Everyone is looking for them, everyone wants them, but what NFTs really are? We deepen the theoretical, technical and legal aspects of non-fungible tokens. Even more about their relationship with blockchain technology and application in the art market. The term NFT stands for Non-Fungible Token. Let’s immediately clarify the meaning of fungible and non-fungible. A Bitcoin, for example, is fungible since it can be replaced with another. NFTs, on the other hand, are unique pieces: they cannot be replicated or replaced. So, what NFTs are, how they work, how to invest in “non fungible tokens”?

Ownership

Non-fungible token (NFT), “ownership” certificates on digital works: these tools are having great success. It is therefore interesting to deepen their characteristics in detail to understand what “Token” is. Indeed, those who buy an NFT really “buy” and what they can then do with that “token”?

And this in-depth analysis is a must both from a legal and a technical point of view. Indeed, it will help us to understand the fragility of the system. If we examine in detail what an NFT is and what is actually on the blockchain, we realize that very little of the purchase “contract” is contained on this distributed register and that all other data (the work itself, the conditions of its purchase and the rights of the “owner”) are actually outside the register, with severe problems of conservation and accessibility of the data over time.

We also realize that these NFTs do not depend only on blockchain technology. But also on other solutions (such as the hashing process) that could be overcome over time (the continuous increase in computing power could in fact allow to “break” some of these algorithms, thus making the unique reference to the NFT very unreliable).

Uniqueness

From legal point of view, we realize that the value (uniqueness) of the NFT does not really rest on blockchain technology. But on the trust between the seller and the buyer, with the former trusting that the latter will not sell or has not already sold the exact same work over and over again, reducing that NFT (paid perhaps millions of dollars) to a derisory value (because if one NFT cannot exist the same as the other, there can be an infinity of extremely similar ones and all aimed at transferring the “ownership” of the same work).

What is an NFT (non fungible token) really?

NFT is the acronym for non fungible token. Something unique that cannot be replaced by anything else. For example, a cryptocurrency can be exchanged for another cryptocurrency while a work of art is unique and therefore non-fungible.
An NFT is digital content that represents real-world objects such as artwork, music, games, and collections of any kind.

Whoever buys a work linked to a non-fungible token does not buy the work itself. But they buy a guarantee through a smart contract or we can call it as peace of paper. It all starts with a digital version of the artwork. Typically, a digital photo or documentation of it filmed and saved in digital format is used. This digital version is nothing more than a long sequence of numbers, 0 and 1 in computer language.

This sequence is then “compressed” into a sequence, called hash. It is important to underline that whoever owns the digital document can easily calculate the hash. But it is practically impossible for anyone else to reconstruct a digital document starting from a hash.

The next step is storing this hash on a blockchain, with an associated time stamp. The use of these tokens has paved the way for an automated hash market. The creator of the hash can use the token to add their own hash to it and resell it. Using payments like ETH coin used in Ethereum.

The NFT keeps track of hash sales internally, so it is possible to map over to its creator. Thus demonstrating ownership. This mechanism therefore provides proof of authenticity and, at the same time, ownership of the work.

The owner of the hash, as reported in the NFT, can prove his rights without the need to contact intermediaries. As long as the blockchain on which his token is hosted will continue to be active.

How to buy an NFT

To buy an NFT we must therefore use a blockchain. In the vast majority of cases it is the Ethereum blockchain. Even if the market is rapidly crowding with competitors, among which Flow Blockchain stands out (which has “grabbed” the sale through NFT of the best games of the NBA ) as well as some arrivals. Last minute such as Binance Smart ChainTRON and EOS.

We can define the blockchain as a decentralized and immutable database. Therefore, no one has the rights to modify the data already entered within it. A blockchain is created by a network of independent computers, which communicate with each other autonomously and therefore cannot be controlled by a single computer or by a single state, and which can be remunerated for their contribution to keeping the blockchain alive.

Storing the hash and its timestamp inside a blockchain is therefore a way of saying… “At this moment I was in possession of a photo or filmed shot of the work of art”. No one else can do the same and no one else can modify or falsify this information. You know why? Because it is on a blockchain! Therefore immutable and decentralized. The first application of the blockchain was at the service of Bitcoin, a cryptocurrency that uses the blockchain to ensure reliability of transactions and to avoid the problem of double spending.

