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3 Problems with NFTs: Blockchains, Copyright, & Return on Investment

3 Problems with NFTs: Blockchain, Copyright, and Return on Investment
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This article is about three concerns with the NFT market: blockchains and digital asset custody (where digital assets are stored and how they correspond to the data of the NFT), copyright ownership, and return on investment in NFTs.

I chose to write about these three because popular opinion seems to think that the digital assets of NFTs are on a blockchain (and thereby afforded all of the protections of blockchain technology), that copyright ownership is conveyed when buying NFTs, and that buying and selling NFTs might be a good investment strategy, and that NFTs are mostly profitable. There is a lot of hype about the huge profit potential in investing in NFTs, but what does the actual data say? Read more about these problems below.

What are NFTs?

“NFT” means non-fungible token. Fungible means that something can be replaced with something else without losing or gaining value. If I give you a dollar, and you give me a dollar, we’ve traded dollars but nothing of value or change has been done. Cryptocurrency is fungible, in that I can give you the equivalent of a dollar, and you can give that to me, and we both have the same amount as before we swapped. You can think of fungibility as things that can be traded, that are identical in value. So this can involve commodities, like wheat and oil. If I owe you a certain amount of money, I can pay that off with wheat, and if you owe me a certain debt, you can pay it off with oil.


Definition of Fungible:

1. being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account.

2. capable of mutual substitution

3. readily changeable to adapt to new situations

Merriam Webster Dictionary

In the market of NFTs, the definition most applicable is definition #2, capable of mutual substitution. So non-fungible means that it’s something that isn’t capable of mutual substitution, because NFTs are unique, as physical art is unique (leaving aside prints of an original piece of art). The Mona Lisa is an original, one-of-a-kind piece of art, so it would be non-fungible. There is nothing exactly like it for which it could be interchanged or substituted without remainder.

The “token” in NFT refers to data that is put onto a blockchain, such as Ethereum’s blockchain. The data becomes a discreet entity in the chain, called a ‘token’.


For more information about where to learn about blockchain technology, NFTs, and cryptocurrency, see our ranking of The Best Colleges for Blockchain Education.


Bored Ape Yacht Club NFT

It would be better if it were called something other than “token”, since token usually makes people think of money, and money on a blockchain is called cryptocurrency. Tokens in NFTs are not cryptocurrency. They are just data entries. It would perhaps alleviate confusion to call them something like Unique Data Capsules, or Original Information Packets, Non-Interchangeable Data, Unique Data Receipt, etc.

Data on a blockchain isn’t by definition non-fungible. Cryptocurrency is fungible. So data on a blockchain falls into three categories: fungible, semi-fungible, and non-fungible. Semi-fungible tokens can contain data that represent concert tickets, raffle tickets, vouchers, and other assets that can be exchanged for others that are of the same kind. You can, in theory, exchange one raffle ticket for another raffle ticket, but you can’t necessarily exchange a raffle ticket for a concert ticket.

3 Problems with NFTs: Blockchains, Copyright, and Return on Investment

1. NFTs and the Blockchain

blockchain

Overview: The data or information about the digital asset is what’s usually put onto a blockchain. This data makes up part of the token. The digital asset (that comprises the actual substance and content of NFTs, such as images, videos, and songs), are often not actually on a blockchain, but are stored off-chain; on computer servers or crypto-wallets.

Jump Down Page To “NFTs: Digital Assets and Blockchains” To Read More.

2. Do Buyers of NFTs have Copyright Ownership?

Copyright Symbol

Overview: No, copyright ownership, and, by extension, copyright protection, isn’t conveyed to the buyer merely by buying NFTs. Copyright ownership has to be specifically conveyed as an agreement between the copyright owner and buyer.

Jump Down Page To “NFTs and Copyright Ownership” To Read More.

3. Can You Make Money with NFTs? What is the Return on Investment data?

NFTs and Return on Investment

Overview: Most traders and investors lose money on their NFT investment(s). The few who are successful have deep pockets and can afford to trade the most popular (and most expensive) NFTs.

Jump Down Page to “Are NFTs Good Investments?” To Read More.


There are many concerns, such as high gas fees (the fees to list data on a blockchain), the danger of blockchains being abandoned (i.e. from a potential collapse of their cryptocurrency), potential federal regulations of cryptocurrency in general, rugpulls, fraud, and theft.

