A depixelled 24×24 picture presenting an alien and entitled “Cryptopunk #5822” was sold on 12 February 2022 for almost 24 million dollars. Why?

High prices of some NFTs do not result from the fact that they are NFT. This is only a technology that lets the authors of digital works differentiate the original from the counterfeit, which has been warranted by the traditional art for a long time. The traditional art is sold for much greater amounts. The most expensive ever sold NFT work, “Everydays – The First 5000 days” by Mike Winkelmann, being the collage of 5000 pictures created by the artist every day (without exception) for 14 years and presenting currently important events, was sold for 69 million dollars. Despite of the high price, the collection of 5000 pictures would not even come within the first hundred of the most expensive ever sold traditional paintings (without sculptures or other creations). The painting entitled “Cryptopunk #5822“ and presenting an alien is that simple at first glance that it could be created by a child within an hour, but it was sold for almost 24 million dollars. “Cryptopunks“ is a collection of 10,000 pictures created in 2017, when the NFT technology was new. And only 9 of those pictures show aliens. Although there are 10,000 pictures, the majority of owners do not intend to get rid of them and the number of pictures actually available for sale is much smaller. People from the NFT and cryptocurrencies sector present “Cryptopunks” as avatars in their profiles or platforms where they do business. If you have a “Cryptopunk” avatar, it means that either you have been in the NFT society since the very beginning or you have paid a great amount of money to become a member of that society. In both cases, there is one effect: you have a greater reliability. Owning the “Cryptopunk” avatar in the society where most transactions are made in the Internet is like having an expensive watch at a business meeting in the traditional world. 

While, according to data coming from one of leading platforms acting as an NFT sales agent, one third of all NFT works is sold for less than 100 dollars and a half for less than 200 dollars. If the NFT is sold for less than 100 dollars, the transaction costs exceed the income earned from the sale of the work, without taking into account time spent by the artist to create that work.

NFT and copyrights

Like the purchase of a book at the bookshop does not entitle us to produce a film based on that book, the purchase of a graphical print in the form of an NFT does not entitle us to produce T-shirts or mugs with that print. The transfer of rights to the medium is not automatically connected with the transfer of copyrights to the work recorded in that medium. The fact that the medium is intangible does not change that rule. The purchase of an NFT entitles you to use a specific copy of the work (you can sell it to another person), but to distribute that copy, you must enter into a relevant agreement. Given the civil law, NFT can be considered as a sales evidence or an identification mark. To earn income from NFTs, you must enter into a separate copyrights transfer agreement or grant a licence for the use of the work for commercial purposes to the buyer. In the latter case, no written form is required. It is enough that the artist adds terms and conditions for the use of their works by buyers to the auction.

A so called “smart agreement” is, for sure, good news for NFT creators. This is a code being an integral and non-modifiable part of the NFT work which, when bought, defines and automatically adjusts rights and obligations of the seller and the buyer. Apart from basic and necessary regulations, it can also include other rules, e.g. concerning the distribution of funds for the payment of gratuities every time the NFT is sold. This is a revolutionary solution for artists because it was very difficult to enforce statutory droit de suite payment in the secondary market. In the case of the NFT, if the sales transaction is made, the percentage of funds will be automatically transferred to the author of the work and any interference in the relevant code is impossible.

Future of NFTs

The NFT has also many potential applications outside the world of art, even outside the virtual world. Nike patented the method of verification of the authenticity of limited shoe collections by use of the NFT certificate that is impossible to counterfeit. A concert ticket can be also produced in the NFT form: apart from the guaranteed place and unique code (functions provided by bar codes), the organiser of the event will be able to get a percentage of profit from the resale of the ticket, if any. In the times when tickets to some musical events are sold within several minutes and then are resold at much greater amounts, such a solution would be indubitably profitable to artists and organisers. NFT-based tickets are already used in the case of events held by the cryptocurrencies community.

Since NFT are actually notarial deeds, it will be once possible to buy a car or a house with cryptocurrencies and obtain in exchange an NFT notarial deed (during the same transaction). As things become more and more technologically advanced, it is not difficult to image a world where an Ethereum portfolio will become your car or house key: the door will be open with a cryptographic certificate of ownership. The objects can be used in a surprising way. For example, the NFT can be used as a collateral for a decentralised cryptocurrency-based borrowing. Due to valuable assets, like cars and real properties, which can be represented in Ethereum, the NFT can be used to secure decentralised loans. The NFT has been with us for a short period of time, but it will indubitably remain with use for a long time.

Sergiusz Mościński, Legal Assistant