Victor Zhang is head of Stormbird Labs, AlphaWallet’s tokenization lab. Victor has been immersed in NFTs for over the last 4 years, working on tokenization of digital and real assets.
When you buy a non-fungible token (NFT), what do you really own?
This question has come up a lot in the NFT space since non-fungible assets exploded into the mainstream earlier this year. People were baffled at multi-million dollar sales of works by Grimes and Beeple. Since anyone could easily view or download with a right-click, it was unclear to many what the buyers of these tokens were actually getting. Then came cases of disappearing NFTs: tokenized images that would fetch handsome sums, only to vanish when their storage rights on centralized servers expired.
Since then, many more tokenized images, sounds, and videos have sold for many more millions of dollars, and the NFT market is still growing. But the answer to the question remains unclear: what do people own after they buy an NFT? Are they buying a digital file containing a piece of media? Are they buying complete intellectual property (IP) rights? The rights to view or display an image? The right to simply own the collectible? Or does the purchase amount to nothing more than the abstract concept of ‘ownership’ being recorded on a blockchain? Perhaps most important, how can NFT creators clearly and effectively manage what they are selling?
IP ownership remains an ambiguous subject in the NFT world
When most people think of an NFT, they may think of a digital image, video clip, or sound bite. But while each NFT may be associated with a piece of media, the media itself is not the NFT. In reality, each token consists of just a few lines of code written to a blockchain. This code contains a series of conditional rights assigned to the holder — most commonly, the right to transfer the ownership of the token.
Unless otherwise specified, this right is the only thing that someone really owns when they purchase an NFT. Therefore, when you view an NFT on its home blockchain, you’ll find the token ID and transaction records. You’ll also find a link in the smart contract that points to its metadata, which can include information about where the token’s associated media is hosted. What you cannot find, however, is information about whether the token represents any other rights related to its associated media. You also won’t be able to determine how these rights are technically bound to the token.
Punks and Phunks
Beliefs and practices around who owns what in the NFT world tend to be ambiguous at best. This was demonstrated in July, when the owner of a Larva Labs CryptoPunk successfully sent a takedown request to NFT marketplace OpenSea over a Lava Labs CryptoPhunk. The move sparked confusion–it was initially unclear whether or not the NFT’s owner held the Punk’s IP rights, and therefore if they had the right to demand the Phunk’s removal.
While the matter was eventually resolved, the incident reopened an important conversation about IP in the NFT space. There is still no clear precedent for who owns an NFT’s IP. Is it the original creator, or the current owner? And how does IP ownership change when an NFT is fractionalized, or when its ownership passes through many hands? How can these ownership rights be managed over time?
The reality is that there is no Intrinsic Mechanism to Manage IP in NFTs.
IP rights may be included in the sale of an NFT. But this raises follow-on questions and logistical challenges that must be resolved. “Bridges” linking NFTs to IP rights may indeed be the starting point that the industry needs, particularly as we collectively work to create a globally standardized legal infrastructure for NFTs — but what’s needed is a standard for the deployment of the IP contained in these assets.
The liquidity of creativity
NFTs can unlock the future of the creator economy. They can enable capital to flow at the speed of creativity and provide an effective way for creators to be paid for their work. But the liquidity of this NFT-enabled creative economy is constrained by the lack of an effective tool for managing IP rights–a problem that stifles the flow of both value and creativity in the space. Therefore, an IP rights management solution that moves just as quickly and securely as NFTs do must be in place in order to realize the full potential of the non-fungible token economy.
The NFT universe needs an ownership rights management platform that people can use to flexibly govern the flow of IP to, from, and around NFTs, starting with derivative rights. Once this standard is established, we can use smart contracts to split, combine, remix, and make derivatives of IP rights. For example, a creator could use smart contracts to divide a piece of media’s commercial rights and non-commercial rights into two NFTs; they could split commercial IP rights across multiple NFTs, issue derivative rights, bundle different kinds of IP rights together, and more.
Suppose the owner of an NFT tied to a short film wished to temporarily license their work for use in an exhibition. Without an efficient way to transfer the rights, IP owners are forced to undergo a cumbersome process of printing, signing, scanning, and sending documents. But with a smart contract-based rights management layer enabled, the person who holds the tokenized film’s IP could instantaneously license the video for use and set precise parameters for licensing conditions. They could determine how and when the film could be displayed, and how much money would need to be paid to the IP owner every time it was shown.
An effective, smart contract-based ownership rights management system would also create unprecedented economic possibilities beyond the creative sector. Intellectual property rights aren’t the only kinds of ownership privileges that could be deployed. People who own real estate could, for instance, license the use of a property for a certain time period by certain people. Smart contracts could be used to license and manage ownership rights in the automotive industry, construction, the medical field, and more — the possibilities are virtually limitless.
The NFT space needs blockchain-based tools that allow for the management and customization of IP rights related to tokens just as quickly as those tokens are created, bought, and sold. This Web 3.0 technology needs a Web 3.0 solution: an IP ownership transfer mechanism that flows as fast as ideas do–a system that moves at the speed of creativity.