NFTs are estimated to be worth $35 billion in 2022 and will grow to $80 billion by 2025 . In January 2022, OpenSea sold $5 billion worth of NFTs. NFTs will unblock many opportunities in the digital world. We’re still very early though, and there are many challenges. In my view, these challenges are actually opportunities and we’ll see many entrepreneurs trying to solve them in the near future. In this post I’m going to focus on the intricacies and challenges related to the content behind an NFT.
What is an NFT?
An NFT (non-fungible token) is a digital asset that is unique. Think of it as a signature or record of ownership that is stored on a blockchain. NFTs come in various shapes, but the two most relevant elements for this post are:
- Owner: the address that owners the NFT
- Content: the content of the NFT. The content can be stored:
- On-chain: the content for the NFT is stored on the blockchain. This doesn’t mean a URL, but the actual image. This is rare because it can be quite expensive.
- Off-chain: the NFT points to content stored elsewhere that is then hashed.
If you’re interested in poking around, check out the contract for the Bored Ape Yacht Club NFT here.
Okay, so who owns the content?
What stops someone else from minting an NFT that points to the same location?
Actually nothing does. I can create an NFT on Opensean that points to the a different NFT’s content within minutes. Platforms like Opensea allow you to submit takedown requests for exactly this kind of thing. But it’s easy to see how this can get messy. More importantly, how does the buyer of an NFT know that the creator owns the content? There is no way to know for sure. Most users end up observing the team on Twitter, Discord etc and forming an opinion. The main takeaway here is that NFT sales are trust-based — you need to trust that the seller actually owns the content behind the NFT.
So do I get the rights to the content when I buy an NFT?
The short answer is that it depends. The sale of an NFT doesn’t imply ownership of the underlying content, unless this is specifically stated in the smart contract. Practically, this means that you are buying an asset linked to content but not the rights to the content itself. For example, Jack Dorsey auctioned away his first tweet and it sold for $2.5 million. The owner of the NFT can sell the NFT and make money, but doesn’t have the rights to print t-shirts with that tweet. This is because Dorsey and Twitter still own that content. This is an excellent read on the legal considerations for an NFT. I’m no legal expert but if you are hoping to monetise your NFT by displaying the art or commercialising it, it’s best to seek legal advice from an expert before doing so.
How is this being solved at the moment?
There are two distinct problems above:
- How do I trust the seller of an NFT?
- What can I do with the content behind my NFT?
The trust problem
This is a hard problem to solve and it’s not new. For example, when you buy a used car you have the lemons problem. How do you know that the car is in good condition? The difference in web3 is that transactions often take place pseudonymously, and the blockchain is immutable. This makes it tough to get recourse even if you try.
In an attempt to counter this, platforms like Rarible and Opensea allow collectors and creators to get verified. But even this process is manual and fairly basic — see below for instructions on how to get verified on Rarible.
The content ownership problem
This is also not a new problem. For example, if you buy a limited edition print of something you don’t own the rights to the content on the print. The key message here is to be very sure about what you are buying. Any expectations you have about content ownership should be clearly specified in the smart contract. Due to this and a host of other reasons (e.g. the recent phishing attack on Opensea), individuals who can read and verify smart contracts are going to be in high-demand.
Ultimately, users will need to be sure that a smart contract does what it’s supposed to do. There’s an opportunity for a protocol or service to do this smart contract verification. The trouble is — will it actually solve the problem or just shift power from the seller to the contract verifier? There’s an opportunity here for a verified smart contract readers, i.e. you can trust that a smart contract does what it it’s supposed to do because an expert has reviewed it. There’s also the question of whether this is the anti-thesis of web3 — i.e. centralisation. But a decentralised version of this with the right incentives could solve that problem.
Says the person who just bought an NFT...
The intent of the above isn’t to put down NFTs. I believe NFTs will unlock many novel use cases. There are many great communities for NFTs. I minted a Decentralien yesterday because I’m passionate about the cause they stand for (web3 education), the team seems trustworthy and because I wanted to transact on Solana. The best advice I can give you on NFTs is to either spend what you can afford to lose, or proceed with caution — read everything you can get hold of, speak to people you trust and investigate the project thoroughly before investing.