THE BASICS

« Understanding is a reflection of creating. »

Auguste de Villiers de L'Isle-Adam

What is an NFT?

A non-fungible token (NFT) is based on a unique and tamper-proof digital identifier that authenticates a digital file.

The NFT represents rights determined by its issuer and is registered in a blockchain. It is created by a “smart contract” (software that defines each property of the NFT and automates the actions around it: purchase, resale, royalties, etc.).

More simply, an NFT represents a piece of content (artistic work, image, sound, video, ticket to a show, etc.) on the blockchain, and this NFT certifies that each work is unique and not interchangeable.

It serves as a certificate of authenticity and digital ownership, constituting digital proof of the provenance and ownership of the work with which it is associated.

What an NFT is not:

An NFT holder is not vested with tangible and intangible property rights. When purchasing an NFT, the buyer does not receive the underlying work, but a digital token. The author of the "tokenised" work remains the sole owner of the moral and economic attributes of the copyright on his work, unless an assignment of copyright has been carried out.

Similarly, the creator of an NFT must respect prior intellectual property rights, as is already the case for physical works. Thus, if an artist became aware of a crypto-counterfeit, he or she would be entitled to take legal action to defend his or her copyright, both moral and economic. This was the subject of the dispute between Quentin Tarantino and Miramax, which has sued the director for selling unreleased extracts from his 1994 film Pulp Fiction as an NFT.

What is the purpose of the NFT?

Owning an NFT simply means being recognized as the holder of a digital certificate of ownership of a token. It is a digital asset that allows:

• For the buyer, to speculate on its value,
• For the author of the work, to regain control of its monetization without an intermediary (gallery, studio, label, etc.)

For the creator (artist, museum, festival, sportsman, gamer, etc.), the NFT is a triple lever enabling different benefits:

• The creator can regain control of its rights, in particular by setting up a smart contract allowing the collection of royalties in the event of resale of the NFT, similar to the “droit de suite” for physical works;
• NFTs can accelerate the transmission and dissemination of our cultural heritage and prvoide a new source of income for collectors, museums, galleries and artists;
• NFTs can help create communities, like the "Bored Ape Yacht Club", where the tokenization of monkeys is the symbol of belonging to a select club. In addition, the NFT can be associated with events, performances, meetings with artists, etc. For example, the Coachella music festival has put lifetime tickets on sale in the form of NFTs, allowing the buyer to speculate on their resale price!

Moreover, NFTs could be the catalyst for the emergence of a common cultural heritage in order to preserve national and world treasures and to allow new sources of income for museums. Indeed, the NFT is a powerful tool for cultural communication. For example, British Museum in London has offered 200 NFTs of Hokusai works for sale to promote its exhibition Hokusai: The Great Picture of Everything.

The NFT could well mark a revival for art galleries and museums following the closures of cultural venues due to Covid-19, which has accelerated the transition to a digitalized relationship with the public.

In practice, the cultural and commercial experiments carried out thanks to NFTs open up new and disruptive opportunities where legal security will be an essential question for all actors on the market.

What are the risks of NFTs?

There are several points to be aware of: 

1. A volatile market

There are no guarantees on the value and durability of the NFT, as with underlying crypto currencies such as the ETH.  The market is also susceptible to scams and market manipulation such as wash trading, where a fraudster artificially inflates the value of an NFT by “selling” it to himself, thus creating a false trading history.

2. The plurality of blockchain technology

Creators need to understand the basis of blockchain (a decentralized digital register open to all that enables the authenticating of all transactions on the chain). They also need be discriminating in the technology they use, to limit their exposure to scams that can lead to the creation of digital counterfeits by third parties. The recognition of the probative nature of blockchain technology is not yet fully accepted according to a simple ministerial reply in France in December 2019.

3. Sector-specific marketplaces

In order to find the most suitable marketplace for NFT, it is necessary to carry out extensive research on the different available marketplaces.

4. Virtual communities

The community that promotes an NFT may be made up of bots, resulting in artificial inflation of speculation ...

5. Potential insecurity of smart contracts

The smart contract software on which an NFT is based allows the organization of the terms and conditions applicable to its first sale and subsequent resales, and must be checked by specialists, since it is irreversible and contains all the data specific to the object it represents, in particular the functionalities of the standards defining the rules of possession and transfer of the NFT.

In short, the resale right must be strictly regulated, particularly the determination of cascading royalties, which can be difficult to follow.

For example, the artist Beeple has stipulated in his smart contract that he will receive a 10% commission on each resale of his NFT, Everyday: the First 5,000 days.

6. Cybersecurity and the protection of your digital identity

Identity theft on marketplaces is on the rise, as in the case of "StakeTheWeb", which has been used against influencers. Like identity theft or hijacking for pornographic purposes, the theft of art images and accounts must be the subject of particular vigilance.

7. Crypto counterfeiting

The NFT medium potentially lends itself to crypto conterfeiting. For example, in December 2021 Hermès discovered that an American artist, Mason Rothschild, had created a series of 100 NFT interpretations of the iconic Hermès bag, the "Birkin", entitled "MetaBirkin", and had offered them for sale on the OpenSea platform for more than 10,000 USD apiece.

As a matter of principle, any unauthorized total or partial reproduction or imitation of a copyrightable intellectual work constitutes an infringement. This applies to both material and virtual creations. Therefore, under French copyright law, the reproduction or imitation of a copyrighted work in an NFT could constitute an infringement. It is therefore easy to see why an NFT, combined with the blockchain, could be an effective tool in the fight against counterfeiting, since it theoretically makes it possible to identify the counterfeiter.

As this is a free, open and creative ecosystem, with little outside regulation, it is imperative to apply some basic common-sense rules, the first of which is never to buy an asset if you do not understand it.

Data Ring aims to offer a space for reflection and to help creators to make informed decisions about their NFTs.

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