Over time, however, different “versions” of the blockchain have arisen. The last step came with Ethereum, a blockchain that, since 2015, has popularized the technology of smart contracts, i.e. computer programs executed by a blockchain, from which they inherit the properties of reliability and decentralization. Smart contract is a computer program that must be executed according to what is declared by its public code. A single computer of the blockchain network cannot replace it and cannot modify its functioning.

In particular, programmers have developed smart contracts. Therefore non-fungible tokens (NFT), which keep track of who creates, sells and buys specific sequences of numbers. This will be the hashes of the works of art. The best known are the Ethereum NFTs, which follow known standards such as ERC-721 and ERC-1155. So what does the Ethereum blockchain do when hosting an NFT? In fact, the system guarantees that the NFT does not change (the certificate is unique and cannot become something else over time) and on the other hand certifies the “transfer of ownership” of the hashes managed by the NFT (registered on its unalterable blockchain).

What an NFT “contains”

If we take a closer look at what the NFT “contains”, we realize, that the data entered are very few. Also for a matter of energy used and available space, its not possible to insert large files in the blockchain. Otherwise it would end up weighing down the whole chain. But only a few elements (the hash of the file together with some properties).

So the owner of the Beeple work auctioned by Christie’s (paid a whopping 69 million dollars) now owns a certificate hosted on the Ethereum blockchain. It includes a unique identifier of the stipulated “contract”. The certificate isn’t directly “written” in the blockchain, but connected to it. It will (probably) contain some properties of the token and the hash. These properties refer to a file that contains the image created by Beeple.

Some of these NFTs also contain the contractual conditions of the sale, but not always. Indeed, more often these are found only on the site that the intermediary sells. With the risk, however, that the complete purchase discipline ends up lost when the platform’s website is no longer valid. Here the first problems begin.

The critical fronts

What will happen when the hash functions are passed? What will happen if the Ethereum blockchain were to be abandoned?… And therefore no longer maintained by a community of subjects who can effectively “outnumber” anyone who tries to pass off a blockchain that is actually not genuine? What will happen when the external contents to which the links / hashes contained in the smart contract refer are lost? Interesting technical solutions have been proposed to tackle some of the above problems.

The technical solutions

For example, to avoid leaving a hash / url address the representation of the work sold, NFTs often make use of IPFSIPFS stands for InterPlanetary File System. A simple url could in fact fail because the site manager stops paying for hosting. Even more, because it deletes the file to make room for new content. In this case a hash may no longer be of any use when the file it refers to is lost.

IPFS addresses, on the other hand, are “links” aimed at content on IPFS network. It is a distributed file system, which we could associate, in its operation, with peer to peer file exchange systems. As long as someone on the IPFS network hosts that content, it can be found. This creates a potential multitude of hosts that ensure that the file is kept online and this increases the chances that the content will survive over time. As for the different blockchains on which the NFT is hosted, it is clear that they will have to start providing some “guarantee” of survival if they want to conquer market shares.

If the Ethereum blockchain is likely to have an assured future even for the years to come given that it moves a popular cryptocurrency and a smart contract system used for numerous different purposes, it is clear that the other competing blockchains will have to offer reassurance of a different kind. to “guarantee” their survival.

Furthermore, with the flourishing of the NFT phenomenon, investors will have to pay maximum attention to the blockchain on which smart-contracts are hosted, to avoid buying improvised, poorly decentralized and consequently unreliable blockchain-based certificates that could later be abandoned.

How to create an NFT and how much it costs

Creating an NFT is extremely easy and the cost is limited to that of the transaction required to “seal” our digital product on the chosen blockchain. A good starting point is for example the Open Sea marketplace, which allows you to start creating your own NFTs with a simple Ethereum wallet and a MetaMask account (a browser extension compatible with Chrome, Firefox, Brave and Edge). As an alternative to MetaMask it is possible to use further extensions, such as Coinbase Wallet or Fortmatic.

Once you have these elements, the starting point is obviously the work you want to “crystallize” in the digital token. Technically it is possible to insert any type of file in an NFT, but the supply / demand exchange platforms usually allow the creation of NFTs only in a limited number of image, audio and video formats. Usually there are also size limits (even here they depend on the fact that the platform will then have to “propose” the content to users and not on the limits of the technology that moves the NFTs), Open Sea for example has a limit of 100 mb, but advises creators not to exceed the 40 mb threshold.