For a very informative deep dive into concerns about NFTs, blockchains, and cryptocurrency, see this video by Dan Olson:


1. NFTs: Digital Assets and Blockchains

The Digital Assets that Make Up NFTs Are Probably Not On A Blockchain

If you are in the NFT market, it’s best to know exactly where your digital assets (jpegs, videos, songs, etc.) that make up the substance of your NFTs actually reside online. This is referred to as ‘custody’. There are two options for storing the NFT:

Let’s take an NFT image for example. The data about the image is put on a blockchain to create the token. The image itself usually isn’t on the blockchain. Blockchains can’t accommodate the uploads of images, videos, or songs, either because they’re too large, or there’s too many of them, or both. The data that’s put onto a blockchain is usually about the image (such as a description of the image), or a URL that points to where the image is stored, or a hashcode that the image generated, or some other data or a combination of these data points. Also, the data about the transaction is stored on a blockchain, which shows the wallet address that bought the NFT.

Storing digital assets off-chain potentially renders many of the benefits of a blockchain irrelevant (i.e. that blockchains are unalterable, perpetual, trustless, distributed, etc.) if the token doesn’t perpetually correspond to the digital asset that’s stored off-chain. The off-chain storage of the digital asset has to remain in place perpetually. If the token data on a blockchain doesn’t correspond to the image or where it’s stored, then the token may become useless. This severance of the token and the image can occur through many means, such as link rot, server failure, the marketplace that stores the image going out of business, etc.

Cryptocurrency Wallets

Custody of NFTs can be contained and stored within a crypto-wallet, such as the MetaMask wallet. When getting a wallet, the user is assigned two keys, their public key and their private key. The public key is the data which is used to record the buying of a NFTs on a blockchain. The private key is kept private by the user. Keeping the NFT within your own wallet means that the security and storage needs of the digital asset is incumbent on you and is your responsibility.

Marketplaces:

If a user uploads a digital assets onto a marketplace, the asset is likely not uploaded to a blockchain. “But I thought they were minted onto the blockchain?” Despite this common belief, the digital assets themselves usually aren’t put onto a blockchain. Blockchains cannot accommodate the size or volume of most digital assets.

“Then what is minted” you ask, “if not the actual digital asset?” What’s “minted” is some form of data; data that describes the NFT (such as “bored monkey with a pink hat chewing on a straw”) or the URL pointing to where the asset is located off-chain, or a hash code, or some combination of these. There seems to be very little if any consistency or transparency as to what kind or type of data is standard practice to put on a blockchain. It appears to me that there is no standard practice or a minimum requirement of data specificity that should always be put onto a blockchain. The data that’s put onto a blockchain and making up the token seems to me at the arbitrary discretion of the marketplace, and varies from one token to another. The assumption of the user is often that the digital asset itself is put onto a blockchain in the minting process.

What About the Digital Assets that I uploaded at OpenSea to create my NFTs? Are they on a Blockchain?

In OpenSea’s Terms and Conditions, it’s not mentioned where the digital assets that artists upload to their site actually reside. It turns out that they’re on servers, such as Google Servers, or on The Interplanetary File System (IPFS). I asked OpenSea about this on their Discord channel. Here are the responses to my questions of where exactly the digital assets reside. In this screenshot, the order of the answers is from the bottom-up (first to last).

To put this exchange in context: When I asked if all digital files are themselves on a blockchain, the answers were: “Yes and no both”; “Yes they are”; “Not all no, the hash is on the blockchain and that often references other sources for the image for example is ipfs”. After asking for more specificity, I was told that “they are stored on IPFS or google servers, as someone told you before”.

So to reiterate, the majority of non-fungible tokens consist of data that describe or point to digital assets that are kept off-chain (on a server somewhere else).

If a token’s data were ever to be disconnected from these digital assets, through link-rot, server changes, or if the marketplace (such as OpenSea), were to go out-of-business, then the token information on the blockchain may point to nothing.

OpenSea, presumably anticipating such potential technical difficulties, absolves and holds themselves harmless and free from all responsibility and liability for keeping digital assets in their Terms of Service.

