Biz Tips: An Answer to the Big NFT Question….

Biz Tips: An Answer to the Big NFT Question….

Biz Tip:

An Answer to the Big NFT Question….

Art by Terry Lash

And here’s the big question: ‘Someone created an NFT of a video that is readily available on the Internet and now claims that “they own it.” And yet, I can download that video onto my laptop, watch it as many times as I want, send it to my friends, embed it in my PowerPoint presentation, and basically do whatever I want to do with it within the constraints of copyright law. Heck, just to prove a point, I go ahead and create an NFT of that same video and offer it for sale in an NFT marketplace like OpenSea.io. So, what’s the point of that first NFT that someone else created or, for that matter, the NFT that I just created, or NFTs in general?’

Yes: NFTs are confusing. In this article, I attempt to explain them as plainly as possible.

It is true that, unlike, say, a painting that has exactly one physical incarnation — there is only one Mona Lisa, not two — a digital picture of the Mona Lisa can be replicated as many times as one wants. And so, while it makes sense to say that the original Mona Lisa is one of a kind, and therefore is scarce and can command millions of dollars ($860 Million), one just can’t say the same thing about a picture of the Mona Lisa. You download that picture to your laptop as a PNG file, create 100 copies of that file, and now you have in your possession 100 copies of that picture!

NFTs were created to take care of exactly this issue: how does one introduce scarcity in the digital world, where fungibility is the name of the game — e.g., all of the 100 images that you created of the Mona Lisa are the same and one is as good as the other one?

To really understand what work an NFT does for us — how they are useful and what problems they solve and opportunities they introduce — let’s continue with the Mona Lisa painting example for a moment to dig a bit deeper into what renders something valuable.

It is true that there is only one Mona Lisa painting. But it is also true that many physical copies of the Mona Lisa do exist (probably in the hundreds of thousands, or probably many more), and that some of them are of such high quality that unless you are an expert, you just would not be able to tell which is the original and which is a copy.

Now assume that you are a rich person and that someone came to you and told you that they owned the original Mona Lisa and that they are willing to sell it to you for not a cent more than $300 Million. They show you the painting, and by God, it really feels to you like it could be the original painting! But since you are no fool and are an informed person, you push back and tell that person that what they are saying could not possibly be true and that the original painting is safely residing in The Louvre museum in Paris, France. But the person insists that what they have is the original and that the one in The Louvre is a fraud. They show you some paperwork that looks very official and assure you that they are not attempting to defraud you. Since you are a rich person, you pull in your expensive lawyer and you task them with getting to the bottom of this curious matter. The lawyer then does what they need to do: they contact some of their connections, who connect some of their connections, and at some point, someone gets hold of the Louvre and asks them if they are sure the Mona Lisa they have is the real one. They answer that, yes, it is the real one. The connections pass the information back to the lawyer who then passes that information on to you, and you go back to the person who approached you and you politely tell them, “Thanks, but no thanks.”

Now, here’s the interesting question: Why did you turn the offer down? Was it because you knew for a fact that the painting was not the original Mona Lisa? No. You don’t know enough to be able to determine this for yourself and on your own. Did your lawyer, who you trust fully, have first hand information? No. Instead, you trusted your lawyer, who himself trusted his connection, and so on down the line, all the way to the person in The Louvre who answered the query: someone who speaks on behalf of an authority — The Louvre — that everyone trusts is an authority on the matter. And once that authority spoke, the matter was settled and closed once and for all.

In other words, the assertion of the authenticity of the painting, it turns out, has effectively little to do with the painting itself, but rather with whether the people involved in the translation chain will believe that it is authentic or not. In other words, if in a fit of madness you were to buy that painting that was being peddled to you and then you had taken that painting to an auction house, with the claim that it was indeed the original Mona Lisa, no one would take your claim seriously. Your painting would be declared a fraud. How come? Because the Louvre said so.

So, then, the bottom line really is this: the value of that painting was not determined by anything inherent in it, but by the fact that trusted and recognized authorities declared that it was or was not authentic.

In other words, the concept of a legitimating authority is at the heart of the matter here.

In the art world, there are many experts who can help you determine whether or not something is what it is claimed to be. When you need to certify that something is what it has been claimed to be — that it is the real thing — you need to find one of these experts who knows how to determine authenticity. And not only do you need to find one of these experts, you also need to make sure that these experts are real experts and that they are recognized as real experts by the potential buyers that you may want to approach. So you need to authenticate not only the object, but also the people who are authenticating your object!

