NFTs are not property rights just like Bitcoin is not money.
Property rights are usually described as a bundle of rights, but every concept can be described as having a bundle of qualities, so what matters is determining what qualities are essential. For example, money is usually defined as having at least three primary functions (1. Unit of account; 2. Medium of exchange; 3. Store of value) which require many qualities such as being fungible, easy to transport, hard to counterfeit, and easily divisible. But some properties are more essential than others. For example, most stores of value are not money. On the other hand, everything that is used as a unit of account IS called money. So being a unit of account is the single most essential function of money followed by usefulness as a medium of exchange. Bitcoin is not money because it is never used as a unit of account and it is rarely used as a medium of exchange except for illegal transactions. The bitcoin payment system is much safer than the banking system for illegal transactions.
Blockchain enthusiasts claim bitcoin is a superior form of money, but it is not even money at all. It is a fungible collectable that is useful for two things: speculation and facilitating illegal exchanges. Some argue that it is also a good hedge against social collapse which could be true someday but so far when there is a place where the monetary system collapsed, the internet has also become unreliable, so bitcoin isn’t the best hedge against societal collapse. In societies where the monetary system has collapsed like Afghanistan or Somalia, or ISIS territory, foreign cash (like US dollars) and commodities (like gold) have been more popular than bitcoin. Bitcoin is simply less convenient as a medium of exchange for most transactions and it is impossible to use bitcoin whenever one party to an exchange lacks an internet connection.
NFTs give no property rights over anything.
In addition to claiming to have revolutionized money, blockchain enthusiasts also now claim to have reinvented property rights using “non-fungible tokens” or NFTs. Again this is wrong because NFTs have almost nothing to do with actual property rights. It is a total sham. Property rights can entail a complex bundle of rights, but the one essential feature of every property right has is the power to exclude other people from doing something. A property right is essentially a right to restrict the freedom of everyone else. Because an NFT doesn’t give anyone any power to exclude others from anything (except an encrypted number that has no intrinsic value), it adds nothing new to the realm of property rights. It is just the exclusive right to an encrypted number. That’s it. There is nothing revolutionary there.
The advent of NFTs is a logical conclusion of cryptocurrency evolution because every cryptocurrency mostly has value from being a kind of collectible. Collectibles get their value from speculation and from an underlying usefulness of ownership. The wild swings in the prices of collectibles is due to the crowd psychology of everyone speculating about what other people will pay for them. There must be a scarce (very inelastic) supply or else there is no point speculating because a rise in price will simply cause more supply which will limit the price rise.
In most cases, there is also some underlying use and most collectibles are aesthetically pleasing to look at, and some collectables have practical uses too. For example, gold is both an aesthetically beautiful metal and it has industrial uses. Bitcoin gets it value as a collectible from the fact that many libertarians have political values that appreciate the aesthetic dream of replacing government-run money. Bitcoin also has a use value because it is the best way to facilitate many illegal transactions and as a hedge against monetary collapse. Rich Russians love Bitcoin for both reasons. Bitcoin thus gets underlying value from both its aesthetic value to libertarians and its practical use value.
NFTs clearly have the same kind of aesthetic value as cryptocurrency, but unlike cryptocurrency which are useful for facilitating illegal transactions, NFTs currently have zero practical use value because they do not confer any more rights than any unit of cryptocurrency confers. Both NFTs and cryptocurrency only give the property right to exclude others from an encrypted number. The sellers of NFTs CLAIM that an NFT gives the property right to something—usually something aesthetically pleasing like a digital artwork–but because an NFT does not give anyone any exclusive power over anything but the token, this is a false claim. People who buy an NFT are just buying an encrypted number which gives zero property rights over anything else.
NFTs are different from ordinary cryptocurrency in that each NFT includes a compressed digital image or other digital media and NFT sellers say that the NFT confers a right to that image, but they are deliberately trying to confuse people with the idea of intellectual property which is a government-enforced right to exclude others from some information. An NFT gives no such right. I could buy an NFT and copy the digital image in it and then sell the NFT and thus keep my pie and eat it too. I’d have both the money and the digital image and nobody could stop me.
The idea that an NFT gives power over whatever is named on the token is a bit like the idea some tribal peoples have about cameras. They think that when a photographer takes their picture, the photograph takes part of their soul and achieves some ownership over part of their being. But owning a photograph doesn’t really give any power over whoever is pictured any more than owning an NFT gives power over anything named on the token unless we all believe that it does. But it is the shared belief in property rights that gives them power and there is no more reason to believe in the power of an NFT than to believe in the power of a photo to capture ownership over whatever is pictured.
Six ways to justify property rights.
There are various ways to justify property rights and Michael Heller and James Salzman argue that they all fit into six stories that are traditionally used. The use of an NFT doesn’t fit into any of these stories:
- attachment, “My home is my castle, and anything attached to it is also mine.”
- first-in-time, “I was first.”
- possession: Nine-tenths of the law. Mine because I’m holding onto it.
- a labor claim.: “It’s ours because we worked for it.”