How much does it cost to create an NFT

The cost of creating the NFT then depends on the cost of the transaction on Ethereum (at the time of writing it ranges between 10 and 100 euros). At the beginning, platforms often require a double transaction, the first for “initialization” of the Ethereum wallet and the second for the creation of the NFT.

Thereafter, the pure cost of creating the NFT is equal to the transaction on Ethereum, unless you opt for more “exclusive” platforms where service costs may also be charged. Once our wallet is credited, some platforms even allow you to sell NFTs without paying anything. The actual creation of the NFT will only take place once it has been sold on the marketplace, so as to avoid digital artists having to anticipate the costs of creating their token.

At that point all that remains is to sell the work. In the various marketplaces it is possible to offer it at a fixed price or at auction, awarding it to the highest bidder within a fixed period of time. Once a subject has offered the price that we have indicated or has won the auction, he will be able to transfer the NFT to his wallet, thus obtaining proof of possession of the work of art sold as well as the crystallized demonstration of the fact on the blockchain. that its purchase comes from the legitimate author of the work, or from the creator’s account.

How the NFT marketplace works

These steps explain in a simple way how the NFT market works:

  1. The first step involves registering with an NFT platform
  2. Once registered, it is necessary to create and set up a wallet or virtual wallet on the chosen platform to store non-fungible tokens and cryptocurrency
  3. After creating the NFT you will need to set the auction criteria and put the product on sale.
  4. Non-fungible tokens will appear for sale in the auction
  5. Bids will be made in the auction by buyers
  6. When the auction has ended, the seller will receive an alert with the buyers’ best offers
  7. Finally, the platform will manage the transfer of funds and items and will close the sales process.

How to invest in NFTs: platforms

If someone wants to negotiate an NFT the choices are the most varied. The most accessible platform, based on Ethereum, is Open Sea, which claims to be the largest NFT marketplace. On the site you can create and buy NFTs, but to do this you need an Ethereum wallet. The site offers the download of a popular crypto wallets are, MetaMask or Coinbase. Once set, you can buy the first ether (in fact it is a currency exchange operation from USD/Euro to Ether) to be spent in non-fungible tokens.

If, on the other hand, I want to “create” an NFT, I can do it directly from Open Sea or from alternative sites such as rarible, where the smart-contract that contains our work is sealed at a price that varies depending on the transaction costs on Ethereum (currently about 50 EUR).

An alternative that takes care instead of “selecting” the artists who can exhibit on their site is Nifty Gateway (nifty is a colloquial distortion of the acronym NFT).

There are also numerous specialized marketplaces: if you want to buy an NFT of a historical moment in the history of the NBA, the site to consult is NBA Top Shot, while for the purchase of tweets the reference site is Valuables. For those who want to grab one of the cryptographic “kittens” that started the NFT-mania again in 2017, the right site is CryptoKitties.

What are the rights of the owner of an NFT

When a person buys an NFT, the only thing they can say with (relative) certainty is that they own an NFT, a non-fungible token that refers to “something” (a work of art, a tweet, a nice basket by Le Bron James). Defining the rights on that “something” to which the NFT refers becomes complicated. In fact, from a legal point of view, not all NFTs are the same. The aforementioned CryptoKitties platform, for example, specializes in the sale of “tweets” on the Ethereum blockchain (and has negotiated the sale of Jack Dorsey’s first tweet for almost three million dollars).

On its website Valuables specifies that the purchase does not guarantee the owner any right on the “tweet” sold: it is only the transfer of tweets “autographed” by the author (identified through his twitter profile and his Ethereum wallet). The author, in selling the tweet, undertakes not to sell it more than once on Valuables so as not to create a proliferation of autographed copies.

It is therefore evident that the tweet in and of itself can be sold over and over again (exactly as it is possible to “autograph” several printed copies of the tweet itself) and it is only a legal commitment to “limit” its proliferation. If the author of the tweet were to decide to sell the same tweet twice on Valuables, obviously it could take action against Valuables and the author of the tweet, while it would be very difficult to take action against Jack Dorsey if he were to decide to (re) sell his first. tweet on another competing platform with respect to Valuables (unless there are internal agreements between him and Valuables, in which case, however, only the latter can act) or in other forms.

But even the NFTs that transfer the “ownership” of a work, in reality most of the time transfer the ownership of that copy of the work, without preventing the free proliferation of the same on the web.

