We have been reading with some sense of trepidation about the rise (and rise) of NFTs. What started out as a kind of internet quirk, has quickly become something where significant sums of money are transferring between parties in exchange for "digital assets".
For example, it has been widely reported that Jack Dorsey, the founder of Twitter, recently sold his first tweet for $2.9 million. This link takes you to that tweet (for free) so why and what has someone paid for?
What does an NFT do?
In essence what they’re trying to do is provide a form of digital proof of ownership for a “digital asset”.
We are all comfortable with the idea that when you purchase an original artwork it has a higher value than a print copy of the same piece, but up until now it has been difficult to understand how the same principle can be applied to a digital asset - think back to those days when teenagers would download an image of a dream car from Google and use it as a wallpaper to spice up their desktop. Would you pay for that? Indeed, how could an artist prevent them from doing so?
When Jack Dorsey "sold his first tweet" what that really means is he has converted it to an NFT and sold that proof of ownership.
What's the blockchain got to do with all this?
NFTs live on the blockchain (a decentralised ledger). The blockchain allows you to track transaction history.
I made an NFT.
Given the fanfare around them, the logical thing for us to do was to create our own NFT. As such, I sat down at the piano and played a few bars which I hope you enjoy. I used an app called S!ng to make it. It uses the blockchain and "millions of independent servers" to "bear a silent, instant and permanent witness to every file you create". I uploaded my recording and it converted it to an NFT.
To listen you have to log in to the app. This link should do the trick, if it does not work please email/message me and I'll share directly. The creator can see who listens to it, who shares it and each transaction is available to see online.
For example, this link shows when I shared it with myself: here. S!ng started out because they wanted to give musicians a better way of sharing compositions without losing sight of who had the original idea. It's a great idea in a world where music is sampled constantly.
However, it's important to remember that as soon as someone makes a recording of my recording then they have taken the NFT off the ledger, and much of the benefit to using the blockchain to track sharing and listens is lost.
What do we think?
From a practical point of view, it does make sense that a digital asset can be certified to be the original digital asset. If Covid has taught us anything in the legal world, it is how comfortable we all are with e-signing. The idea that an original document must be printed and signed in pen has vanished.
However, the value being ascribed to some NFTs in recent auctions – click through to the BBC link below to see what we mean – it is slightly baffling. Essentially, all you are purchasing is a certificate saying that you own what has been deemed to be the original. There is actually no difference between the original and the non-original piece.
From a legal perspective, it’s unclear what the impact will be on transactions. For lower value transactions on online marketplaces, purchasers and sellers are likely to remain comfortable simply transacting through the platform.
However, looking at high-value pieces, our expectation is that the usual sale and purchase agreements and associated warranties will be continue to be required. This is because in a sense all the NFT does is allow you to identify one particular copy of a digital asset. Admittedly, that digital asset is the "original" version but it is nonetheless the same one as you could download from YouTube or copy from a hard drive.
One point to consider is that when you transfer real property, you refer to the Land Registry title number as a form of identification. NFTs may end up serving the same purpose because, for now at least, the underlying agreement whereby Party A agrees to pay £X to Party B for the asset, remains stubbornly offline.
Other questions also remain about the energy consumption associated with mining, which is required to ensure transactions can be recorded on blockchains. However work is being done to mitigate this and "mining" is due to be replaced by "staking", but that's for another post...
What do you think?
NFTs are "one-of-a-kind" assets in the digital world that can be bought and sold like any other piece of property, but they have no tangible form of their own.