A Rational Examination of NFTs

This is the original/source version of this document – originally written in 2021 – Last Updated 6/17/23.

The CryptoReality of NFTs (Non Fungible Tokens): You don’t own anything. (And you probably have even less rights to this art than you think, including the false assumption you can freely repost it since you “own” it)

The latest fad in the crypto currency industry is the proliferation of NFTs – Non-Fungible Tokens that purport to represent “digital ownership” of artwork. People are paying tons of money to own a NFT associated with some art they like.

But what are you actually getting?

Unfortunately if you Google this topic you get a lot of articles about NFTs and how much money people are spending, but very little details on actually what “rights” come with ownership of these tokens. And who would be responsible for even enforcing/granting such rights? It’s another example of one of the huge gaping holes in the industry that’s not being discussed.

What is the real deal? Do you really own anything? Do you have any “rights” as the owner of a non-fungible token?

If you try to scan the web site for OpenSea, one of the most populart NFT exchanges, you’ll find there’s virtually nothing in their terms of service (at the time of this writing 1/2022) that says what rights are actually conveyed by purchasing a NFT. There are other sites that do enumerate these rights (or lack thereof) which I’ll outline later, but before we examine OpenSea’s caveats, let’s scan their TOS for a few worthwhile tidbits in the user operational restrictions.. Here are a few points we want to single out:

6 – User Conduct (as of 1/2022)

You agree that you will not violate any law, contract, intellectual property or other third-party right, and that you are solely responsible for your conduct and content, while accessing or using the Service. You also agree that you will not:
[..]

  • Use the Service to carry out any financial activities subject to registration or licensing, including but not limited to creating, selling, or buying securities, commodities, options, or debt instruments;
  • Use the Service to create, sell, or buy NFTs or other items that give owners rights to participate in an ICO or any securities offering, or that are redeemable for securities, commodities, or other financial instruments;

Why have I singled out the two items above? They are in there to make sure that OpenSea isn’t regulated as a traditional brokerage of securities. Which would make them subject to a lot more scrutiny.

But more importantly, they state that NFTs cannot represent anything exchangeable for something that could be considered a security (like cash, stocks or real world material). In other words, NFTs have no material value, and suggesting they might have material value is against the terms of service.

Now this seems odd, doesn’t it? Because the only reason people buy these goofy things, is thinking they do have value and can be exchanged for something worth money.

So when you realize the NFTs are worthless, they’ll point to the fine print and say, “It says right there…”

Let’s take a further look at what caveats OpenSea is legally obligated to reveal:

12 Assumption of Risk

You accept and acknowledge:

  • The value of an NFTs is subjective. Prices of NFTs are subject to volatility and fluctuations in the price of cryptocurrency can also materially and adversely affect NFT prices. You acknowledge that you fully understand this subjectivity and volatility and that you may lose money.
  • A lack of use or public interest in the creation and development of distributed ecosystems could negatively impact the development of those ecosystems and related applications, and could therefore also negatively impact the potential utility of NFTs.
  • The regulatory regime governing blockchain technologies, non-fungible tokens, cryptocurrency, and other crypto-based items is uncertain, and new regulations or policies may materially adversely affect the development of the Service and the utility of NFTs.
  • You are solely responsible for determining what, if any, taxes apply to your transactions. OpenSea is not responsible for determining the taxes that apply to your NFTs.
  • There are risks associated with purchasing items associated with content created by third parties through peer-to-peer transactions, including but not limited to, the risk of purchasing counterfeit items, mislabeled items, items that are vulnerable to metadata decay, items on smart contracts with bugs, and items that may become untransferable. You represent and warrant that you have done sufficient research before making any decisions to sell, obtain, transfer, or otherwise interact with any NFTs or accounts/collections.
  • We do not control the public blockchains that you are interacting with and we do not control certain smart contracts and protocols that may be integral to your ability to complete transactions on these public blockchains. Additionally, blockchain transactions are irreversible and OpenSea has no ability to reverse any transactions on the blockchain.
  • There are risks associated with using Internet and blockchain based products, including, but not limited to, the risk associated with hardware, software, and Internet connections, the risk of malicious software introduction, and the risk that third parties may obtain unauthorized access to your third-party wallet or Account. You accept and acknowledge that OpenSea will not be responsible for any communication failures, disruptions, errors, distortions or delays you may experience when using the Service or any Blockchain network, however caused.
  • The Service relies on third-party platforms and/or vendors. If we are unable to maintain a good relationship with such platform providers and/or vendors; if the terms and conditions or pricing of such platform providers and/or vendors change; if we violate or cannot comply with the terms and conditions of such platforms and/or vendors; or if any of such platforms and/or vendors loses market share or falls out of favor or is unavailable for a prolonged period of time, access to and use of the Service will suffer.
  • OpenSea reserves the right to hide collections, contracts, and items affected by any of these issues or by other issues. Items you purchase may become inaccessible on OpenSea. Under no circumstances shall the inability to view items on OpenSea or an inability to use the Service in conjunction with the purchase, sale, or transfer of items available on any blockchains serve as grounds for a claim against OpenSea.
  • If you have a dispute with one or more users, YOU RELEASE US FROM CLAIMS, DEMANDS, AND DAMAGES OF EVERY KIND AND NATURE, KNOWN AND UNKNOWN, ARISING OUT OF OR IN ANY WAY CONNECTED WITH SUCH DISPUTES. IN ENTERING INTO THIS RELEASE YOU EXPRESSLY WAIVE ANY PROTECTIONS (WHETHER STATUTORY OR OTHERWISE) THAT WOULD OTHERWISE LIMIT THE COVERAGE OF THIS RELEASE TO INCLUDE THOSE CLAIMS WHICH YOU MAY KNOW OR SUSPECT TO EXIST IN YOUR FAVOR AT THE TIME OF AGREEING TO THIS RELEASE.

