• Beyond the hype of the NFT: Developing Long-Term Business Models for Artists

  • Nonfungible tokens, or NFTs, could be said to have existed since 2012. For example, the launch of “Colored Coins” in 2012 may have paved the way for NFTs today, as this project demonstrated how the Bitcoin (BTC) blockchain could be used as a transaction mechanism for real-world assets.

    Fast forward to 2017, when CryptoKitties became one of the most popular Ethereum-based decentralized applications, or DApps. CryptoKitties was described as “the first Ethereum-based decentralized Pokemon-like game, in which users can collect and breed digital kittens” by Ryan Hoover, founder of Product Hunt, in 2017.

    Unsurprisingly, as cryptocurrencies became more widely accepted, the concept of nonfungible tokens grew in popularity. During the first half of 2021, NFT sales surpassed $2.5 billion, demonstrating the potential of a seemingly new business model for digital creators. However, as the year 2021 progresses, some in the industry believe that the original intentions of NFTs have become muddled by the financial gains frequently associated with these digital collectibles.

    According to John Wolpert, co-founder of TreeTrunk and head of research and development at ConsenSys Mesh, what makes NFTs both exciting and problematic is that they are being marketed in financial terms. “There is a lot of money to be made from NFTs,” he says, “but we need to ask ourselves if we are talking about NFTs as stocks or if we actually care about the artists and their artwork.” Furthermore, while it’s impressive that artists like Mike Winkelmann, aka Beeple, have made millions of dollars from a single NFT sale, Wolpert questions how long these instances will last:

    “What happens if the million-dollar NFT is sold for less than $1,000?” There is no evidence that we are in a pattern that does not result in crowding out. This begs the question, “Is there a real, long-term business model beyond the NFT hype?”

    A royalty stream as a long-term business model for NFTs

    According to Wolpert, there is currently no long-term business model underlying NFTs, as he believes most are financial projects that will fade as the hype surrounding nonfungible tokens fades. Given this, Wolpert believes in a multilevel marketing structure that will ensure a consistent stream of revenue for NFT artists worldwide.

    The “tree trunk approach,” as Wolpert calls it, ensures that buyers are selling a revenue stream while also resolving the “double-spend” problem that occurs when digital media is reproduced infinitely with no variations. Nonfungible tokens, for example, are considered immutable records on a blockchain, but Wolpert pointed out that they are easily replicated. “If an NFT is a picture, I can copy the token’s IPFS and put it on another blockchain.” In NFT land, double spending is alive and well.” However, by renaming an NFT a “tree trunk,” Wolpert explained that each owner or reseller of the artwork will have a one-of-a-kind, exclusive version that cannot be copied before it is sold to someone else.

    Although they have not yet been released, Wolpert revealed that they are made using “crypto lithography,” a mechanism that employs privacy-centric zero-knowledge proofs: “With zero-knowledge proofs, NFT files are never seen by anyone, including the owner, but it is still possible to prove what an NFT looks like and whether images were created based on an original NFT artwork.” Wolpert referred to the original NFT images as the “parent file,” analogous to a family tree, while copies based on the original are referred to as “children files.” If enough copies are made, there may even be “grandchildren files.”

    The verification process would be accessible to any artist. According to Wolpert, such a tool is necessary because, in the digital world, revealing the 1s and 0s of a piece of art allows it to be easily copied. As a result, someone else may claim ownership of the original piece.

    Disputes over NFT royalties

    In terms of revenue, Wolpert mentioned that TreeTrunk NFTs could be sold on secondary marketplaces such as OpenSea, explaining that when an NFT is sold, each reseller — including the original creator — will receive royalties. “There is now a tree-like revenue stream where the original artist serves as the trunk,” Wolpert explained. While the concept of TreeTrunk NFTs is intriguing, a number of issues may arise. The idea of paying buyer royalties, in particular, may raise legal concerns.

    According to Brett Harrison, president of cryptocurrency exchange FTX.US, while the FTX NFT marketplace allows creators to earn royalties from secondary sales, complications arise when an artist makes an NFT resemble an investment product. As a result, Harrison stated that FTX will not endorse an NFT that may be subject to securities regulation: “We believe that if an NFT distributes a portion of secondary royalties to all holders, it looks more like an investment contract.”

    Despite the fact that FTX’s NFT marketplace has chosen not to support buyer royalties, it is important to note that regulations remain unclear. Hester Peirce, a Securities and Exchange Commission commissioner known as “Crypto Mom,” warned in March that issuers of fractionalized nonfungible tokens and NFT index baskets could be distributing investment products.

    However, it is still too early to tell whether NFTs will become securities right away. According to Dan Simerman, head of financial relations at the Iota Foundation, what is likely needed now is a lightweight framework that is as robust as current securities laws but does not stifle innovation:

    “With blockchain technology, it’s possible that all digital ‘things’ will be able to earn yield and royalties, so we may need to reframe what it means to be a security or earn royalties at all.”

    To ensure the integrity of current NFT business models

    Aside from royalties, ensuring the integrity of NFTs is a critical problem to solve before determining the structure of a long-term business model. While TreeTrunk NFTs provide authenticity through zero-knowledge proofs based on the Baseline Protocol standard, other marketplaces take a different approach.

    For example, Harrison explained that FTX’s NFT marketplace takes specific steps to ensure that NFTs traded on the platform are genuine: “When NFTs are generated, they include a set of creator addresses that ensure the original creator can verify their work, for example, by signing a transaction on Solana.” “Unless you are a creator and have control over another creator’s wallet, you cannot authenticate as that user,” he added. No one can pretend to be another user’s wallet.”

    Despite this, Harrison is aware that people can still make copies of JPG images. Emily Poplawski, chief operating officer of Metaplex Studios, an NFT storefront solution, told ULTCOIN365 that some platforms are using human verification for NFTs in an attempt to solve this problem. For example, Poplawski mentioned that the DigitalEyes NFT marketplace for Solana, like Twitter, allows NFTs to be verified with a blue checkmark. However, Poplawski pointed out that these solutions are far from perfect and are prone to errors:

    “The business model of NFTs is still in its early stages, and there is a lot of experimentation.” It is, however, a game changer for thousands of people right now. In this brave new world of financial empowerment made possible by decentralization, stories of people quitting their jobs as gas station attendants, paying off student loans, or writing $100,000 checks to charity are quite common in our community.”

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