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Special Report: The Downside of NFTs

By Gary Symons

TLL Editor in Chief

If you’re like me, you’ve likely been reading about the recent NFT craze and wondering if these ‘Non-Fungible Tokens’ will be used in the licensing industry as a means to establish intellectual property ownership and licensing rights.

The answer is both yes … and maybe no.

Most of the news about NFTs over the past month has focused on the use of blockchain technology in the area of ‘rare’ collectibles. A variety of companies have been using and selling NFTs to establish someone’s ownership of a digital property, and to create an aura of ‘scarcity’ around that collectible.

The most startling example to date is the sale for $69.3 million of a digital art collage by an artist known as Beeple, purchased by an anonymous buyer during an auction through Christie’s auction house. Beeple earlier sold $3.5 million worth of art, the electronic musician 3LAU reportedly earned more than $11 million from album sales and digital goods, and Canadian artist/musician Grimes (Elon Musk’s girlfriend) sold $6 million worth of digital art as NFTs in late February.

The War Nymph collection of NFT tokenized art sold for $5.8 million as the NFT craze took hold.

For now, NFTs have primarily been used as a sort of digital bragging right for the buyer, who can say they spent X dollars on a digital artwork, and now own that art, even though the copyright still belongs to the artist.

So, what exactly is a ‘Non-Fungible Token’. Basically, it is a unique form of cryptocurrency. It differs from typical currencies in that it is supposed to be unique. A ‘fungible’ currency, like a dollar bill, is meant to be exactly the same as all other currency. Just as one dollar bill is exactly like another, one bitcoin is exactly like another, and so they all have the same value. 

By contrast, NFTs are ‘non-fungible’, meaning one NFT is unique from another NFT. This idea has allowed cryptocurrency companies to come up with the idea of creating a unique, non-fungible token to establish a person’s ownership of something that, in itself, is easily copied and distributed. 

In a way, the idea of NFTs is similar to someone buying a famous and expensive work of art like the Mona Lisa. There may be many copies of the Mona Lisa, but there’s only one original copy, and that copy is owned by the Louvre Museum in Paris.

In a very similar way, NFTs provide someone with the bragging rights that they solely own, such as (for example) the very first tweet posted on Twitter by CEO Jack Dorsey. Of course, anyone can copy that tweet, but Dorsey’s tweet was in fact auctioned off to the highest bidder on a cryptocurrency marketplace called ‘Valuables’.

NFTs and Licensing

The much bigger question for the licensing industry is whether NFTs and blockchain technology offer a new and rock solid means to establish one’s ownership over a property, and to control the licensing rights of that property. For example, could I buy out the rights to an Elvis Presley song, establish that ownership by acquiring the NFT, and, if necessary, protect my licensing rights in court by establishing my ownership with the blockchain-protected NFT?

According to a new player in the field called RAIR, the answer is yes.

RAIR describes itself as a “… blockchain-based digital rights management platform that provides universal encryption to enable digital scarcity.” The company says its tech allows anyone “to create unique, controllable, and transferable digital assets tied to the actual underlying content.”

Specifically RAIR says it is combining the idea of a Non-Fungible Token with the concept of Digital Rights Management, establishing ownership in a way that cannot be challenged, because the time, date and circumstances of ownership are irreversibly stored in the blockchain, which is publicly accessible and can be audited.

Strangely enough, I worked on contract doing media relations and investor relations with a similar company called TruTrace, which produces a software solution for the legal cannabis industry based on blockchain technology. There were two main purposes for this software. The first was to be able to establish on a blockchain that a certain batch of cannabis had gone through quality testing, and was therefore free of any potential contaminants. Similar companies are working on identical systems for food distributors, including Walmart.

The second purpose, however, is more relevant, as TruTrace could essentially establish someone’s ownership of a specific cannabis strain, and could therefore prove their ownership of that strain in court. If another person violated their copyright, the original owner could sue for licensing fees using the blockchain data as evidence of ownership.

All of that would seem to indicate NFTs could, in fact, become a baseline technology for establishing the ownership of intellectual property, and also protecting that IP in a way that cannot really be challenged.

But, not so fast.

