What do you buy when you buy an NFT?

The $3 million dollar tweet.

| Part 1 | Part 2 | Part 3 | Part 4 | Part 5 |

On March 23, the technology sections of several news websites reported the same story. “Jack Dorsey’s first ever tweet sells for $2.9m” said the BBC. “Twitter CEO Jack Dorsey sells first tweet as an NFT for $2.9M”, wrote CNET. The Wall Street Journal went with a similar headline, as well as most other publications. As I pointed out on Twitter, these headlines were inaccurate, the tweet did not sell because it was never for sale. What was sold was not the actual tweet, but a non-fungible token (NFT) of it. As I have discussed in the two previous blog posts dealing with NFTs (here and here), an NFT is not the actual work itself, but it is often a chunk of metadata that has been encrypted using the original work.

Then, why the headlines? Why the incredible prices being paid? Why all the hype? I think that in part modern mainstream media operates in an environment where accuracy is sacrificed for clickability, and one has to admit that it is very difficult to convey the nuance of an NFT in a headline. But I also think that what is taking place is that when confronted with reality, a normal reaction will be one of disbelief. How can someone pay millions of dollars for some glorified metadata file written in an online database?  And it is even worse when it dawns on people that there is actually no ownership transfer at all, and that all the rights are retained by the creator in the first place.

The current hype is riding almost exclusively on the failure to understand what is being sold and bought, coupled with the often purposeful misinformation coming from various camps that have a vested interest in furthering the hype. The tech media loves NFTs because the hype drives clicks. Crypto-bros love the hype because it increases FOMO and drives up prices. In the process, some artists win, but most lose as their works languish in the platforms without buyers.

Types of NFT

We can attempt to clarify the ownership involved in the minting and sale of an NFT. Firstly, one has to distinguish between the three main types of NFT. Roughly speaking, these are:

a) The work is uploaded to the blockchain

The original work, or a copy of that work, is uploaded into a blockchain. NFT advocates often respond to the criticism that most NFTs are only metadata by pointing out that some projects allow artists to upload their artwork directly into the blockchain, so what is being sold is an actual copy of the work. This is a truly blockchain native work, and it can only be exchanged and transferred with other people in the blockchain.

It is true that there are a few such projects, but these tend to be limited because the cost of writing data into the blockchain is often prohibitive. This is a feature, not a bug, in Ethereum the cost of uploading a kilobyte of data is 640k gas (as explained in this yellow paper). At the time of writing, this would amount roughly to $13.61 USD per kb (this varies depending on a lot of factors). However, everything in cryptoland is determined by supply and demand, so the more you upload, the more it costs to upload it. Therefore, the cost of uploading data to the ETH blockchain increases exponentially, as described in the chart shown (source). According to this, the cost of uploading a megabyte to the ETH blockchain today would be around $475 USD. The result is that the existing artwork uploaded to the blockchain is limited by size, and in my opinion the results are not particularly impressive (I’ll let you be the judge).

b) The work’s ownership data is in the blockchain

A second type of NFT is one in which the ownership rights to the work are either part of the NFT, or are the NFT itself. The advantage of this is that one could be using an NFT as means to transfer property, which would mean that each transaction is a contract of sale in which the ownership of the work is transferred. To my knowledge, one of the most prominent use of this has been the implementation of Cryptopunks, in which a smart contract is the NFT, and this adjudicates ownership of the artwork.

The limitation of the ownership data being written into the blockchain should be obvious. The first problem is whether the smart contract itself can be considered a legally valid contract, it is entirely possible that a badly formulated contract would not stand up to legal scrutiny, however, if it fulfils the legal requirements for a contract, then there’s no reason to think that this would be an issue (more about smart contracts here). The second problem is that the smart contract itself is not proof of initial ownership. I can take any artwork from the many NFT marketplaces, claim ownership over it, and generate my own smart contract selling it. Garbage in, garbage out. The third issue is an economic one, there are not many implementations of this type of NFT because for the most part creators would prefer to maintain the copyright over their work, which would allow them to generate more NFTs of it. If you sell the rights to your song as an NFT, that’s it.

