Can NFTs Actually Solve The Royalty And Ownership Problem?

Non-Fungible Tokens or NFTs have been in existence since 2014 but recently their popularity has seen a meteoric rise. More and more artists today are converting their original works into NFTs with the hope of getting better royalties, but can this happen?

There is a lot of speculation in the crypto-verse about NFTs and how they can benefit artists in all industries. While many people believe that NFT is the answer to the ever-present royalty and ownership issue, a faction also counters this notion.

Before we try to speculate which side of the argument is stronger, let us find out what NFTs are and why artists are hovering around them like moths to a flame.

What is an NFT?

Non-Fungible Tokens or NFTs are tokenized blockchain assets. They can represent any physical or virtual object. Each NFT is unique and authentic. They cannot be copied, interchanged, or replicated because the underlying code of each NFT is different.

Fungible Tokens and Non-Fungible Tokens are intrinsically different from each other. Cryptocurrencies are Fungible Tokens because they have an equivalent fractional value. Everybody knows the value of one Bitcoin right now.

Non-Fungible Tokens do not have an equivalent fractional value, they represent unique and individualized values. The value of NFT is subjective to the creator and the bidder and thus there is no yardstick to gauge the real value of an NFT.

Why do people think NFT can solve the royalty and ownership problem?

With the advent of blockchain technology, peer-to-peer trustless transactions have become possible. Now there isn’t a need for middlemen in any transaction and thus creators and artists don’t need to depend on recording labels and production and distribution houses for their royalties.

Blockchain technology creates immutable digital ledgers as every transaction is recorded on the public network and cannot be changed. This technology also allows artists to preprogram royalty conditions into their work.

In principle, this means that artists get control of where their work goes and how much they get paid for it. Also because their work cannot be counterfeited, they get rid of the piracy issue surrounding their work.

If two or more creators are coming together to produce a piece they can take advantage of fractional ownership rights. There can’t be any dispute regarding which party gets how much royalty because the share of each party is already predetermined.

And to top it off, every time an NFT is flipped, the creator of the NFT gets his royalty share. This means even after the creator has sold his NFT to a buyer, he can still make money from the NFT from all its subsequent sales.

Isn’t this the wet dream of every artist and creator? But is this true or something is missing in the fine print?

Let’s first address the ownership issue surrounding NFTs

NFTs have been selling for crazy sums of money in the past couple of years. Naturally, when a buyer buys a certain artwork for upwards of a million dollars he is expecting to get the ownership of the piece.

The reality is that when a buyer buys an NFT all he is buying is Metadata associated with the work and not the work itself. This confusion stems from the fact that everyone from the buyer to the reporter assumes that the work itself is being sold simply because of the sums of money involved.

Is NFT actually solving the royalty problem?

While theoretically, NFTs do promise to give greater control to the creator because of the underlying smart contract, the reality is starkly different. Creators feel that every time their NFT will be flipped, they will receive their fair share of royalty, but that doesn’t always happen.

The biggest problem with the NFT marketplace is that different markets are not designed to be compatible with each other. Smart contracts indeed allow peer-to-peer transactions, but they can’t communicate with each other across different blockchains.

Let’s say the artist creates his NFT and sells it to a buyer. He will get paid for this first sale. But then if the buyer lists this NFT on a different platform and sells it for three times the original price, the artist gets nothing from the sale.

This is because right now every creator who creates his NFT has his royalty tied to the marketplace where the NFT was originally minted. Because the creator cannot stop the buyer from listing the NFT in other marketplaces, there is a big possibility that the creator will miss out on royalties from any and every subsequent sale.

Another major issue is private sales. Most sellers are now opting for private sales to avoid the hefty transaction fee. In a private sale, the NFT is transferred directly from the seller’s wallet to the buyer’s wallet.

So if a buyer buys an NFT from a creator and then flips it using the private sale model, he will effectively cut the creator and the corresponding marketplace from the entire transaction sequence.

What is the solution?

The solution to this problem is a simple one. If all the NFT marketplaces agree upon Universal Token Standards, then the creator will always get his royalties irrespective of the marketplace of blockchain where the NFT is subsequently sold.

Everything that looks simple though, is not always realistic. Right now NFT marketplaces are in the midst of cutthroat competition and each blockchain wants to emerge as the winner. Achieving interoperability between blockchains and Universal Token Standards right now is simply a pipedream.

Conclusion

NFT indeed has promise and blockchain technology is evolving at lightspeed. While right now NFTs promise to solve royalty and ownership issues only theoretically, it is not beyond the realms of imagination that this idea can be implemented practically and fairly quickly.

Within less than a decade, blockchain technology has shown tremendous advancement and there is still a lot of room for improvement. As the marketplaces and the technology matures, the hope of creators can certainly become a reality.