So, the TL;DR of the above is basically: Use this system at your own risk. You could lose everything. We’re not responsible in any way. You have no rights, and we have no liabilities – Love, OpenSEA

So in light of OpenSea not telling anybody what rights they don’t have.. let’s find another exchange that’s a little more honest:

So, let’s go to where it matters, the actual Terms of Service of one of the Internet’s most popular and active NFT marketplace: Superrare.co.

Here are their terms of service:

https://www.notion.so/SuperRare-Terms-of-Service-075a82773af34aab99dde323f5aa044e

Scrolling deep into the page, we find the part we’re looking for:

Ownership

All works Minted on the Platform are subject to the SuperRare License, the terms of which are described below. All Users who receive a SuperRare Item acknowledge and agree to accept or purchase the Item subject to the conditions of the License.

Ownership of a SuperRare Item

Owning a SuperRare Item is similar to owning a piece of physical art. You own a cryptographic token representing the Artist’s creative Work as a piece of property, but you do not own the creative Work itself. Collectors may show off their ownership of collected SuperRare Items by displaying and sharing the Underlying Artwork, but Collectors do not have any legal ownership, right, or title to any copyrights, trademarks, or other intellectual property rights to the underlying Artwork, excepting the limited license granted by these Terms to Underlying Artwork. The Artist reserves all exclusive copyrights to Artworks underlying SuperRare Items Minted by the Artist on the Platform, including but not limited to the right to reproduce, to prepare derivative works, to display, to perform, and to distribute the Artworks.

Emphasis mine. As you can see, when you purchase a NFT, it’s “similar to owning a piece of physical art” except it isn’t. Usually when you own the original of something, it conveys various rights unless otherwise stipulated. If I hold the original negatives to a photograph, in the absence of any other evidence or legal agreements, that would indicate I own the rights as well. This is not the case here. You don’t actually “own” anything, except an arbitrary digital token, which these terms spell out quite clearly: in no way indicate ownership of the art, or the rights to use it as you desire. All those rights remain with the artist.

You do not own the right to reproduce, make derivative works, to display, perform or distribute the art. So what can you do with it? Apparently the only clear thing is you can display the art within the context of the web site that brokered the deal between you and the artists.

Here are the clarifications regarding “displaying the artwork”:

Collectors May Display the Artwork

The Collector’s limited license to display the Work, or perform the Work in the case of audiovisual works, includes, but is not limited to, the right to display or perform the Work privately or publicly: (i) for the purpose of promoting or sharing the Collector’s purchase, ownership, or interest in the Work, for example, on social media platforms, blogs, digital galleries, or other Internet-based media platforms; (ii) for the purpose of sharing, promoting, discussing, or commenting on the Work; (iii) on third party Marketplaces, exchanges, Platforms, or applications in association with an offer to sell, or trade, the Token associated with Work; and (iv) within decentralized virtual environments, virtual worlds, virtual galleries, virtual museums, or other navigable and perceivable virtual environments, including simultaneous display of multiple copies of the Work within one or more virtual environments.

So apparently you can say you “own” the work, but you don’t really have any rights to it.

