A Q and A on NFTs: What they are and the legal, creative, and environment implications of this hot blockchain application

NFTs. Non-fungible tokens. These are digital assets you can buy and trade, just like artwork, farm ground, or stocks. NFTs are one of the latest additions to the digital world that’ve grown in popularity over the last year or so, with some costing millions of dollars to buy. Popular images, gifs, and even tweets have been minted as NFTs. Remember the Nyan Cat? It’s an NFT. But what does that exactly mean? There are many questions surrounding NFTs, such as what they are (or could become), why prices are so varied, what makes them special, and why there are now concerns about them. 

ECE Associate Professor Lav Varshney and postdoc researcher Kyle Soska answered some of those questions. Varshney specializes in information theory, artificial intelligence, and network science. Soska is a postdoc under ECE and CS Assistant Professor Andrew Miller, who has expertise in cryptocurrency and blockchains. 

What are NFTs, and why is there now a big boom in digital art surrounding them?

Kyle: NFTs at their core have actually nothing to do with art. It's essentially a binding between some kind of identifier (this could be your public key on a blockchain) and some piece of data (a picture, a link to a picture, etc). It could be a deed to a piece of land, or it could be a ticket to a concert or a number of things. But in practice, NFTs are most commonly either a serial number for some item in a game, or a link, or a URL to a picture, or something like that. That's typically what 99% of them end up being. 

The boom in digital art is, in my opinion, mostly speculation. It's this idea that, sometimes art has really bizarre, spooky values, and a banana nailed to a wall is suddenly worth millions of dollars, and if I have good tastes, maybe I can find something that'll ascend in value very quickly. Digital Art has other kinds of implications. For example, Twitter has this thing now where you can link your NFT to your profile. Since forever, we've had avatars that we use online to represent ourselves, and so NFTs can be thought of as part of your Avatar complex.

NFTs can refer to a digital image, but people can still copy and paste the image without having its NFT. Meanwhile, you have artworks like the Mona Lisa, which there is only one of. What makes NFTs special?

Kyle: I would say that instead of comparing NFTs to things like the Mona Lisa, I would compare a NFT to an item in a video game. There have been a lot of video games in the past that have created items (skins). Basically, it's a cosmetic upgrade to a character that you play. I may have to pay real money to open loot boxes to get a chance of getting a rare skin or something that's highly sought after. And the markets for these things have been huge. There are records of these kinds of skins trading amongst players for like $3,000, or $4,000, or $5,000. There's something about owning it that that connection is worth something to people.

What role will NFTs play in the new metaverse?

Lav: I think it is still uncertain what the metaverse will look like. One role that NFTs could play is to allow transactions of unique items in the metaverse. Thus far, NFTs have been largely focused on purely digital items like visual art and lists of weapons for video games. But there are also strong possibilities for connecting the metaverse back to the real world, for example, NFTs for plots of land—and is fundamentally non-fungible—or food, or scientific research ideas, or other unique items like that.

Like Bitcoin, which soared and then crashed recently, are NFTs subject to wild fluctuations in market valuation? Are they an investment or a guilty pleasure?

Lav: The term that people use, tokenomics of NFTs (the economics of these tokens) is hard to predict. There's volatility. It's usually unclear which NFT projects will take off and which will not. There have been some studies showing, for example for ones that have visual art as their basis, that the visual properties of the art influence their valuation, but the network structure of the community is also important. There are a lot of factors that drive value. If you think about the sociology of this, along the lines of research by Matthew Salganik on the popularity of songs or books, the intrinsic quality does make some difference but also a lot of uncertainty and luck.

Kyle: It's actually worse than the stock market. NFTs have all of the bizarre pricing properties that traditional art does. Traditional art is kind of weird in the sense that, what is a painting worth, and if there's exactly two people who are very rich, who both want this painting, it could be worth a tremendous amount of money. But the third highest bidder might hold it at like $10 of value. And who's actually buying this stuff? Maybe I'm selling 100 things and the first 10 of them, I bought myself. So I've created some kind of a precedent for what other people have paid for it, unbeknownst to the public that it was just me buying my own art.

These are kinds of the things that have already happened for centuries in traditional art markets, and it's no exception here. The fact that it's digital doesn't mean that those things go away, and in fact, it means that things are accelerated. Traditionally, if a piece of art sold twice in the same year, that's kind of a lot, but the same NFT can change hands 10 times in a day, and that's fairly normal. So things are like art markets have been but at a very accelerated rate. And I want to be clear, there's nothing wrong with the way that the market is currently unfolding. There's no rules, right? This is sort of intentionally not a regulated space. So the fact that I can buy my own NFT collection is sort of a feature, not a bug here. You're going to get things like speculation. You're going to get things like goofy pricing where things go up and down really fast, but I think that's part of what attracts a lot of the people who are interested in this.

Cent halted NFT sales on Feb. 6 due to plagiarism concerns. OpenSea has also said that more than 80% of the NFTs minted for free on its platform were "plagiarized works, fake collections and spam". What does that uncertainty mean for NFTs and those who buy and sell them, and is it possible for this to be regulated?

Kyle: I've seen a couple of cases like this and the way that it usually plays out is that you have some kind of an artist who is doing this as a passion project, they're releasing art, they've got a Deviant Art page or a Twitter account, and they put their art out there for people to enjoy. What ends up happening is that somebody goes to their page, saves a bunch of their images, and then mints them as an NFT collection and sells them. That in and of itself isn't necessarily a problem. The problem is that people come up and then buy these things for a substantial amount of money, and the value is not being captured by the original artist, it's being captured by the guy who minted the collection, and that seems super wrong.

