An NFT was sold for $69 million at the beginning of this year. Because of such a whopping price, it attracted a lot of attention. That was the time when the frenzy started, and NFTs became the talk of the town, much like the Bitcoin craze a decade ago. Interestingly, NFT became the word of the year, establishing the extent to which they took the world by storm.
Artists, sportspersons, and musicians have seen monetizing potential in their work as the value of digital assets is skyrocketing. From being in millions in 2020, the value of NFT transactions was in billions by the end of Q2 in 2021.
Many people are still unaware of NFTs and their role in the latest technological ecosystem. Because of their popularity, NFTs cannot be ignored by creators, collectors, and investors. The value of these NFTs for users and IP owners is still vague, which may raise potential issues from these unique assets.
We aim to give a clear idea of the effects of NFTs on the creative industries, IP rights, and their intersection with other technologies.
What are NFTs and What Gives them Value?
A non-fungible token, commonly known as NFT, is a token based on blockchain technology and can represent any collectible asset in digital form. It can be an artwork, a song, a video, a screen capture, or an in-game item. Firstly, we need to understand the term “fungible”. When you exchange something (money or commodity) with an item of equal value, it becomes fungible. Conversely, a non-fungible item is unique and irreplaceable by anything else.
Putting it in simple words, an NFT is a unique file that represents a digital asset. NFTs rely on blockchain technology to create unique files that cannot be traded with other files. The non-fungible nature of NFTs gives them value.
Just like a deed of land doesn’t portray the land itself, NFTs are only a mere representation of digital assets. NFT is not artwork but only represents it in digital form. While the popular belief is something else, you do not own the work itself despite having the NFT in your ownership. You purchase a digital asset that possesses a unique digital ID. A digital asset or hash is bought and sold when trading NFTs.
How do we convert an original artwork to an NFT to trade it on an NFT marketplace? Firstly, upload the digital file containing the work to an NFT platform. Since blockchain has a few technical limitations, the work itself cannot live on it as the file size is too large to be stored. Therefore, the need for NFT arises.
Secondly, an algorithm creates an alphanumeric digital ID of the uploaded file. It is a unique signature or hash as no two files can have the same digital ID. Also, the algorithm creates a metadata file, which is tied to the underlying work. Not only does this file contain information about the digital work but also the digital ID of the underlying work.
To finish the cycle, a URL that focuses on the metadata record is installed into a “smart contract,” which is composed of the blockchain. This last step creates (or “mints”) the NFT. The individual who mints the NFT is considered the “proprietor” of the NFT inside the smart contract. No one but this individual can execute the smart contracts. An NFT buyer, in this way, has essentially gained the capacity to run the smart contract attached to the NFT.
Because of this, the NFT buyer cannot claim any ownership over the underlying work. He doesn’t get rights to this IP. The smart contract embedded in the NFT provides exclusive ownership rights to the one who created the art, music, or GIF. However, the work remains accessible. NFT provides an unalterable link to the digital asset, and this version remains extremely valuable.
NFT derives its value from the unbreakable chain of digital references. Essentially, they are a way to secure and authenticate digital assets.
You can find many copies of digital assets. Hence, ascribing a digital token to the original version of the asset makes it possible to give ownership rights over it. The specific arrangement of data in the digital version generates the unique hash. Changing even a single pixel of an image can cause the hash to alter. Henceforth, an NFT is proof of the original work on blockchain.
This element of NFTs cannot be found in different tokens on the blockchain. An NFT, in contrast to different tokens, can’t be traded or substituted by another. Indeed, two duplicates of the indistinguishable digital work will essentially produce novel arrangements of metadata. Each duplicate would have its own different and particular NFT.