NFTs elegantly solve this problem by leveraging a crypto public ledger for a given cryptocurrency. (In the world of NFTs, that cryptocurrency happens to be mainly Etherium, but it can be some other currency, such as Helium.) Think of this public ledger as a digitally accessible record of all transactions conducted using a cryptocurrency that shows who bought what when for how much and from whom.

So: say I create an audio. I mint an NFT and provide information that goes along with that NFT (the audio itself, when it was created, who the artist is, when the audio was recorded, where it was recorded, and anything else that the artist wishes to include in the Meta data). That transaction has a unique ID — a token — that is now recorded on the public ledger, along with the Metadata, and is available for the whole world to see. I have now created a digital asset that is not only absolutely unique, but, crucially, unique in a verifiable way, and unique in a way that is impossible to replicate.

Now, say someone gets hold of my audio and creates an NFT and gives it exactly the metadata that I gave it. Does this not now introduce two copies of the same audio?

The answer is no. The first NFT, whose owner is you and which was minted at a certain time — in this case before the second one — is an entity that exists and continues to exist separately, uniquely. The second one is another entity and has nothing to do with the first one other than the audio and perhaps some of the meta data that describes it.

Now, let’s say that three years after you mint your NFT, you become a famous artist, or at the very least, build a solid following that believes in you and your promise. Now, all of a sudden, that NFT that you created, which was initially worth very little and that anyone can go to the public ledger and verify that it’s really yours, is all of a sudden worth something! Maybe you signed a Netflix contract, or appeared in a hit movie, or won an award, and you are now someone that has a whole new world of fans. People believe that you are someone who is going places and are therefore eager to invest in you. One way for them to do that is to buy whatever NFTs that you may own and are ready to sell. (Oh, by the way, that very first NFT that you minted — the one that came into existence when you were a nobody — well, that one is a very special one — since it was the very first one — and you probably can now ask a pretty sum for it from people who are interested in your NFTs.) And why would they do that? Because they believe that if they hold on to it, it will turn into a much tidier sum in the future as your brand grows. In a nutshell, you are now akin to a public company: people are buying equity from you (instead of stocks they are buying your NFTs), speculating about your value, and you, in turn, are able to benefit from the speculation by selling NFTs and raising funding. In a nutshell: they are financing you, in a sense, and with that money, you may perhaps be able to focus on delivering the best art that you can create.

But how about that other NFT that the other person created? The one that was identical to yours, but not created by you? Wouldn’t that person also be able to sell their NFT for a tidy sum and cash in? The answer is: probably not. Why? Because they are not you, and since it’s the fact that the art was created by you that is in this case the main thing — what gives the NFT its value — then the one that was created by you will be the one that people want, not knock off imitations. (Why “probably”? Because maybe it was created early on, when you were nobody and such NFts about you were scarce at the time, or maybe that person is a person in their own right, or a well know fan of yours, or a company — whatever could make that NFT valuable has probably little to do with the content.)

Now let’s say that now that you are famous, some rich person makes you an offer that you just can’t refuse and you sell them your NFT, so that now, you no longer own the NFT. Someone else owns it. Does this mean that now that you no longer own the NFT, that that NFT is now not worth much anymore?

The answer is, of course, no. First, the fact that that NFT is authentic — that is, that it was created by you and originally owned by you — is easily verifiable through the public ledger. How come? Because all transactions are logged into the public ledger: the first one, when you created the NFT, and then the second one, when you sold it to the rich person who made you that offer that you took. So, down the line, when the rich person wants to sell the NFT that they bought from you, the potential second buyer will be able to see that you, the very hot artist, did indeed create that NFT and that you sold it to the person from whom the new buyer is buying it.

An additional side, but very important, benefit of the fact that every transaction that is made with an NFT can result in artists being compensated when their art becomes valuable. This is not how things work in the real world today: the starving artist sells their painting to someone for $200. A few years later, that painting is worth $200 million. The buyer cashes in handsomely, but the artist gets none of the $200 million. Fair? No. NFTs solve this by establishing what are called contracts that have stipulations that any increments in value of the NFT as it gets bought and sold accrue to the original artist, and since every transaction is logged, such payments happen automatically.

NFTs are here to stay. They not only solve current problems much more cheaply (verification of authenticity without expensive middlemen — lawyers, authenticity certifiers), but open new possibilities, the most important of which is the ability for artists to create a new revenue stream, enabling the creators themselves, and not just the speculators, to reap the financial rewards of their creations.

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Art by Terry Lash.

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