Where I come from ownership = rights. But apparently things are a lot different in the 21st digital century.

Basically the term “owner” really doesn’t have any clear meaning here. In reality, you’re just a licensor, with the ability to display the artwork in certain contexts.

Certain contexts? Are there restrictions? Yes:

Collectors Shall Not Make Commercial Use of Artwork

Collectors have the right to sell, trade, transfer, or use their SuperRare Items, but Collectors may not make “commercial use” of the underlying Work including, for example, by selling copies of Work, selling access to the Work, selling derivative works embodying the Work, or otherwise commercially exploiting the Work.

So, technically, you can’t post your artwork to page that may have Google ads on it, or in a monetized video. You can’t make a t-shirt of your new artwork and sell it. You are not allowed to monetize something you “own.”

You can however, find another sucker who might be willing to pay you for the “privilege” of owning the NFT. That’s basically it.

At least with a print of artwork, you have something physical. Yea, you might not own the original or any commercial rights, but you’re also not hamstrung by a brokerage telling you where you can and cannot display your work, and potentially revoking your ownership rights if you violate the agreement — I haven’t checked, but I would bet there has to be some facility to revoke a token under certain conditions. This emphasizes another issue: Who has examined the underlying Ethereum smart contract code to find out whether this ownership is or isn’t reversible?

The Limited License Belongs Only to the Current Owner of a SuperRare Item

The User agrees and acknowledges that the lawful ownership, possession, and title to a SuperRare Item is a necessary and sufficient condition precedent to receive the limited license rights to the underlying Work provided by these Terms. Any subsequent transfer, dispossession, burning, or other relinquishment of a SuperRare Item will immediately terminate the former Owner’s rights and interest in the license or SuperRare Item as provided by these Terms.

Interestingly enough, it may seem that a person who doesn’t hold the NFT may have more rights, since they are not expressly prohibited from using the image for commercial purposes. So it seems if you purchase a NFT for your favorite artwork, you agree to more restrictions than non-owners.

And once again, it’s clearly stipulated, the artist isn’t giving anything up relative to actual “ownership” of their art, by creating a token:

The Artist’s Rights and Restrictions

The Artist owns all legal right, title, and interest in all intellectual property rights to creative Works underlying SuperRare Items Minted by the Artist on the Platform, including but not limited to copyrights and trademarks. As the copyright owner, the Artist enjoys several exclusive rights to the Work, including the right to reproduce, the right to prepare derivative works, the right to distribute, and the right to display or perform the Art. Subject to, and in accordance with these Terms, the Artist hereby acknowledges, understands, and agrees that Minting a Work on the Platform constitutes an express and affirmative grant of the limited license rights to the Work to all subsequent Owners of the SuperRare Item, as provided herein.

So what does it cost?

As of the time of this writing, based on the TOS, there’s an 18% surcharge on top of the sale of any NFT. The exchange charges an extra 3% on top of the transaction amount, and then takes 15% of the sale price as commission netting the artist 85% of the sale price for an initial NFT sale.

I can’t find any details on who pays for the gas/transaction fee for the blockchain transaction, but that may be another fee the buyer has to pay.

However, the real money comes in reselling the work. The original artist gets a whopping 10% commission on any secondary sales on the platform. The TOS don’t mention what happens with the 90%…. obviously it goes to the house. If you assume a subsequent piece of art will sell for more than it did originally, that’s a huge payday for the NFT exchange. Hardly fair to the artist if you ask me. But then again, the real suckers are the buyers because the artist still owns “exclusive rights” to their work. Although they do grant the exchange a bunch of rights too:

Artist Grants SuperRare a License to All Minted Works

The Artist hereby acknowledges, understands, and agrees that Minting a Work on the Platform constitutes an express and affirmative grant to Pixura, its affiliates and successors a non-exclusive, world-wide, assignable, sublicensable, perpetual, and royalty-free license to make copies of, display, perform, reproduce, and distribute the Work on any media whether now known or later discovered for the broad purpose of operating, promoting, sharing, developing, marketing, and advertising the Platform, the Site, the Marketplace, or any other purpose related to the SuperRare Platform or business, including without limitation, the express right to: (i) display or perform the Work on the Site, a third party platform, social media posts, blogs, editorials, advertising, market reports, virtual galleries, museums, virtual environments, editorials, or to the public; (ii) create and distribute digital or physical derivative works based on the Work, including without limitation, compilations, collective works, and anthologies; (iii) indexing the Work in electronic databases, indexes, catalogues, the Smart Contracts, or ledgers; and (iv) hosting, storing, distributing, and reproducing one or more copies of the Work within a distributed file keeping system, node cluster, or other database (e.g., IPFS) or causing, directing, or soliciting others to do so.

