What can you do with NFTs?

This is Dragon, a CryptoKitty that was sold for $170,000 two years ago. CryptoKitties are at once blockchain collectibles and a game of sorts. The cats can be bred, producing new cats belonging to a new generation on the Ethereum blockchain. Early-generation kitties, of which there are only a few, carry the highest collectible value. CryptoKitties are an example of non-fungible tokens. While cryptocurrencies such as Bitcoin have been the talk of the town for quite some time, they are far from the only blockchain technology on the rise. Among the more inconspicuous developments are these non-fungible tokens. So what are they exactly? And what can you do with them?

Fungibility is a term that describes whether an object is interchangeable, whether it can easily be replaced by something functionally identical. Money is a fungible asset: the specific coin or banknote you possess is inconsequential, as they are equal in use and value. A painting, by contrast, is non-fungible, as its value lies in its specific expression. Even if another painting were identical in size, paint and canvas, the two would not be interchangeable.

Herein lies the power of NFTs. Where bitcoins are interchangeable (each bitcoin holds the same value), NFTs are unique. They are equipped with metadata describing their specific, unalterable identity. This can be likened to a certificate of authenticity. They can also be rare (if the developer limits the number of items in existence) and indivisible. Remember, you cannot buy half an artwork, a quarter of a concert ticket or only Dragon’s tail.

Uses of these tokens include, but are not limited to, digital artworks, tickets to events and in-game items. An exciting development, as it can take virtual assets to a new level. Piracy and plagiarism will be tackled quite effectively, as an NFT cannot be copied and shared illegally. It is as one-of-a-kind as a real-world asset. In fact, their use also extends to actual real-world assets. Some watchmakers, for example, have started to use an NFT as the accompanying certificate of authenticity, including details and some extra information, for some of their vintage watches (read more). NFTs become collectibles. A replacement for the good old Pokémon. Or baseball card. One example is the Monsters of Rap series of NFTs, published by R2 and my company EOS Amsterdam.

Which brings us to the next question: what can you do with an NFT? If you are the proud owner of Dragon the CryptoKitty, can you copy him to sell to someone else? Can you do that at the official CryptoKitties storefront? Does “exhaustion” apply? These questions are as yet unanswered.

Though no conclusive answers are available, some clues may lie in analogies. Can you use pictures of your acquired asset as your screensaver? On your website? On a book cover? Some ideas may be borrowed from copyright in artworks. If you were to buy a painting, you would have ownership rights but not the copyright in that specific painting. As for reproduction, you may reproduce the artwork for personal study, practice or use (see, for example, articles 16b and 16c of the Dutch Copyright Act), but you cannot sell your reproductions. An image of the artwork may also be posted on a website, in the context of freedom of expression or of a sale of the artwork. So not merely as a decoration. That may be similar for NFTs that are protected by copyright.

Speaking of copies, one has to be precise. The NFT itself is a concept. It is an allocation of ownership to a certain blockchain account, by registering that ownership in the ledger that a blockchain ultimately is. The object of such ownership can be anything: a particular CryptoKitty, for example, or a picture of a footballer. The idea behind blockchain technology is that such ownership information, and every transfer of it, is recorded permanently. It is not possible to double the object by copying its position on the blockchain. One cannot change the ledger.

The thing represented by the NFT, which may be an image, is a different matter. It is unlikely that a copyright holder will object to the copying of the CryptoKitty, since spreading copies of the image may actually drive the value of the original NFT up. The image itself does not denote ownership, which lies in the NFT itself as recorded on the blockchain. Conceptually, this is not so different from a bitcoin: sharing or having a picture of a bitcoin is not the same as owning it and having access to its value.

As far as “exhaustion” goes, it is hard to say how it will affect NFTs, and it will probably vary depending on the type of NFT. As a refresher: exhaustion means that if a copy of a work is sold by the copyright owner (or with their permission), the copyright owner “exhausts” their right to control distribution any further. In other words, if you sell something, you cannot prevent the buyer from selling it again or giving it away. As we know, digital exhaustion is a tricky subject. E-books and used software have been fighting the good fight for a while. In the case of NFTs, though, their value seems to lie in the fact that they are indivisible, rare and, unlike any other digital file, cannot be multiplied through simple copying. An image of Dragon the CryptoKitty, or a derivative work, will not have the same value as the NFT Dragon himself, as it will not have the same specifics in its metadata. Exhaustion may therefore apply in a way that is more similar to real-life assets than to other digital assets. That would mean that one can offer and resell an NFT. This has not been ruled on yet, however.

All in all, NFTs are an exciting development for technology as well as for art, commerce and property in general. Their many uses are being explored as we speak, from watch certificates to digital cats. It will be interesting to see how this new type of property, and the rights that govern it, will be formulated and viewed by the layman and the courts alike.