NFT Marketplaces and Liability

As it is now, marketplaces (such as Rarible and OpenSea), operate as platforms, like Facebook (Meta), and disclaim any responsibility for storing or tracking users’ digital assets. They also reserve the right to delete without notice any NFTs or user accounts at their sole discretion. Users agree to this when they agree to the Terms of Service.

(A note about Terms of Service: As a general rule, a company’s Terms of Service is usually written in favor of the company which wrote them. Terms of Service can make whatever claims and terms that the company wants, but if it comes to litigation, what matters is what the law says. Terms of Service aren’t more authoritative and don’t usurp the law. Terms of Service are always subjected and subordinated to state and federal laws.)

My suspicion is that most average users that buy or sell NFTs assume that the digital assets are themselves on a blockchain, and that all parties (buyers and sellers) are thereby afforded all of the protections and transparency of blockchain technology. That’s often not the case. Most NFTs appear to be stored off-chain, with ancillary data being stored on-chain.

The token information on a blockchain is only as good as what it points to. If the token information and the digital asset don’t correspond, the NFT may become dead in the water as in investment.

Imagine if you counted on Facebook or Twitter to maintain your digital assets that may cost more than your parent’s house. Then you discover that the digital asset itself isn’t actually on a blockchain. Then you discover that the marketplace holds themselves harmless and not responsible for maintaining or storing the digital assets. Then you discover that they’re operating as a platform and can delete whatever they want whenever they want. In other words these platforms are not a bank, and users aren’t protected by the government, as the government insures funds within banks. It doesn’t matter the amount of money that the NFT is worth, these marketplaces aren’t responsible for storing, tracking, or keeping digital assets.

Of course, marketplaces such as OpenSea and Rarible are incentivized not to be so cavalier about deleting their users and/or their assets, like social media is prone to do, for saying the wrong things or holding unpopular political beliefs. They need public trust.

Keeping user’s digital assets maintained, and the information on the blockchain coherent, and the token and the digital asset together making something commercially viable is in their best interest. It would be counterproductive to have the token data point to nothing, or to delete their users, or their users’ assets. Nevertheless, they retain the right, leaving the user without necessary asset protections that would be afforded by federally backed banks or credit unions.

Given the high prices of some NFTs, these circumstances create dangerous territory for asset maintenance and investment protection.

Imagine if a bank were to absolve and hold themselves harmless for losing your diamonds (NFTs) that you assumed were in their vault (blockchain). But later you found out they were actually being held outside the bank in a third party’s possession (Google servers). Maybe the bank has so many diamonds that they’ve outsourced their diamond storage. And all that actually resides in the vault (on the blockchain), is a bit of data with information about where the diamonds are stored outside the bank. Of course in this illustration it would matter a great deal where the diamonds were stored, and exactly what the data in the vault says.

A potential solution would be to make it customary (and transparent to marketplace users) that all digital assets are uploaded to IPFS. And perhaps make it standard practice that these are the data put onto a blockchain to create the token:

For more about NFTs and Blockchain:

Credit: TechLead

Unless the asset is altered, the asset should always produce the same hashcode if using the same hashcode generator. In this way, the hashcode that’s on the blockchain can verify the authenticity of the asset that’s on IPFS.

Since blockchains can’t accommodate the file sizes and volume of NFTs, putting the images into IPFS in all instances would be the best solution. The IPFS generates a hash code, which is a special set of numbers that’s specific to that digital file, and so will always produce that same hash code when submitted to the same hash generator standard (there are different hash generator standards, and to switch between them will produce a different hash).

So as long as the image is submitted to the same hash code generator, it will always produce that hash. In this way the hash code of the file that’s stored on IPFS will match the hash that makes up the token data, and has been added to the blockchain. In this way authenticity and longevity between a blockchain’s token data and the digital asset can obtain.

What’s the longevity of Blockchains?

Another consideration is the longevity of blockchains given that they’re essentially subject to the interest and attention of people to be involved. If public attention wanes or disappears altogether, the blockchain may become a non-entity, because no one would be incentivized to participate or invest in its cryptocurrency. Imagine if ETH (the coin within the Ethereum network), went to $0 or close to zero. In this scenario, what’s the ongoing incentive to mine or invest in the coin, or to use the blockchain in any fashion, which is expensive with gas fees and slow and cumbersome for any data recording?