Edited to add: I minted an old screenshot from the game City of Heroes and selected the copyright transfer option. I’m highly sceptical right now that this action will stand up to scrutiny in many jurisdictions as to acting as a valid transfer of property. You be the judge.

c) The work is used to create an NFT

This is the most common type of NFT, for reasons that should by now be apparent. As it is too expensive to write data into the blockchain, and adjudicating rights may be useless anyway as the smart contract may not provide any proof of actual ownership over a work, and also it may not be in the author’s best interest to sell the rights to their work, so the majority of the existing NFT market has gone for the creation of small metadata file that can be written cheaply into the Ethereum blockchain. As I explained in previous blog posts, the NFT is not the work itself, but it is used to generate a hash of the work, and then this is used to create a non-fungible token, which is intrinsically linked to the original work.

The data in the NFT can be whatever the minter wants to include in it, but the main datapoint is a link to where the work is hosted (usually an IPFS service). One can also add who the author is, and any other data one wishes.

What is bought when buying an NFT?

The answer to this question will depend entirely on the type of NFT that you’re buying. For the types a) and b) above, the answer is that quite probably you’re buying the artwork, song, or text itself, but as explained above, there are reasons why this may not be feasible and/or desirable for the artist. So at least at present, for the most part NFTs fall under the third category, namely the NFT signifies the ownership of a metadata file.

It has become evident reading many of the articles dealing with NFTs, that this concept is still somehow elusive, so I will use Jack Dorsey’s tweet to illustrate the point. We’re going to assume that the tweet itself has copyright. Twitter’s terms and conditions specify that you own whatever original work you post to the service. The tweet itself exists as code in Twitter’s servers, but thankfully it can be embedded in other pages using a simple embed code, such as this:

<blockquote
class="twitter-tweet"><p lang="en" dir="ltr">just setting up
my twttr</p>&mdash; jack (@jack) <a
href="https://twitter.com/jack/status/20?ref_src=twsrc%5Etfw">March
21, 2006</a></blockquote>
<script async src="https://platform.twitter.com/widgets.js"
charset="utf-8"></script>


And it looks like this:

just setting up my twttr

— jack (@jack) March 21, 2006

When one uses a service such as Cent to mint a tweet, what one is doing is simply using the above code to generate a hash that can be turned into a non-fungible token. This token is precisely what one buys, it is nothing more than a transferable entry in the Ethereum blockchain, and not the original tweet itself, which is still stored in Twitter’s servers, and is still owned by Jack Dorsey. What Cent is offering is a service that allows Twitter users to link their own Twitter account to a Cent account (here’s mine), so you’re ensure to buy only an NFT that has been minted by the tweet’s owner. In principle, someone can make an offer on a tweet without the knowledge of the writer, take for example the now famous Ed Balls tweet, it will be up to Ed Balls to answer the offers, but to do that he will have to buy into Ethereum, as he would need a wallet and some funds to accept the transaction.

But then, anyone can setup a similar service using Twitter’s own embed codes and API, as it’s possible to turn anything into an NFT, so once again the much vaunted uniqueness and scarcity of an NFT dissipates upon close inspection. What is more, anyone could generate an NFT of any tweet on their own. I went ahead and saved the embed code to Jack’s first tweet and uploaded it to Pinata. The second step would be to mint and NFT out of it (but who would ever do that?). True, it’s not “signed” by Jack… but then again, that’s the whole point of this futile exercise.

What’s more, NFTs are completely useless as a rights management method. Take even the works that have been uploaded into the blockchain, or whose rights are part of the NFT. In order to be sold, these have to be shown in a browser, so they’re just one “Save Image As” click away from being copied.

So what one is buying with an NFT is an idea, the idea of uniqueness. But I have been arguing that this is illusory, it is part of an ideology of scarcity that is at the heart of many types of cryptocurrencies. In a world in which information flows freely, a few cryptocurrency enthusiasts have found a way to sell the idea that digital items can be made scarce. This was already attempted with DRMs, but this iteration is not even good at keeping the goods locked.

This is why it is so difficult to explain what an NFT really is. People tend to assume that the NFT confers ownership over the work, otherwise the price makes no sense. But the price makes sense if one thinks of this as a combination of a bubble, possible money laundering, and also the implementation of an ideology of digital scarcity. Proponents of NFTs will argue that this is a new paradigm, that the NFT connects the buyer with the creator in a much deeper manner than a mere signature. There is a lot of talk about maths, hashes, uniqueness, and the art being internet native, whatever that means.

Concluding

The reality is that one is buying a link to a file. But also one is buying into an ideology of value and scarcity. For many of us the illusory scarcity is not worth it, for many it is what draws them to the space in the first place. In the background there’s the inescapable question of environmental cost. Is it worth it?

Only time will tell.