There are huge issues arising with the NFT market, the most important being the accusation it is a massive market bubble destined to blow up in our collective faces, and the second being that it is an environmental disaster in the making. My own opinion is that NFTs are both, and that the NFT craze will end in both massive financial losses and a planet-threatening bump in greenhouse gas emissions.

Those are very different concerns, so it’s worth looking at them individually, starting with how the NFT craze today has its roots in a 17th century market bubble involving supposedly rare tulip bulbs.

NFTs and ‘Tulipmania’

The Dutch Tulip Bulb Bubble was one of the earliest and most infamous market crashes of all time. As the name would imply, it happened in Holland in the early 1600s when speculation on rare tulip bulbs drove prices to extreme levels. At the height of the market a single tulip bulb traded for as much as six times the average citizen’s salary, or by some estimates $750,000 in today’s US dollars, and by 1636 tulip bulbs traded on the Stock Exchange of Amsterdam.

At the time, the value of tulip bulbs was based on a sense of their scarcity. Because they came from far off Turkey, tulips were considered both exotic and rare, and were believed to be very difficult to cultivate. However, when professional growers refined their techniques, the flowers quickly flourished in Holland, and the tulip bubble promptly burst. By the end of 1637, shortly after sucking up what would today be millions of dollars in investment, the confidence in tulips had begun to fail, and by 1638 they were practically worthless. 

For that reason the tulip bubble still serves as a precautionary tale for the pitfalls of excessive speculation on things that may have little or no intrinsic value. 

In one of the most controversial art sales of all time, the digital collage ‘The First 500 Days’ by Beeple sold for an eye-watering $69 million.

In a similar way, the NFT craze seeks to create an aura of scarcity around images, gifs, tweets, and other digital assets, even though one can easily search out those same assets on Google, download, and then stick them on your wall or use them as a wallpaper on your computer screen. Based on the idea of ‘scarcity’ or unique ownership, NFTs have soared in value, with some being sold for millions of dollars, despite having little or no artistic provenance. As the Mashable writer Amanda Yeo put it, “A recent surge of interest in NFTs has seen a huge rush to tokenise non-fungibles, with even Taco Bell jumping in with some taco GIFs. 

“However, having an NFT doesn’t give you exclusive use of a work,” Yeo adds. “It doesn’t add any improvement to it. It doesn’t bestow any worthwhile rights you can exercise, beyond the right to sell it. An NFT is merely the very costly, environmentally disastrous, tech bro equivalent of peeing on a hydrant.

But, what if the NFT did add value? What if NFTs were in fact used to establish an individual’s or a company’s ownership of the underlying intellectual property, as RAIR is now attempting to achieve? That could, in fact, be a worthwhile use of NFTs because blockchain tech does in fact make it very difficult, if not impossible, to usurp someone else’s prior claim to IP. 

For example, a musician or music publisher could easily establish IP by linking an NFT to a new song. If anyone came along later and claimed the musician had copied their music, and had a prior dated NFT to prove it, then that could in fact establish who holds the rights.

That is a much different use case than what is currently happening with NFTs, which are currently being used to establish scarcity and therefore speculative value. 

But, there are problems with that as well. The world is already piled up with literally centuries of intellectual property, from Billie Eilish to Mozart, and unfortunately, unscrupulous speculators are launching a land rush on already existing intellectual property. 

Around the same time artists like Beeple were cashing in on their NFT tokenized art, others like @engwind_art were taking to Twitter to complain about people making NFTs to establish ownership of their art. It is similar, in a way, to using an NFT to assert ownership of a Van Gogh, even though you’re not the one who created or purchased the original painting. 

Unfortunately, NFTs do NOT guarantee that credit or payment goes to the person who created the art work. At the current time, there is nothing to stop people from ‘tokenizing’ other people’s art works, claiming it as their own, and then profiting from it. 

On Twitter one can quickly find @tokenizedtweets, which will allow anyone to create an NFT and therefore ‘own’ that tweet, even though they didn’t write the tweet and did nothing to establish ownership. 

Unleashed on the world of art and music, NFTs in an unregulated market could create real havoc, and for some digital artists, is already doing so.  Unfortunately, even that is not the worst part about NFTs which, in essence, is simply a different form of cryptocurrency, using the same energy-sucking technology. 

