Real Use of NFTs

Before we get to the real use of NFTs, we need to understand the concept of NFTs.

What is a NFT?

• NFT is a cryptographic asset that exist on the blockchain and is unique creating digital scarcity for the asset.

• Currently they are being widely used to link the ownership of digital assets.

• NFTs are traded on various exchanges and most people are buying them by trading them for other cryptocurrencies like ethereum, solana, near etc.

The problem with NFTs at the time

• Most people are buying NFTs because they think they own the digital asset. But they are not the owner of the digital asset. They just own the access to the link to the digital asset and they don't even have the complete ownership of the link as the domain owner of the particular link ( in case it is not deployed using ipfs ). The domain owner of the link is the person who has the rights to change the content being delivered through that link.

In short NFTs are the pointer towards the digital asset and they are not the digital asset itself and you don' have the guarantee that the pointer will work forever.

Why don't I own the digital asset?

• Even if you have the ownership of the link that does not mean that you are the sole owner of the digital asset.

• Many digital assets are so huge in size that it is difficult to store them on the blockchain and not feasible at all that's why the stored off chain and only the link is stored.

• Any person can copy the digital asset and use it for their own purpose and that's why the digital asset is not owned by the NFT owner.

If I buy the NFT at least I will have the copyright to the digital asset right?

• Owning an NFT does not confer ownership of the underlying work that the NFT represents. See more here

Is there any way to own the digital asset?

• Legally you can own the copyright to the digital asset. But even if you do others can still use the digital asset by a simple copy paste.

• You can try to use encrypted media solutions to reduce theft but there are still loopholes in the system. You can read about them over here and here.

Understanding the economic value of Digital Assets and Digital Scarcity

• In normal everyday economics even the copies of the art has some value they are not as valuable as the original art but they still have some value.

• For example,

is not as valuable as the original mona lisa but still costs 9,000 indian rupees.

The original painting is worth more than the copy. But the copy is still valuable.

How to determine the value of the copy?

The major parameters that determine the value of the copy are:

• Scarcity
• Ease of Production
• Quality

Why does the original painting have a higher value than the copy?

• The original painting also carries the story with the painting which makes the art subjective that's why people are more likely to buy the original painting if they like the story and have the capital.

• The copy is not subject to the same story.

• Even though there is no inherent law that states the copy of an artwork cannot be more valued than the original as a story can also be attached to the copy.

Does copies of the digital assets have any value?

• Well if the digital asset is protected by copyright then the copy of the digital asset is protected by copyright and the owner can license others to use that digital asset for commercial uses. But if the digital asset is not protected by copyright then the copy of the digital asset is not protected by copyright and anyone can use that digital asset for commercial uses.

  So the copy of the digital asset has no value but the license has value.

• Also even if the digital asset is protected by copyright people can easily pirate the content and share it using torrents.

Understanding torrents as a technology

• A torrent file (.torrent) contains information telling users which computers are part of the file-sharing process. It may also provide some details on the files and folders that a user is downloading.
• The torrent client connects to a tracker, which holds the IP addresses of the devices in a swarm. The tracker forwards the IP addresses to all torrent clients to ensure all peers are connected.
• The torrent client starts the download. Once it receives sufficient bits of data, it also begins to upload the file for the benefit of other users.

This technology is mostly used for file sharing and downloading.

Why pirates are using torrents

• Well the main reason why pirates are using torrents is because they are using the technology to share the content in a way that not a single person would be targeted for pirating the content.

Torrenting is legal but piracy is not.

Then do the copy of the digital asset have any value?

• Theoretically the copy of the digital asset has the same value as the original digital asset because we can download the at lossless quality.

• And as we can download the digital asset at lossless quality then there is no scarcity of the digital asset.

Thus Digital Assets have no value and there is no scarcity of the digital asset and thus there is no value of the copy of the digital asset.

Does it mean pirating digital assets became legal?

Well yes and no.

• As we can see digital asset has no monetary value and there is no scarcity of the digital asset. Thus sharing the digital asset is not piracy as the people who are downloading the pirated torrent are no gaining any monetary value.

• But if the digital asset is protected by copyright then you need to pay to use the digital asset for commercial purposes.

• You are paying for the license and not for the digital asset.

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So till now we have concluded that digital assets have no value specially if unprotected by copyright and just depending on an nft to show proof of possession.

If you would like you can also read my personal thoughts on digital scarcity and digital assets here.

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Now let's see what use cases are there for NFTs

NFTs are not that useful for showing the possession of the digital asset when there is no defined end consumer but when there is a defined end consumer like a company or a person then it becomes very useful.

For example,

There is a company who is hosting a concert and wants to sell the tickets to the people who are interested in the concert.

If the company decides that all the tickets will be sold through the medium of nfts we can see if there is not reselling of the tickets in the black market as the ownership can be validated by the company using the chain and even if some one resells the company would get back the profits from the reselling.

This way the nft it self had no value but can be exchanged to get something of value just like a currency but for a very unique purpose.

Thus using nfts as a medium of exchange of ownership is a very good use case for NFTs specially when the end consumer is a predefined entity like a company or a person.

Another use case of NFTs to show ownership of the digital asset.

If we can link the copyright to the digital asset in the nft then we can sell the nft to people who are interested in getting the rights to that digital asset.