NFTs or non-fungible tokens are quickly becoming the new hotspot in the blockchain and cryptocurrency markets. Over the past few months, stories of digital collectibles — from Jack Dorsey’s first tweet to Beeple’s collage — being sold for millions, have been making headlines around the world. This phenomenon is particularly pronounced in the art scene, with over $400 million worth of NFT artwork already sold to-date — the bulk of which chalked up in the last 3 months alone.
NFTs’ sudden rise in popularity can be attributed to greater appreciation that art collectors and crypto enthusiasts have shown for tokens, which are, by nature, unique and immutable. Those qualities give NFTs their value, with scarcity at the heart of it all. This has definitely been a boon for the art industry and artists alike, opening up a plethora of new opportunities while offering artists a new way to interact with fans and followers and to monetise their creative output.
Yet, despite the market potential of NFTs, a plethora of risks and security challenges remain. Digital artist Pest Control’s sale of ‘appropriated art’ — NFTs in a similar style to Banksy — and NFT marketplace Opensea’s blocking of the artist’s account — when NFTs are meant to be immutable and uncensorable — are two such examples. Not only do they raise questions of fraud and plagiarism, but also cast a light on the current state of NFT collectibles — that most are not decentralised after all, and are vulnerable to manipulation. If not addressed, these issues could have a seriously detrimental effect on the industry’s future growth prospects.
On Protecting the Digital Rights of Creators and the Importance of Regulation
As valuations for NFTs continue to rise and established musicians, artists, and other rights owners enter the fray, intellectual property considerations will undoubtedly become increasingly important. For digital art to continue proliferating, artists’ rights must be protected. The combination of new on-chain tools and expert human assessment or oversight can help establish trust in NFTs, but ultimately, we need a secure and clearly defined regulatory framework for this space to truly thrive.
This means we need to evolve existing regulations, some of these being ill-suited to advanced open source technology like blockchain, in order for them to account for the new dimensions of IP brought by NFTs. These must be considered, especially with this new world with large transactions like Beeple’s Everydays;The First 5,000 Days NFT, which sold for $69 million via a Christie’s auction, or high profile NFT experiments like the Banksy piece burnt and sold as an NFT.
If we take past blockchain innovations like Initial Coin Offerings as indicators, we know that regulators end up imposing existing rules, such as Anti-money Laundering (AML) on the sector. This is a very real possibility for DeFi and NFTs as well. However, AML rules only address financial aspects of transactions. What is needed is for regulators to ensure the protection of the artist’s rights are also enforced.
On NFT Collectibles Being Stored Off-Chain and their Vulnerability to Manipulation
To fully understand the implications of off-chain storage, let us first examine the workings of an NFT.
Typically, there is a standardised structure which every NFT token follows — be it the ERC 721 or the ERC 1155. Whenever someone buys an NFT, they are purchasing the “ownership” of the ‘token’ on the blockchain, with the assurance that the ‘token’ is compliant to some measure of standards.
In an ideal world, this ‘token’ — comprising a unique media asset such as an image, GIF, video, audio, or tweet, and the metadata or properties associated with that media — would be stored either on IPFS or on the blockchain itself to make it completely decentralised and ownable.
However, in reality, many projects tend to store the data off-chain on centralised servers like Amazon Web Services or Google Cloud. Examples include Crypto Kitties, where the “genes” of every Crypto Kitty are stored in an unverified, closed source contract on Etherscan; MegaCryptoPolis, whose main Smart Contract on Etherscan also has not been verified; and Axie Infinity, whose $1.5 million equivalent of a “rare” plot of digital land and the metadata associated with it, are stored on a centralised server.
This could pose serious risks for the “owners” of these assets, as those in control of the centralised server will have free rein to change the media image or video at their discretion. If this were to happen, neither the owners nor the marketplace would be aware as the links to the media and the metadata would still be “valid”. The NFT would still be following the ERC 721 standard, and everything would appear as normal. However, to the “owner”, the expensive artwork that was purchased could suddenly be reduced to little more than a silly meme worth next to nothing.
What this means is that all of the $150 million plus spent on the primary and secondary purchases of these NFTs are at the mercy of these project teams.
Of course, proponents of off-chain storage may justify their methods by pointing to the limits blockchain has in terms of the size of the data that can be stored on-chain. However, this destroys the very fundamental proposition that NFTs offer — that they are decentralised and not controlled by any authority. The least these critics should do is to follow the example of Hashmasks, which hashes every image ever to be produced under the project and puts that hash on IPFS — thereby creating an indelible provenance.
What can be done then?
Every NFT project should do two basic things — hash every image and store as much media and metadata on IPFS as possible, if not completely on the blockchain. That way, the users would receive some form of ownership and visibility on the properties and the provenance of these artworks that they are spending millions of dollars on. Eventually, we hope to see more instances where both the media and the metadata of NFT artworks are stored on the blockchain, thus making them completely decentralised.
NFTs have had a phenomenal record of growth over the past few months, yet this is just the beginning. To spur greater maturation in the space, structural changes to the way NFTs are stored and regulated are necessary elements in order for them to become increasingly attractive to a larger pool.
Regardless, thanks to the creation of NFTs, artists now have an innovative and meaningful new way to engage with their fans as well as to monetise their creative output.
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