The very fact that the blockchain (where the NFT data resides) is tied to a coin’s value, which is subject to market forces, means that the value of the coin (and functioning of the blockchain) could become negligible. In which case the whole project could be abandoned, and popular participation has moved on to another cryptocurrency coin and blockchain. If people have moved on to focus on another of the many blockchains, in which case there are no longer any servers to contribute to and calculate blockchain transactions, then how will future transactions be recorded? In short, if the coin tanks, the blockchain might be right behind it.

What actually happens when “minting” an NFT?

I think most people believe that “minting” means that the digital asset that makes up the substance and content of the NFT is itself put onto a blockchain, and as a result is afforded all of the protections and perpetual existence that blockchain technologies purport to offer. But blockchains cannot support the upload needs of the NFT market, which often may involve uploading 10,000 images for a given NFT project. So what most often happens in the minting process is that ancillary data is put onto a blockchain to reference in some capacity that digital asset which is actually stored off-chain.

So what are you buying with an NFT?

You’re buying a token that was generated through the process of putting information (any information), onto a blockchain. What is a token? A token, conceptually, is a unique bit of information that’s supposed to correspond to a digital or physical item. You can think of it as a unique receipt that is supposed to correspond to an asset that makes up the substance and content of the NFT. When you buy a house or land, that sale is recorded in the county courthouse as a deed. So you can think of buying an NFT as buying the deed. You’re buying the data or metadata that refers to the asset.

Where are the Digital Assets of NFTs usually stored?

What are the risks of digital assets not being put onto a Blockchain?

The obvious questions to ask are: what data is being put onto the blockchain and how does that data correspond to the asset, and does the correspondence and storage of both the token and the asset have longevity?

The meta data or identifying data that makes up the token aspect of an NFT (the data that is put onto a blockchain) is only as relevant as what it points to, which is the digital asset that makes up the actual substance of the NFT. These digital assets include digital art, such as images, videos, or songs.

But since the digital asset itself is usually not on the blockchain, and is stored on a server somewhere else off-chain, such as Google servers, then the conclusion is that the digital asset isn’t perpetual or verifiable on a blockchain itself. The claims that the blockchain is perpetual, unalterable, distributed, verifiable, trustless (and thereby trustworthy), has no benefit or advantage if all that’s on the blockchain is a string of data or description potentially signifying nothing. It would be like hiring a company to put a map in a safety deposit box at a bank, which has the location of your diamonds buried on someone else’s land.

These digital assets, given their off-chain storage, are subject to commercial failures (what if Rarible or OpenSea goes out of business?), disappearing due to server changes or failures, or link rot, or other circumstances that sever the token and digital asset that could arise in the digital space.


2. NFTs and Copyright

green and white braille typewriter

No Way of Verifying Originality

How would any buyer of an NFT know that the NFT that they purchase is original to the seller, and can be legally sold? There have been instances on people trying to sell and selling digital assets as NFTs that didn’t belong to them. So of course if the seller doesn’t own the item, then the buyer doesn’t own it, and has to attempt to collect back their losses in some fashion.

So that brings up the question of “How does one attain copyright” in the first place?

Automatic Copyright: Copyright ownership vests automatically with the creator of a work. If you’re the artist who created the digital image, song, or video that makes up the digital asset, then copyright ownership resides with you upon creation of the work, automatically. If someone were to copy your work, they would have to prove prior ownership in time, which means that it’s a good idea to have your work, such as a digital work, stored with a timestamp on your computer or Dropbox, etc.

Registered Copyright: Traditionally, to solidify this ownership with the United States government, artists can register their work with the United States Copyright Office, which then indexes the work, and makes the record official and searchable by the public.

Both means above have the backing of copyright protection according to copyright law. Registering your work to the Copyright Office is an added layer of protection.

Given that NFTs in their current form consist predominantly of digital files, here is the link for registering digital files: Register Digital Content at the Copyright Office. It’s worth noting that the Copyright Office protection includes:

“[A] wide variety of works that are used with computers, tablets, smartphones, videogame platforms, and other electronic devices. It also protects works that are used or distributed on the internet, such as websites, blogs, and other online content. To register this type of digital content, identify the predominant authorship and submit the claim either as a literary work, a work of the visual arts, or a work of the performing arts.”