If with an NFT further rights on the work were acquired (e.g. with a transfer of copyright such as that of publication, reproduction or processing of the work), these would be governed by a contract external to the blockchain (or at the latest certified on blockchain) which perhaps internally could refer to the sale of the NFT, but we would still go back to talking about an “ordinary” contract in terms of forms and safeguards.

This means that the commitments of the author “ascertained” in the blockchain are solely those of selling the work If Beeple one day were to resell his work “EVERYDAYS: THE FIRST 5000 DAYS”, varying a simple pixel and thus changing its hash, would be entitled to do so and the remedies to prevent it would be only contractual (it is therefore essential a contract in which it is specified that what was sold is not “the NFT containing that computer copy” of “EVERYDAYS: THE FIRST 5000 DAYS”, but rather the work itself) and non-technological.

The blockchain technology allows us to say only that the purchase auctioned by Christie’s for 69 million dollars constitutes the first sale of the work, nothing else (and not even with absolute certainty, Beeple may have already sold the work a thousand times months. first, generating different hashes each time as a few pixels vary).

Still, if one day Beeple were to decide to create a series of 5000 variations on the theme of his work “Everydays: the first 5.000 days”, he would certainly be entitled to do so, except for his contract with the auction house Christie’s or the one with the buyer explicitly exclude this right. What is indisputable, therefore, is that the art market on NFTs is not driven by an unavoidable technological system, but is driven, once again and as it has been for thousands of years, by the current trust between author and buyer.

A further critical point of the NFT market (which started with art but is moving to increasingly disparate sectors, thus ending up by forcing the legal mechanisms that regulate transactions relating to works of art) is that of the right of art. author.

First of all, in a global and unregulated market such as that of NFTs, it is easy to imagine that copyright infringement cases are on the agenda (especially when it is not the millionaire transactions that earn the headlines), as well as that it is difficult to obtain protection especially at a transnational level, with the difficulties of a cross-border recovery of compensation due and with the conflicts between copyright regulations further complicating the situation (especially if the transfer of rights is not clearly regulated and in any case it is not included in the NFT).

It is difficult then in the digital art market not to talk about works derived from other works, of reinterpretations, of contaminations, which often create works of art that are a real nightmare when it comes to reconstructing the bundles of copyright. that overlap it.

In this sense, the example of the NFT which will be auctioned by Christie’s and “created” by the model and actress Emily Ratajkowski is significant. In deciding which work to include in a smart contract, Ratajkowski opted for a photograph that portrays her in front of a painting (made by a third party and of which the model has a copy) which in turn reproduces a post from Ratajkowski’s Instagram profile, which shows a photograph of the model made for Sports Illustrated.

The provocation that this NFT represents is entirely legal and raises the question whether Ratajkowski can legitimately sell what is in fact a simple hash code of an image, although it does not hold all the rights relating to the image itself (with regard to which they could claim rights Sports Illustrated, the photographer of the magazine, the painter who made a picture from the Instagram post, as well as the photographer who photographed the model thus creating the “collective work” that became NFT).

For the future of NFTs it is therefore essential to clarify what the sold work is and whether the object of the NFT is simply a hash code, or a link, or the digital work to which the previous references refer or, finally, some or all rights to the work itself? From another point of view it must then be considered that often, in selling an NFT, the author agrees with the buyer to obtain a percentage on each subsequent transfer of the asset, an agreement that is then “transferred” from buyer to buyer.

On an economic level, this is one of the most interesting strengths of this tech market, and it is one of the not immediately perceptible traits that is determining its overwhelming success on the supply side. The impossibility of negotiating an NFT without going through a shared ledger (blockchain) guarantees maximum transparency for the artists, who therefore do not have to worry too much about the initial sale price of the work, being able to then take advantage of the subsequent “handovers” of the work. their creation and earn in proportion to any increase in the value of the asset.

The future scenario

The NFTs are an artistic drift that has shaken the art world, which on the one hand has finally given dignity to a creative form debased by its infinite reproducibility, but on the other hand it has created an opportunity for speculative bubbles and incursions of non-artistic products. exactly worthy of the name.

It is likely that this form of art is here to stay and that the first disparaging reactions (which for centuries have accompanied the evolution of the art world that are ahead of its time) are destined to be disavowed. However, it is important that enthusiasts approach this market with the necessary knowledge, including technical and legal ones, to be able to separate the wheat from the bran.

