NFTs have burst onto the scene in a big way, and no more so than in the art world with digital works tied to NFTs heralded as a ‘new art medium’, and all, including established auction houses, art galleries and others, rushing to mint, promote and curate digital art and sell them (hopefully) for small fortunes.
The Rise of NFTs
Established art gallery, Pace, recently announced the launch of its NFT platform “…for showing and selling…” digital art non fungible tokens, set for launch in September 2021, with its inaugural offering being “… a series of NFTs from…” Lucas Samaras’s “…archive of digital works…”. The Platform promises both primary and secondary sales, and, interestingly, to include “…digital Samaras prints…offered as physical tokens to accompany the purchase of the NFTs…”.
Blockchain technology has come thick and fast to the art world, and a work of art is now considered something new simply because its digital image is an ‘NFT’.
But what does it mean to be an ‘NFT’?
Why, for example does Pace talk about NFTs when discussing Samaras’s “…archive of digital works…”? Why, and how is a physical print simply “…a physical token to accompany…” the purchase of the NFT? Is an NFT now a digital work of art and a physical artwork not? which is the authentic original piece of art? The digital or the physical?
Lots of questions. Just from a ‘shortish’ press-release. And the question of why NFTs have come to to be associated solely with digital art, perhaps the topic of another discussion.
But, in point here, is how can we even understand what NFTs are, and, even more so, their value or potential, without understanding what they are, and how they are structured without getting the lexicon right?
A Legal Perspective
A good place to start in understanding the value in NFTs, digital art, crypto art, or whatever you want to call it, is in its emerging legal definitions.
The Joint Committee on the Uniform Commercial Code and Emerging Technologies (the “Committee”) including members from the American Law Institute and Uniform Law Commission, is working to amend the Uniform Commercial Code (“UCC”) to provide for digital assets, the very species that comprise NFTs, and other emerging technologies, including blockchain technology.
At their annual meeting, held on July 9–15th in Madison, Wisconsin, the Committee, in its working paper (the “Paper”), progressed the draft addition of Article 12 to the UCC, the proposed completely new Article to the UCC dealing with ‘controllable electronic records’ (in other words ‘digital assets’), with the objective of finalizing Article 12 for final approval and implementation in July 2022.
The Paper defines a ‘controllable electronic record’ as “…an electronic record that can be subjected to control under Section 12–105…”. An ‘electronic record’, in turn, is “…information that is stored in an electronic or other intangible medium and is retrievable in perceivable form…” .
To fall with in this definition, the record must be controllable, in other words it must give the person controlling the record the power to avail herself of the benefit conferred by the record, and the exclusive power to both prevent others from enjoying the benefit of the record AND to control the transfer of the electronic record to another person. Further, the record, itself (or “…a record attached to or logically associated with the controllable electronic record…”: important for our metadata discussion, below), must enable that person to readily identify itself as having the powers mentioned above.
Bitcoin as a Controllable Electronic Record
The classic example of a controllable electronic record is Bitcoin.
Itself a digital asset, the Paper refers to Bitcoin as a record that has “…what one might call “inherent value”…” with Bitcoin capable of being “…exchanged (sold) for cash or other valuable assets. Or, the owner of Bitcoin can hold the Bitcoin as an investment…”.
Not All Records are Made Equal
While Bitcoin may have inherent value and a bunch of them worth millions of dollars, with other records, whether physical or digital, what rights the record conveys depends what it says.
Just like any ‘record’ in the real world, the value or meaning of a record depends what is written on it.
The Paper elaborates: “[t]he value of many (if not most) records, however, is as evidence of the rights of the parties to a transaction. In these situations, it is essential to differentiate between the record and the rights that are evidenced by the record.”
So if a seller sells simply a piece of paper (a record), that is all the buyer gets. But if the paper is intended to give the buyer the right to, lets say, take delivery of a car, the paper is worth so much more.
Its the same with digital records, which when held on a distributed ledger and configured to produce a digital asset, or a fungible token, or when the token is unique and tied to a specific asset, NFTs.
Value in NFTs
But legal definitions are not enough. We need to understand how NFTs are structured. This detail is often not clear when we see NFTs on digital art platforms like Nifty Gateway, SuperRare or others.