The Environmental Cost of NFTs

Over the past month, cryptocurrencies and especially bitcoin have come under fire for using more electricity than entire countries, based on figures from the Cambridge Centre for Alternative Finances, which estimates that bitcoin alone uses more than 115 terawatt hours (TWh) of electricity per year. 

To put that into context, I went to the Cambridge Bicoin Electricity Consumption Index website on March 22. As of that date, Bitcoin was estimated to use 133.65 TWh per year, which puts it above Sweden in terms of electricity consumption, and below Malaysia. As well, according to the Cambridge researchers, a single bitcoin transaction uses as much energy as 680,000 credit card transactions, or watching 51,210 hours of YouTube. 

The energy usage of bitcoin, and by extension all other cryptocurrencies, is even more ridiculous when you consider Bitcoin would use almost 1/10th of all the power generated by solar power, wind power, wave power, and geothermal power combined. 

The most insane thing about cryptocurrencies, including NFTs, is that at a time when all of humanity is trying desperately to combat climate change by cutting back on energy consumption, we’ve created a technology with no obvious utility that is using up massive amounts of power. 

Worst of all, while that sounds like a lot of energy, it’s worth noting these types of figures are being posted when cryptocurrencies still remain a marginal currency that is not commonly used. Most retailers don’t accept cryptocurrencies, and so their use has been confined primarily to speculation or to transactions on the fringes of society, most notoriously Dark Web transactions involving drug traffickers or other illegal/quasi-legal groups.

The issue is that cryptocurrencies are, by their very nature, extremely inefficient.

The Nature of Cryptocurrency Mining

Cryptocurrencies demand for power is high because of the way it is produced, which is commonly called ‘mining’. To mine Bitcoin, for example, specialized computers are connected into the cryptocurrency network, and put to the task of solving complex computational puzzles. When that puzzle is solved, the bitcoin miners occasionally receive small amounts of Bitcoin in a process that has been likened to a sort of computer-coded lottery. 

To be profitable, Bitcoin miners are often operating large warehouses full of these computers, all of them guzzling electricity like beer on a hot summer’s day. Essentially, all bitcoin miners are competing against other bitcoin miners, so there really is no way to become more efficient. As one miner becomes more efficient, competitors will then work to equal that efficiency, and the lottery becomes a literal war of computing power. 

““Bitcoin is literally anti-efficient,” says David Gerard, author of Attack of the 50 Foot Blockchain.  “More efficient mining hardware won’t help – it’ll just be competing against other efficient mining hardware. “This means that Bitcoin’s energy use, and hence its CO2 production, only spirals outwards. “It’s very bad that all this energy is being literally wasted in a lottery.”

A graph showing the electricity demand of Bitcoin vs. entire countries.

 

How It All Relates to NFTs

Like cryptocurrencies, NFTs are created by mining, and when created, are logged into the wider blockchain that establishes ones so-called ownership of a particular digital property. The hope is that over time, the ‘scarcity’ created by tokenizing that digital property will cause it to rise in value. 

The problem, however, is that scarcity doesn’t necessarily confer actual value. For example, in a recent advisory call to its investors, Goldman Sachs earned the ire of Bitcoin fans by arguing that cryptocurrencies are not a valid ‘asset class’, saying, “We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients.”

The analysts likened Bitcoin to the tulip bulb crash in 1638, but said the money lost in the various price crashes were actually worse than the bursting of the tulip bubble. 

It is true that blockchain technology may, in the end, be more useful in establishing legitimate ownership of a particular digital asset, and thus establishing the inarguable right to license that intellectual property, but the question has to be asked, why use such a complex, energy intensive technology to essentially do the same job as a written contract? 

Legal contracts may not be quite as indisputable as a blockchain, but the reverse argument is that NFTs don’t really serve as a contract either. Rather, they log the event when a person asserts ownership over a particular asset, but they do not ascertain whether that asset was acquired in a manner that was fair and legal. 

More seriously, the practice of cryptocurrency mining is already coming under scrutiny at a time when world governments, including the US and China, have now accepted the need to take drastic action on energy consumption. 

Does it really seem likely that an energy crackdown will ignore an obvious, energy sucking sector like cryptocurrency?

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