Minted my first NFT collection today…

It’s just two pieces: my animated cat and dog avatars, along with a copy of my book: The Clubhouse Diaries.

The Clubhouse Diaries is ghostwriter Brian Penny’s first-hand account of navigating the Clubhouse Drop-In Audio app from February through August of 2021. During this timeframe, he acted as a beat reporter for the platform and reviewed shows, interviewing participants, and involving company leadership.

As the CEO announces a Creator First pilot season and opens the app to Android users and the public, a dark underbelly of hate rallies forms. Nothing is as it seems, and stories run abound of people losing money, dignity, and even their lives to the platform.

By the end, Penny determines Clubhouse is a cult run by Alpha Exploration CEO Paul Davison. The business model is unproven, and the company is selling a path it can’t provide. It fumbled its NFL partnership and wasted a ton of money hiring talent to turn “rooms” into entertainment.

How to Build an NFT Community

NFT collectors face a tough dilemma – fans buy an artist’s work because they love them. But in order to share that art with other people, they have to sell it and lose access to the back-end success of supporting that artist. That’s not a great way to build a community, and it’s something my company set out to resolve through our project. 

In fact, there are a lot of problems plaguing the NFT space – stolen art sold by unscrupulous actors looking to take advantage of a phenomenon. But the point of blockchain platforms like Ethereum and Polygon is to track a chain of ownership, and there needs to be a way to link copies back to the original owner.

Proof of ownership isn’t talked about enough, because both the artist and buyer of an artwork hold certain rights, whether it’s a movie, song, print, or digital. We understood that and developed a new NFT standard that supports the organic way an artist’s community develops and grows. It’s all about building a sustainable collector-artist relationship that incentivizes fans to contribute without punishing them for leaving.

Sell the Ape, Lose the Yacht Club

Artists create more than art; they create an ecosystem and community. And the NFT space is meant to foster the relationship between collectors and artists who enjoy their work. It’s all done through smart contracts, and today’s smart contract standards (ERC721 and ERC115) didn’t anticipate the way these communities would grow.

With so many NFT artists in this space right now, having that social proof is really important, and platforms like Twitter entered the NFT space through a verified NFT profile picture. Like a blue checkmark, it validates that you’re the one who owns that work. It adds an extra layer of emotional attachment when the NFT is part of your identity, but what happens if your life changes and you need to sell it to make money?

Bored Apes, for example, are beautiful works, but they’re not accessible to the average person when Justin Bieber is spending $1.29 million for one NFT. And he had to buy a second one barely a week later after he realized he enjoyed the private access to the Yacht Club but may one day be tempted to sell an ape. Bieber is not the artist in this equation though – he’s the collector.

The creators of BAYC were recently identified in a Buzzfeed report as 32-year-old Greg Solano and 35-year-old Wylie Aronow. And If Bieber did sell one of his Bored Apes, the only way the brand’s founders would get a cut is if the transaction takes place on the original marketplace. Current ERC standards don’t include secondary or downstream royalties on-chain.

Artists have to rely upon the goodwill of the platforms like OpenSea and others to implement something that’s in the off-chain metadata. That leaves a lot of artists either mistakenly or purposely cut out of getting secondary royalties. It’s a system that relies too heavily on trust in outside parties while stunting its own growth by design, as you leave the Yacht Club if you ever need money and sell your Bored Ape. 

Royalties should be paid to artists algorithmically, and collectors should be able to monetize the artwork they bought without needing to give up access to the community they love.

A Better Way in Web3

Word of mouth is one of the most powerful marketing forces on the planet. Over 90 percent of the population believes their friends and family over advertising, and about 13 percent of all sales can be quantifiably traced back to word of mouth. For artists, the first purchasers of their work should be the distributors, like how you tell your friends about a new song or show you discovered.

In the art world, that could be galleries, collectors, influencers, the early adopters. If they wanted to share the art, they may choose to purchase a print, create 10 copies and sell for a fraction of the cost to make the work more accessible while earning a profit. In the web2 world, copying a DVD to sell would be considered piracy, and that’s because the original creators don’t get a cut. That’s the problem with the Pirate Bay – it promotes the work without the creators being compensated.

But web3 changes that – the creator will not be losing out on secondary sales so long as the residuals are stored on chain. That means not only does the creator get a cut of secondary sales, but so do collectors. It’s a win-win situation and the key to growing our community organically. 

Once an artist sells their work in the web2 world, it’s gone. NFTs have the potential to change that paradigm to incentivize a sense of community, but we’re not there yet. There’s currently a lot of confusion over who owns what rights between the buyer and seller, and the ERC721 standard needs revision to allow this to happen. If you’re interested in an artist, you buy their work because you love it. You shouldn’t have to sell it to share that love.

Are NFTs Technically Considered Art?

Wikipedia created a stir this year when its editors determined that NFTs don’t count as art. The vote followed a long public discourse over whether NFT artists like Beeple and Pak deserve to be listed with Jasper Johns and Damien Hirst on a page listed the most expensive art sales by living artists.