- self-ownership, “It’s mine because it comes from my body.”
- family – “it’s mine because I’m in the family”
Ultimately, most property rights in capitalism are created and maintained by government. IF governments start using NFTs to keep track of property rights much like they use legal deeds today, then NFT’s may someday actually confer the right to exclude people from something much like a copyright gives owners the right to restrict everyone else’s freedom of speech and a property deed gives owners the right to stop tresspassers. But until governments give NFTs legal weight, the whole concept is just a sham and the people who have paid over $1.5 billion for NFTs in the first three months of 2021, mostly for “ownership” of artwork are a bunch of suckers. That money gives them zero rights except the right to brag about buying an encrypted number for a ridiculous price. Anyone can enjoy the digital artworks that the NFT buyers think they bought just as much as the suckers who paid money for the NFTs.
An NFT is a receipt for patronage, not ownership
NFT enthusiasts like Chris Berg are confusing ownership and patronage. These are two completely different things.
[NFTs] offer ownership – cryptographic, certain, secure ownership – but none of the exclusive rights we usually associate with ownership. You can freely stare at my two miserable CryptoKitties [that I ‘bought’ NFTs of] as easily as I can explore Beeple’s $69 million “EVERYDAYS.”…
To buy an NFT of a piece of art is to own something without having the means of excluding others from enjoying it… The pleasure a buyer gets from owning something is the experience of ownership itself… [It is] ownership-as-consumption.
This is wrong. The pleasure an NFT “buyer” gets is the pleasure of donating money to the “seller”. It is patronage-as-consumption, not ownership-as-consumption because ownership confers rights over something and NFTs don’t confer rights over anything except a big encoded number.
So until governments start giving legal power to NFTs, lets call them what they really are. An NFT is an uncounterfeitable receipt for a donation. It is just a mechanism for giving money to the creator and getting a proof of that donation which may be worth money if the donation becomes famous. A famous receipt for a donation becomes valuable because it is famous and will get collected by others, but they are just receipts for donations and their value has little to do with the amount of the original donation and nothing to do with ownership of anything other than the receipt itself.
NFTs are also collectables
The unusual feature of NFTs compared with other kinds of donation receipts is that people like to collect NFTs which means that there is a resale market. Other kinds of fundraisers should take note and make their donation receipts fancier and more collectable to attract more donors. Some donors could then hope that the receipts might later gain so much value that people will pay more for the receipt than the original donation cost.
Each NFT is a unique and excludable digital number that some people think is cool to buy because of some famous information that is associated with it. The value of many collectables is determined by their connection with something famous and that is what makes NFTs valuable. For example, President Kennedy’s tape measure sold for $48,875 in 1996. It was an ordinary, mass-produced tape measure that was otherwise identical to tens of thousands of other tape measures except for information that it had been owned by the Kennedys. Similarly, a few mass-produced, used baseballs are worth millions of dollars whereas most used baseballs are worth $1 even though the balls themselves are indistinguishable. The difference is that a $1 baseball becomes worth millions after it gets hit in a home run in a famous game. It would be fungible with all other used baseballs except for that information associated with it. Similarly, a pair of used, mass-produced shoes worn by a famous basketball player are worth a half-million dollars more than an identical pair of used shoes without that associated information that brings fame.
NFTs become valuable collectables for being associated with fame, just like a tape measure or pair of old shoes can become valuable for having a famous history.
In theory an NFT’s owner could keep a digital artwork encoded and thus excludable from people who had not previously bought it, but that isn’t how it works in practice. The odd feature of NFTs is that although they contain a secret, encoded artwork, they become more valuable the more the digital artwork gets freely copied by the public! In theory an NFT’s owner (and all previous owners) could exclude people from seeing it, but it would not become valuable if it were kept secret. That isn’t going to become valuable and attract buyers because it won’t get famous. The main value of a collectable is being famous and to make an NFT famous requires distributing its digital artwork as widely as possible. NFT buyers have every incentive to publicly display “their” artwork for free view on the internet and hope that lots of people see it. That gives everyone the opportunity to copy it if they want their own copy for free. If the digital artwork goes viral, then that increases the chance that someone will want to buy the NFT receipt that someone originally paid for the artwork. Making the artwork freely available is the best way to make its NFT receipt famous which is only going to increase its value.
The future of NFTs is brighter than the future of cryptocurrency
Crypto currencies are not money because they are useless as a unit of account and lousy as a medium of exchange and are a long way from achieving the qualities a currency needs. In contrast, NFTs could already be useful for keeping track of ownership if governments would just give them legal legitimacy. It is easy to imagine that NFTs might someday be a better than paper stock certificates for trading shares of stock and better than paper deeds for keeping track of real estate ownership. With regulatory approval, they could track contractual debts like bonds (which are sometimes called “security tokens“). NFTs seem like they could be useful in theory, and time will tell if there is really any advantage over traditional receipts for ownership. Ultimately government will have to decide what kind of receipts have legal authority over real property and that is what will be required before NFTs are able to confer any real ownership.
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