Copyright Office

From the U.S. Copyright Office:

“Under the Copyright Act, the U.S. Copyright Office accepts certain types of documents for filing and indexing into the Office’s public records. There are three primary types of documents that may be submitted for recordation: transfers of copyright ownership, other documents pertaining to a copyright, and notices of termination. Once indexed by the Office, recorded documents become available for inspection by the general public.”

Copyright Office

This office acts like a public blockchain given that its records are indexed and can be checked by the public. Since any given blockchain isn’t associated, managed, or their contents checked against the Copyright Office, there is a risk of people putting digital assets into an NFT marketplace that don’t belong to them.

NFTs and Copyrights:

Does the buyer of an NFT have copyright ownership by virtue of buying the NFT? No, copyright ownership is not transferred merely by buying an NFT. Copyright ownership has to be expressly conveyed from the seller to the buyer. This means that copyright ownership has to be expressly articulated in some way between buyer and seller. Handling the copyright ownership details is the responsibility of the buyer and seller (and can be a factor in determining the sale price).

NFTs don’t have to convey copyright ownership in order to be bought and sold. But the buyer needs to be aware that copyright ownership isn’t theirs unless it’s expressly conveyed. When buying an NFT without conveyance of copyright ownership, the buyer is buying the NFT as a collectible only, with no commercial value or opportunities outside of reselling that NFT on the blockchain.

According to Odin Law:

“The individual who purchases the NFT undoubtedly gets the ability to buy and sell that specific NFT. That’s all they get. An NFT ownership interest does not give any rights to any intellectual property. Instead, it gives interest in the literal digital file purchased…Put differently: when someone buys an NFT piece of digital art it’s somewhat akin to buying a physical piece of art. The original painter or creator of the art still owns the underlying copyright. If I walk into a gallery and buy a painting I like, I cannot then sell that image to Coca-Cola to put on its cans. That would be copyright infringement. If I took a picture of that art and sold an NFT version of it, that would also be copyright infringement. If I bought an NFT version of it from someone else who did not have the right to create the NFT in the first place, they (and maybe I too) have engaged in some plain vanilla copyright infringement with a tech twist.” 

Odin Law

In other words, the NFT buyer who doesn’t also seek and get copyright ownership from the copyright owner, is buying an NFT as a collectible only, without any other current or future commercial value outside of a collectibles market. The only value in the NFT is as a collectible, to be sold again as a collectible, and so on with every future sale. Of course a future buyer may track down the original copyright owner and negotiate the sale or transfer of copyright ownership.

3. Are NFTs Good Investments? Return on Investment Data

If you’re the average buyer without deep pockets, NFTs are not a good investment. According to Forbes, who identify a study done by Chainalysis, most NFT investors who profit have deep pockets and trade in the well known and expensive NFT campaigns. The profiters are a concentrated small minority of the total number of buyers.

Here are the numbers and findings of this analysis, call the NFT Market Report by Chainalysis:

Newly Minted NFT Market:

Secondary NFT Market:

How to Quantify the NFT Market for Context

Given these numbers, average NFT buyers likely don’t make money on newly minted or on secondary market NFT investments. Most NFT sellers are out of luck too.

Also, given that OpenSea is the largest marketplace, what NFTs they decide to feature can be in their own best interest. They were caught last year investing in NFT projects before they would promote them on their website.

A bug in the listing process of NFTs allowed for a buyer to purchase a Bored Ape Yacht Club NFT on OpenSea for $26, against the owner’s wishes, and resell it for $250,000. So the original owner is suing OpenSea for $1 million in losses.

It’s important to remember that people who are acting like hype men may be the person holding the NFT and needs a new buyer, so they hype up the product to attract potential buyers. The only value that NFTs have is in the next buyer, especially considering that in the current set up of the marketplaces, commercial copyright ownership isn’t conveyed in buying NFTs.

Some NFT sellers will create different wallets and make bids on, or outright buy their own NFT art themselves (anonymously) in order to give the appearance of interest and value. The anonymous nature of these transactions can be used to manipulate the market.

My overall impression is that there are misunderstandings about blockchain protections, copyright ownership, and commercial viability failures and potential losses (in the digital assets themselves and in investments in them), that need to be addressed to make the system work in the long term.

Disclaimer: I’m not a lawyer and this isn’t legal advice. I’m also not a financial advisor and this isn’t financial advice.