What Do You Actually Own If You Buy an NFT?

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The term NFT is being thrown around plenty right now, and interest in these strange blockchain tokens is only set to grow in the coming years.

But before spending even a small amount on an NFT, or “digital collectible,” you should know exactly what it is that you’re purchasing. It’s probably not what you expect.

What is an NFT?

NFT stands for “non-fungible token.” A token is a digital asset that can be transferred between people on a blockchain. And a non-fungible token is a completely unique token. It can’t be replicated or divided into smaller parts. This property of uniqueness gives NFTs a wide range of potential uses.

In contrast, a fungible token is a token that another identical token can easily replace. One example would be cryptocurrency tokens. One Bitcoin is, for all intents and purposes, identical to another Bitcoin.

Right now, we’re seeing NFTs mainly being used to sell “digital collectibles” such as digital art, music, online articles, tweets, in-game items, and collectible cards such as CryptoKitties.

NFTs can represent different types of assets. Because of this, they can have different rules attached to them. These rules are often referred to as Smart Contracts and are defined by their programming code, which controls the transfer of ownership and verification of NFTs.

So What Are You Actually Buying?

Holding Money

When you buy an NFT from one of the many NFT marketplaces out there, you’re paying for a token that represents a unique item. In other words, you’re paying for an extremely small digital record (likely only a few bytes in size, which often contains a URL or a serial number) that’s sent to your address on the blockchain. That’s it.

Having ownership of this token means you can prove that you own a specific item and that the item you own is authentic—kind of like a certificate of authenticity.

If you own that NFT, nobody else can own it, unless you sell (or give) it to them.

Owning an NFT is analogous to having possession of the deeds to a house. The deeds are a record of ownership, not the house itself. Similarly, an NFT is a record of ownership or authenticity of an asset, not the asset itself.

Inherently, NFTs are nothing more than this.

What an NFT is Not

An NFT is not the digital asset itself. If you buy the NFT for a piece of digital art, the NFT is not the image file. It is only the record of ownership or authenticity that’s stored on the blockchain. The image file will be hosted elsewhere.

It’s like buying a limited edition print of a photograph. As the owner of the print, you would not have any exclusivity rights over that photo. You wouldn’t own the copyright of the photo. You couldn’t sell your own reprints of the photo. And you couldn’t use the photo for commercial purposes. However, owning the certificate of authenticity for your print confers value to that print.

The case is pretty much the same with NFTs. Owning an NFT by itself does not automatically grant you any rights to its intellectual property at all. By default, the original author of the work (a record of which is stored in the NFT) retains ownership of the copyright.

As you can see, by default, NFTs transfer very few rights to you. Absent any additional terms or written agreements. This is all you get.

Additional Terms With NFTs

This being said, many NFTs do indeed come with additional terms that explain in more detail what you can do with your new purchase. This is why it’s so important to fully understand the terms of every NFT you purchase, as they can vary wildly from one to another.

Drabber Labs Inc., the company behind CryptoKitties, has created a simple NFT License that explains what you can and can’t do with an NFT that they created. This license makes it clear that you do not own any copyright. Rather, you own a form of licensed content.

Other NFTs do not automatically come under the “NFT License,” although any NFT project can choose to adopt this license if they wish. Other licenses containing different sets of terms will no doubt be developed in the future.

The takeaway: before purchasing an NFT, read the terms carefully to understand what you can and cannot do with your purchase.

What Could Go Wrong?

There are many things that could go wrong when purchasing NFTs.

First, it’s still very early days. Legal frameworks that protect traditional ways of purchasing don’t exist yet for NFTs. For instance, if the author of an NFT screws you over by minting more copies of your “rare” digital asset, there might be little you can do.

Similarly, if you’re attempting to purchase ownership or outright copyright when buying an NFT, you should check that the seller actually owns the asset in the first place. If so, the transfer of ownership should really be put in writing, so it’s definitely protected under current legislation.

Second, many NFTs simply contain a link to the digital asset in question. If this link breaks, if the owner redirects the URL to a different location, or if the hosting account isn’t renewed, your NFT may become worthless. This isn’t always the case as more and more NFTs are being hosted via IPFS, which largely protects against this risk.

Related: Goodbye HTTP: A Faster, Safer, Decentralized Internet With IPFS

Third, an NFT you purchase may have exorbitant royalties attached. This means that when you sell the NFT to someone else, the author may get a huge portion of the sale. This is something you need to check for before buying your NFT.

Do You Still Want to Buy That NFT?

With NFTs being the craze of 2021, it’s vital to know what you’re actually going to “own” when making a purchase.

Many promises are being made in this space, and with this comes a lot of speculation. With this in mind, consider the risks before splashing your cash, and do your due diligence before making a purchase.

Knowledge really is key here, from understanding what the blockchain is to understanding what you can actually do with the assets you buy.

Image Credit: travisessinger/Unsplash

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