Examples of more expensive NFT artwork

The hype of the NFT phenomenon has brought huge fortunes into the coffers of eccentric digital artists. The hype for these code snippets crystallized on blockchain has extended their use far (perhaps too much) beyond simple crypto-art.

For example, a German company created the “perfume of the metaverse”, a digital spectrogram of the essence produced by the company, while one of the founders of the web sold the internet source code as NFT (sold for 4.7 million euros ) and there are also those who plan to sell their genome as an NFT.

Last March a Saturday Night Live sketch made a mockery of the NFT phenomenon. The video of the sketch was then sold as an NFT, realizing $ 365,000. However, if we look at the ranking of the most expensive NFTs, we realize that crypto-art is the master, and that Beeple is the artist who most of all has been able to grasp this trend.

However, the estimates relating to the selling prices must be taken with a grain of salt since these are conversions into fiat currency of purchases made in cryptocurrency (with all the consequent fluctuations).

Here are some examples of more expensive NFT artwork:

1) Everydays: the First 5000 Days – Beeple 

60 million euros, approx.39,000 ETH. First in the rankings is Beeple, with his Everydays which is a collage of 5000 other works, sold by the famous auction house Christie’s last March, making NFT a mass phenomenon.

2)HUMAN-ONE – Beeple

25 million euros. In second place in the ranking we find again the combination Beeple and Christie’s, but the sale is much more recent and dates back to last November 9, when Beeple confirmed himself as the leading artist of the NFT phenomenon with the sale of a video-sculpture kinetics on NFT.

3) CryptoPunk # 7523

4) CryptoPunk # 3100

5) CryptoPunk # 7804

€ 10 million, € 6.7 million and € 6.6 million respectively. These three works, which it is really daring to define artistic, are part of a project of 10,000 stylized avatars, each made with different characteristics from the others, so as to be unique. After being released for free as NFTs back in 2017 by LarvaLabs, their price has only soared since last March, when the transactions of these precursors of the NFT phenomenon have multiplied. As for the enhancement of the individual “models” it is easy to understand why, among all the 10,000 avatars created by LarvaLabs, the one that has reached the highest price is the number 7253, that is the avatar that represents a subject wearing a surgical mask.

6) CROSSROADS – Beeple 

€ 5.7 million. Beeple once again appears in this ranking of the most expensive NFTs, with an image composed of a grotesque and ironic depiction of Donald Trump naked and lying on the ground.

7) A coin for the ferryman – XCOPY 

€ 5.2 million. Here too we have an “ancient” NFT. Created in 2018, this token created on the Ethereum blockchain which consists of a short video depicting a human figure sketched against a background of psychedelic colors, passed several times before being sold, on November 4th, for over 5 million. EUR.

8) Ocean Front – Beeple 

€ 5.2 million. Beeple again, this time with the image of a reinvented marine platform.

9) CryptoPunk # 5217 

€ 4.8 million. Still a CryptoPunk, but this time the avatar represents a monkey.

10) Stay Free – Edward Snowden / Source Code for the WWW – Sir Tim Berners Lee 

€ 4.7 million. Last place in the top ten for the first examples of less “artistic” and more “committed” NFTs, such as the internet source code, sold by none other than Sir Tim Berners Lee and sold for 4.7 million euros, and the Edward Snowden’s first NFT, also sold for about 4.7 million euros donated to the Freedom of Press Foundation, of which he is president.

The ranking of the most expensive crypto-art works is also full of bizarre products, such as the meme dedicated to the Shiba Inu renamed “Doge”, sold for the beauty of 3.8 million euros, the first tweet of Jack Dorsey, sold for 2.5 million and a dunk by Le Bron James, whose video was sold for “only” 170,000 euros.

The peculiarities of the NFT system (ie being hosted on completely transparent, although anonymous platforms), means that the ranking can be closed with an outsider, namely CryptoPunk # 9998, “sold” last October for about 500 million euro.

In reality, the transaction was recorded on the Ethereum blockchain, but it only constitutes the transit of the NFT (and conversely of the funds) from one Ethereum wallet to another owned (probably) by the same subject.

The advantage of blockchain operations can be seen precisely in these situations, with unimaginable figures that can be moved with minimal commissions and not proportionate to the enormity of the values ​​involved, indeed probably the funds were collected with flash loan tools that allowed the owner of the two wallets involved to set up a similar operation by returning the capital shortly afterwards and getting the world’s attention on his NFT.

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