Recently, the artist Beeple became one of the most valuable living artists by selling a purely digital piece of art for $69.3mm at an auction. Using similar technology, a website called NBA Top Shot has been selling many tens of millions of dollars of digital clips, highlights from past NBA games. In response, too much of the public attention has focused on the inexplicable price tags for these assets, and the fact that it’s easy to make copies of things like digital art — or items like Jack Dorsey’s first tweet, which also sold for millions. The numbers are eye-popping but beside the point. The focus should be on how the innovative underlying technology — called non-fungible tokens (NFTs) — changes the technological and legal landscape for digital assets.
NFTs based on blockchain technology do two things that have so far been very hard to do with digital assets.
First, NFTs verify that a particular asset is the original one. This has always mattered in the physical world, which matters for markets like collector’s items, antiques, memorabilia — where original fetch more value than replicas — but also for things like wills and various documents where the law requires an “original.” The sentimental, economic, and legal value ascribed to originals has largely been lost in the digital world because of the difficulty of proving that something is, in fact, the original. NFTs change that. They allow people who care about originals to find and pay for them.
More than that, the ability to market an original digital asset — combined with the ability to reliably transfer the original asset in a way that keeps it distinct from copies — will create entirely new markets for digital content. Take the example of Fortnite, a free video game that makes billions of dollars because users buy digital additions like costumes and “skins” from the video game. The creators of Fortnite made certain items rarer and more difficult to attain, so users will pay more money for them. Think of it like any limited edition good. But with NFTs, this can now go a step further. In theory, Fortnite could make it so that the best or most notorious players are able to sell the items they have as important and unique digital memorabilia — just as Michael Jordan can sell the jersey he won on a particularly memorable game, the best players of these video games can sell assets that are associated with memorable moments for fans of that game.
Second, and more importantly, NFT technology permits a verified transfer of a digital asset, so that the seller can no longer use it. In physical property, this concept is straightforward and usually taken for granted. If I sell you a banana, I no longer have it; you do. This is known as a rivalrous asset — something that cannot fully be enjoyed by both buyer and seller. Before NFTs, digital assets were different; they were often non-rivalrous. This means the seller could sell the asset and retain a copy, and so on, such that multiple — theoretically unlimited — users could “have” the asset at the same time. It’s just like texting a photo to a friend. It results in you both having a copy.
NFTs change this — or at least use technology that gives us the option to change this. They permit a seller to transfer a digital asset so that the seller no longer has that particular asset. This was the basic innovation underlying bitcoin. The fundamental problem with digital money before bitcoin was that if I sent you a dollar, while keeping a copy of that dollar for myself, we would instantly have an inflation problem. The classic contemporary solution to this problem was relying on a centralized intermediary — e.g., a bank — to ensure that the dollar is removed from my account and posted to yours. Bitcoin changed the game by removing the need for that intermediary.
In doing so, it provided a solution to the inflation problem — a solution that has applications outside of just digital money. Take the example of Napster. In the early days of accessing music online, users could download music from other users, while the original user kept a copy of the song. That means I could send you a song and keep a copy of it at the same time. This allowed endless copying of music which meant no one other than the first buyer needed to buy any particular song. This was a potentially existential challenge for artists and a music industry that relied on revenue streams from selling music. The music industry responded with aggressive copyright infringement lawsuits, convoluted digital rights management technologies, and ultimately shifting much of music consumption to a licensing model on favored services like Spotify, rather than the ownership model that existed before the internet (where fans would buy physical albums from stores).
But now the ownership model looks more feasible. With NFTs, every legitimately purchased copy of a song would have its own NFT (meaning that if you and I both bought a song, we would have the same song but a unique NFT, which act almost like a receipt to prove we have a real and legitimate copy). The buyer of that song could then later sell that song, just as they might sell a used book, and this would no longer be an existential challenge to artists, because the sale would mark an actual transfer, just like the sale of used albums before the internet. NFTs could, in theory, spur the creation of robust secondary markets for things like digital music which before were very difficult to create.
Many commentators have overlooked this important innovation because they point out that some of these tokens don’t necessarily transfer the actual copyright, meaning that purchases of the NFT can’t prevent others from replicating the content associated with that NFT.
But this misses the point. Insofar as the value of a digital asset is premised on it being an “original” — like an original will, or an original work of art — then copies or replicas will inherently be less valuable. Aside from that, however, this point overlooks that nothing is stopping NFTs from conveying broader rights of ownership, like those associated with copyright. The owner of a work of art could, if she chooses, sell the intellectual property, so that the downstream buyer can use IP laws like copyright or trademark or even patent laws to prevent others from making unlawful copies. IP laws in the U.S. expressly contemplate that IP owners can sell their IP, and NFTs can facilitate digital transfers of those rights. More than that, the blockchain technology underlying NFTs can be helpful in enforcing these rights. If an NFT is used correctly, any copies would have to be made outside of the blockchain that houses the NFT — and thus easily identified as a copy, rather than a legitimately transferred asset. This is important because it functionally helps to mark counterfeits.
It’s important to understand that, at their core, NFTs and intellectual property law have a significant functional overlap. The foundational challenge of intellectual property has always been the same: it can often be copied (and is thus non-exclusive or non-rivalrous) and shared by many, which makes it less valuable to the creator because others can just copy it. In order to encourage innovation and art, IP law offers a limited monopoly to creators and innovators, and a cause of action against people who try to make illegal copies. This was a legal solution to the problem, and the result is a very robust set of incentives to invent patents and likewise to write and to create art and receive copyright protection. NFTs now offer a technological solution in the context of digital property — the creation of digital assets that can verifiably be transferred — and the result will likely be the same: the incentive to innovate in digital spaces will explode.
The deeper takeaway here is that NFT technology enables the creation of digital scarcity. Human beings have a paradoxical but important relationship with scarcity. We both work hard to eradicate it — so that everyone can have not just food and water, but amenities and things that make life easier — and yet we need it to drive value and innovation. The price of any good is, by definition, at the intersection of supply and demand. If available supply is unlimited, the price, even in the face of great demand, is pushed towards zero. NFTs introduce a way to create more digital assets that are limited in supply, and therefore can be sold at a price higher than zero. This ability to profit in turn spurs innovation to create digital assets that other people will find interesting or useful. The NFTs that are making headlines today may be wildly overpriced, but they are the first iteration of an important new technology. In the long run, one can imagine a future in which NFTs and AR/VR combine so that people build and actually own digital spaces for gatherings — with friends or for work — and hang their digital art.