And agrees to hold the exchange not responsible for anything:

User Releases SuperRare from Copyright Claims

The Artist and all Users irrevocably release, acquit, and forever discharge Pixura and its subsidiaries, affiliates, officers, and successors of any liability for direct or indirect copyright or trademark infringement for Pixura’s use of a Work in accordance with these Terms, including without limitation, Pixura’s solicitation, encouragement, or request for Users or third parties to host the Work for the purpose of operating a distributed database and Pixura’s deployment or distribution of a reward, a token, or other digital asset to Users or third parties for hosting Works on a distributed database.

So, just like in the mainstream world of crypto, in the world of NFTs, the real money to be made is by the exchanges, fleecing people who think they actually own something of value, when they don’t.

So far that’s just one site’s TOS… maybe we should look at another? Here’s another popular site called Nifty:

Source: https://niftygateway.com/termsofuse

NiftyGateway has an even more ambiguous series of Terms of Service that don’t mention any details on what rights you have as the purchaser of a NFT. The only section of “ownership” is this:

6) Ownership

Unless otherwise indicated in writing by us, the Site, all content, and all other materials contained therein, including, without limitation, the Nifty Gateway logo, and all designs, text, graphics, pictures, information, data, software, sound files, other files, and the selection and arrangement thereof (collectively, “Nifty Gateway Content”) are the proprietary property of Nifty Gateway or our affiliates, licensors, or users, as applicable. The Nifty Gateway logo and any Nifty Gateway product or service names, logos, or slogans that may appear on the Site or elsewhere are trademarks of Nifty Gateway or our affiliates, and may not be copied, imitated or used, in whole or in part, without our prior written permission.

You may not use any Nifty Gateway Content to link to the Site or Content without our express written permission. You may not use framing techniques to enclose any Nifty Gateway Content without our express written consent. In addition, the look and feel of the Site and Content, including without limitation, all page headers, custom graphics, button icons, and scripts constitute the service mark, trademark, or trade dress of Nifty Gateway and may not be copied, imitated, or used, in whole or in part, without our prior written permission.

Notwithstanding anything to the contrary herein, you understand and agree that you shall have no ownership or other property interest in your account, and you further agree that all rights in and to your account are and shall forever be owned by and inure to the benefit of Nifty Gateway.

Users of this site appear to have even more restrictions, and are not even allowed to link to their exchange content in most cases unless it’s just a link straight to their site. And over and over it says users basically own nothing and have very little rights, if any, to any content in their account.

This TOS also has the dubious reference to another set of Terms of Service that you also have to agree to when you register an account. So there’s another hidden set of terms that I was unable to find that are also in play.

Perhaps one of the most truthful parts of Nifty’s TOS is a disclaimer on the risks:

11) Risks

Please note the following risks in accessing or using Nifty Gateway: The price and liquidity of blockchain assets, including Nifties, are extremely volatile and may be subject to large fluctuations; Fluctuations in the price of other digital assets could materially and adversely affect Nifties, which may also be subject to significant price volatility; Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of Nifties; Nifties are not legal tender and are not backed by the government; Transactions in Nifties may be irreversible, and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; Some transactions in Nifties shall be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that you initiated the transaction; The value of Nifties may be derived from the continued willingness of market participants to exchange fiat currency or digital assets for Nifties, which may result in the potential for permanent and total loss of value of a particular Nifty should the market for that Nifty disappear; The nature of Nifties may lead to an increased risk of fraud or cyber attack, and may mean that technological difficulties experienced by Gemini may prevent the access to or use of your Digital Assets; Changes to Third Party Sites (discussed in Section 12 below) may create a risk that your access to and use of the Site will suffer.

You agree and understand that you are solely responsible for determining the nature, potential value, suitability, and appropriateness of these risks for yourself, and that Nifty Gateway does not give advice or recommendations regarding Nifties, including the suitability and appropriateness of, and investment strategies for, Nifties. You agree and understand that you access and use Nifty Gateway at your own risk; however, this brief statement does not disclose all of the risks associated with Nifties and other digital assets. You agree and understand that Nifty Gateway will not be responsible for any communication failures, disruptions, errors, distortions or delays you may experience when using Nifties, however caused.

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