Many assume that the digital art is the NFT, or the NFT the digital art, but while the actual work of art may be capable of storage on chain, it usually isn’t.
Standards are developing for smart contract integration of what we call metadata into the contract. It is the metadata that is linked to the token that really determines its value.
Unlike with Bitcoin or other cryptocurrencies, where value has by consensus been deemed to be implicit in the transaction output or ‘token’ itself, an NFT, or the non fungible token has no implicit value.
Its value is wholly dependent o its metadata: that string of information that is tied to token producing smart contract through a unique identifier.
ERC 721 is the Ethereum standard “…for representing ownership of non-fungible tokens, that is, where each token is unique…” . This smart contract standard points to the specific metadata associated with its token by referencing a function or an identifier in its code, for example: function tokenURI(uint256 _tokenId) external view returns (string memory).
It is the token identifier tokenURI that points to the URI where the digital art and other metadata is located. This can be on a centralized server (usually controlled by the platform that mints the crypto art) or decentralized, using services like ipfs or arweave which create a degree of permanence in the existence of the metadata.
And the structure of the metadata is starting to receive coordinated attention. There is an official ERC 721 metadata standard, and efforts for chain interoperability based in the Cosmos protocol have emerged with the InterNFT Working Group.
So, it is the type of metadata and where and how it is stored and structured that should, at least to some extent determine, NFT value.
After all if you just paid millions of dollars for a limited edition work of crypto art, and you knew that the image itself was a low resolution image sitting in digital storage controlled by the centralized platform that minted the work, possibly with your prized work of art to disappear if the platform cratered or was otherwise susceptible to ‘link rot’, or that the artist or other person still controlled the original high-resolution file, waiting for the opportunity to ‘remint’ the image, you may experience a mild case of buyer’s remorse…
More to Metadata than an Image
But while the image (and its scarcity) is crucial to defining value, so are the rights that the NFT conveys to you.
And this is where we go back to the legals.
As we have seen, an NFT is a digital asset, is a digital record. Absent anything to the contrary in the record, buying the record gives you the right to control, or perhaps own the record with a function in the digital asset pointing to the work of digital art.
The devil is truly in the detail as to the rights which the record conveys to you, and it is in the metadata too that these rights would be housed.
So it is the metadata ‘fine print’ that not only defines the crypto art linked to NFTs but also the very rights on which the work of art is bought and sold.
These rights can add to, or even detract from your ownership of the record, but as with any real world piece of paper, it all depends on what is written on it.
This may include a license of the underlying intellectual property in the digital file, for example the right to copy or make derivative works in the underlying art.
Conversely, it could detract from your rights of ownership in that image, by, for example, giving you only a non-exclusive license to privately enjoy the digital image attached to your token or record.
One wonders whether this is truly appreciated in NFT sales, and whether the effort has been made to look under the hood at the rights in the image actually conveyed.
The very purpose of blockchain technology should be about authenticating uniqueness and making ownership of digital assets a reality. Some may be dismayed to find out that they have actually purchased a lesser right that outright ownership in the digital art.
Yet, we have seen this, stuck in the metadata, the fine print of the fine print. If collecting simply a non-exclusive license in a limited edition piece of art for millions of dollars wouldn’t wash in the real world, so shouldn’t it with crypto art.
Moral of the Story
Is really: look under the hood when you buy and sell crypto art and ensure, not only that the NFT is structured correctly so that it truly is a limited edition or unique work of art and is not susceptible to ‘link rot’, but also that you are giving or getting ownership in the exclusive limited edition or original work of art, as a collector would expect in the real art world.
And since these are digital records, we now understand that everything is pretty much off-chain, referenced in the record’s metadata, whether it is digital or physical artwork, and that the concept of limiting NFTs to digital works is unnecessarily limiting of the potential that NFTs can deliver. But that is a topic of a different (and much needed) discussion.
And to attorneys out there. Don’t confuse ownership rights and intellectual property rights. If you want to convey IP, then that’s all well and good, but don’t throw the baby out with the bathwater and dilute simple ownership, the very thing for which blockchain technology was gifted to us.
Metadata is magic. Use it wisely.
** This article is intended to be informational only, and does not constitute legal advice. Competent, specific legal advice from a suitable, licensed attorney, should always first be obtained before taking any action, and the information in this article should not be relied upon independently of that advice.