In terms of legal statute today, I don't think that there's anything wrong with this, but even OpenSea and a lot of these marketplaces acknowledge that something doesn't feel right about this. But it's not exactly clear. What part isn't right? Is it that a link to a copyrighted image, or an image that wasn't owned by the person who minted the NFT is wrong? Is it just wrong that people make money off of other people's hard work? Is it something else entirely? But it does feel a bit wrong.

Lav: Cryptocurrencies are starting to face financial regulations in various countries, and similar regulatory regimes have been proposed for NFTs.  More interesting, however, is considering NFTs from an intellectual property perspective due to their creative elements.  There are many creative domains where there is no intellectual property protection; tattoo art, for example. There are no copyrights on tattoos, and yet there is a cultural norm that prohibits copying. That's an example of a domain where, despite the lack of intellectual property rights, things still seem to work out. There is still copying, but community standards actively discourage it. I think it's possible that NFTs could be more like the realm of the tattoo artist, where one does not need regulation, or it's possible it could go more towards strong, formal intellectual property enforcement. It is still unclear which way it'll go.

There is some controversy in the art world surrounding the unlawful use of other people’s art to create NFTs. The original creators are then locked out of using their own art. How should we approach this problem from a legal and societal perspective?

Lav: I think this is very problematic. I think one of the great promises of NFTs has been a way for creative folks, artists and musicians, and others to monetize their creativity, especially those who come from disadvantaged groups and who are often exploited. Indigenous communities have faced this kind of intellectual property theft for a long time as well.  NFTs should offer creative people a way to monetize their creativity and grow cultural wealth, but if other people mint their hard work, that is not right. I believe there is a need for a mechanism [to protect their art], but it is unclear to me how to construct such a thing besides social norms or legal regulations that I had mentioned before. 

Kyle: Generally, if your artwork was sitting out there, it's already public. Which is why if you were an artist who was looking to monetize your work, likely what you would do is you would release your work either in like really low resolution, or with some kind of obnoxious watermark over it, or something like that. You'd basically be giving a teaser of what it could be, but the actual raw image, the thing that you generate, you wouldn't release without payment. But if the artist is out there releasing their full work for free to the public, I don't know that they should really have an expectation that they own it anymore, or that somebody else can't copy it. I think that they can be properly annoyed, though, that somebody is profiting off it, and that there was a market out there to buy their work the whole time, despite the fact that they released it for free, and that somebody else captured that market and not them.

Should there be any concern regarding fair use of images that are copies of NFTs?

Kyle: I think this really gets to like the expectation of what you actually own when you own an NFT, because when you own an NFT, you obviously don't actually own the image. The image is out there. Everybody can right click it and save it. So what you have is not the image, it's something else you have, this binding that associates you with that image. You own the association. I don't think that there should be an expectation that because I own an NFT that gives me or grants me some sort of exclusivity over the ability to use the image. Anybody can use that image, and I shouldn't expect that everybody politely stops using the image because I now own the NFT of it.

What is the impact of NFTs on the environment, and should we be concerned about this?

Kyle: The impact on the environment today is actually quite large, and that is largely due to a function of many of these NFTs existing on top of the Ethereum Network. What happens as a secondary effect of the popularity of NFTs is this creates a lot of demand for the Ethereum Network’s currency, ether. This therefore creates a lot of demand for mining the Ethereum Network and that manifests in electricity consumption. I don't have the exact figures, but it's staggering. This is not a technical limitation of NFTs itself, it's more a function of how NFTs are currently implemented and used right now. 

So NFTs, for one reason or another, exist on blockchains. They don't have to, though. You could imagine NFTs existing on centralized platforms or alternative versions of blockchains that have a smaller energy footprint, and maybe less aggressive assumptions about what adversaries can hack the network. So NFTs don't require fundamentally the negative environmental impact that many NFTs today generate as an externality. But right now, the current implementation and what's popular is quite harmful to the environment because of its reliance on these sort of very heavy blockchain solutions.

Is there anything else you think people should know about NFTs? 

Lav: They are such an interesting technology, but I think it is still to be seen how they'll impact society at a broader level. It seems to me that keeping track of transactions in an open and secure manner, like NFTs allow (and broadly blockchain generally allows), will be important as we go forward. This idea of augmenting personal trust and institutional trust with these kinds of distributed trust mechanisms, and markets created on top of this kind of distributed trust, can help societies take collective actions that they couldn't otherwise. I think that there are some possibilities as we go forward with reshaping things, both in the physical world as well as in the metaverse.

Kyle: There's two sides to the argument, because one side makes the very good point that 'look, it's just an image,' or 'it's a link to an image,' or 'a picture of an image.' It seems like peak absurdity to ascribe huge dollar values to these kinds of associations, because again, there should be no expectation of exclusivity to the image. It's not really clear that what you own is much. So this feels absolutely absurd. But I would say the counterpoint to that is that what you're really buying is something that looks like membership in a club, right? You're basically associating your identity with a thing, and that's that's basically as good as a club membership. In fact, there have been actual parties that have been thrown, where the requirement to get into the parties is that you need to prove ownership of one of these NFTs to show that you're one of the club members.

But again, you could imagine a lot of things [with NFTs]. You have these NFTs which are transferable, and this maps well on to real world problems. You could imagine that NFTs map onto things like property, and certainly in the digital space in the metaverse, people are already selling NFTs of digital property, basically the land deed itself is encoded as the NFT. It's this binding, and then I can take that binding and I can sell it to somebody else, and now they're bound to the physical property. So there's a lot of things that I think NFTs could be useful for. But I think that the sort of crazy high dollar value speculative art market right now that we see is going to eventually be a short run phenomena and not what NFTs eventually end up settling as.