The Laboratorium (3d ser.)

A blog by James Grimmelmann

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I Do Not Think That NFT Means What You Think It Does

I recently tweeted that every sentence of this “explanation” of blockchain-based non-fungible tokens (NFTs) from the Harvard Business Review is false:

NFTs have fundamentally changed the market for digital assets. Historically there was no way to separate the “owner” of a digital artwork from someone who just saved a copy to their desktop. Markets can’t operate without clear property rights: Before someone can buy a good, it has to be clear who has the right to sell it, and once someone does buy, you need to be able to transfer ownership from the seller to the buyer. NFTs solve this problem by giving parties something they can agree represents ownership. In doing so, they make it possible to build markets around new types of transactions — buying and selling products that could never be sold before, or enabling transactions to happen in innovative ways that are more efficient and valuable.

In a follow-up thread, I expanded on why I am so skeptical about NFTs. I thought it would be useful to clean up and collect my thoughts in one place. I am a law professor who thinks a lot about digital property and about decentralized systems, and I think the idea that NFTs are about to revolutionize property law misunderstands how property law actually works.

Loosely speaking, there are three kinds of property you could use an NFT to try to control ownership of: physical things like houses, cars, or tungsten cubes; information like digital artworks; and intangible rights like corporate shares.

By default, buying an NFT “of” one of these three things doesn’t give you possession of them. Getting an NFT representing a tungsten cube doesn’t magically move the cube to your house. It’s still somewhere else in the world. If you want NFTs to actually control ownership of anything besides themselves, you need the legal system to back them up and say that whoever holds the NFT actually owns the thing.

Right now, the legal system doesn’t work that way. Transfer of an NFT doesn’t give you any legal rights in the thing. That’s not how IP and property work. Lawyers who know IP and property law are in pretty strong agreement on this.

It’s possible to imagine systems that would tie legal ownership to possession of an NFT. But they’re (1) not what most current NFTs do, (2) technically ambitious to the point of absurdity, and (3) profoundly dystopian. To see why, suppose we had a system that made the NFT on a blockchain legally authoritative for ownership of a copyright, or of an original object, etc. There would still be the enforcement problem of getting everyone to respect the owner’s rights.

There are two ways to enforce NFT “ownership.” The first is to get the legal system to do it. Judges would issue orders saying you own this widget because you have the Widget NFT, and then county sheriffs would show up to take possession of the widget and give it to you. The thing is, if you’re going to do that, there’s no point to the blockchain. We already have land registries, the DMV, and the Copyright Office. The blockchain is just an inefficient way of telling judges and sheriffs to do the same thing.

The other is to enforce everything digitally, by linking the physical world to the blockchain using secure digital hardware devices. That way, your car won’t start unless you prove ownership of the YourCar NFT. There are some serious downsides here. When your computer gets hacked, you also lose ownership of your car!

Sometimes, NFT advocates avoid dealing with the inconvenient fact that the physical world doesn’t run on a blockchain by shifting to a future in online spaces that do. They propose a blockchain-based metaverse, or online games with NFT-based economies, etc. The thing is that we’ve had digital property in those virtual spaces for decades. None of them needed a blockchain to work.

The bottom line is that almost1 everything NFT advocates want to do on a blockchain can be done more easily and efficiently without one, and the legal infrastructure needed to make NFTs work defeats the point of using a blockchain in the first place.

I say “almost” everything because NFT art may be an exception. A lot of the current hype around NFTs consists of the belief that the rest of the world will follow the same rules as NFT art. But of course part of the point of art is that it doesn’t follow the same rules as the rest of the world. ↩︎