Not only that, but 3LAU’s $11.7 million ‘Ultraviolet’ NFT album sale is ignored while Wu Tang Clan’s $2 million ‘Once Upon a Time in Shaolin’ vinyl record is celebrated as the most expensive album ever sold. There appears to be a stigma against NFTs that needs to be addressed.

It’s not exactly wrong either – what NFTs really are is basically just a unique indivisible number that comes along with some immutable business logic. It tells you how it can be created, how it’s managed by the owner, how it can be transferred and how we destroy it. That’s basically it – it’s just a number that is sitting somewhere. 

But what people have done starting with CryptoKitties is actually attaching a visual thing to this number. When Rembrandt signed the Nightwatch with his handwriting, how do you know that the Nightwatch is actually authentic? 

They’ve spent thousands of hours analyzing it. Imagine you had a digital video camera back in time that took a video of how he finished it and how he signed it. He could have given a thumbs up to assuage our fears. We’re doing exactly the same thing to digital object, but with fancy cryptography around it. Think of cryptography as a digital video of Rembrandt finishing his work.

Digital certificates of community 

Of course, minting an NFT only verifies its authenticity on Ethereum. It does nothing to prevent tokenizing the same work on a competing platform like Avalanche or Polka Dot and using the same image. In fact, you could use the exact same hash and point to the exact same image file on a competing chain with no way to prove it. 

So again, this is just an elaborate construct of business rules wrapped around single digits that are, that are indivisible. That’s it – think of it as serial numbers and nothing more.

But not only have people attached them to art, but many also created a decentralized autonomous organization (DAO). The ecosystem around this piece of art starts to form because there’s a purpose there. The artist is the seed of this ecosystem, and the collectors and distributors of that art do it because of the love of the art.

No matter how much work and modifications are done, the root is simply a smart contract. The Bored Ape Yacht Club (BAYC) sailing on OpenSea is all a construct of third parties making these tokens more accessible and providing utility to them. And these smart contracts need a few upgrades to make them more useful for artists. 

Upgrading a blank canvas

TreeTrunk is a new smart contract standard that essentially wraps around the ERC721 standard to make it easier for both artists and their collectors to buy, sell, and trade their tokens while addressing some of the major problems plaguing the NFT industry today. It focuses on the artists to rectify their pain points and treat them with the respect they deserve.

Placing a work of art on a peer-to-peer interplanetary file system (IPFS) with a link on the blockchain has more utility than painting on a canvas. Each smart contract, for example, can hold an indiscriminate amount of NFTs. Using crypto-lithography, a collector could sell copies while properly compensating the original artist.

If there was metadata and an immutable digital record of ownership, art theft would be a lot harder. NFTs can contain digital watermarks encrypted within the smart contract to easily verify authenticity. This process is currently manual and flawed, as evidenced by Logan Paul’s $3.5 million purchase of fake (but verified by a third party) Pokemon cards. 

And the more metadata you add, the more prepared an artist would be for any legal battle necessary to protect their work. It won’t just be a link to the file but a link to a web page filled with all the detailed information behind that work of art. Of course, this new standard is still in the R&D phases with ConsenSys Mesh, but once it’s on the mainnet and adopted by major platforms, NFT artists and collectors alike will have more control over the work.

Are NFTs art?

Art is subjective, and it’s hard to say whether an NFT counts or not. The editors at Wikipedia are using the technical definition to say it doesn’t count as art, and they’re not necessarily wrong. At the root, an NFT is nothing more than a number on the blockchain. 

The intermediary step of it being a link to the actual art is a bit semantic though. Mona Lisa is nothing more than oil paint on a canvas – if you wiped the paint off, that canvas would have no more value than a random set of numbers on the chain.

But the community that built around NFT artists like Beeple and Pak can not be ignored. They created meaning in those numbers, and they fueled a movement that earned them each tens of millions of dollars. Whether Wikipedia recognizes their accomplishments or not, nobody can take away the success these artists achieved.

Understanding NFTs from a Legal Perspective

It’s difficult to discuss technology without worrying about the bad actors who may use that knowledge to exploit it. From Megaupload to Hulu, I’ve spent much of my career deeply entrenched in the legal and technical aspects of streaming Hollywood movies, video games, and even art. Everytime there’s a new technology, like the VHS tape or compact disks, there’s always some people using it for good while others use it for bad.

Because that’s just the nature of human behavior. Some folks are just not doing a good job on rights clearances, and some simply don’t care. So the web3 technologies emerging today to tackle issues surrounding intellectual property are particularly interesting to me.

As far as Ethereum is concerned, proof of authenticity and provenance and ownership are basically the manifestations on the blockchain. NFTs (Non-fungible tokens) have an immutable digital record of ownership attached to them, and people could look these up through something like Etherscan. Of course, when it comes to off chain activity, they’re exactly like Hollywood and the video game industry and all the other industries are. 

We still have to trust that people clear the rights to a work before minting it on-chain. Blockchain is no more foolproof against unscrupulous activity than any other technology, but smart contracts on a distributed ledger still have utility as the world evolves.

What is an NFT?

So what you have is an NFT, which is basically a hash on the blockchain, and that hash tends to be unique.

Through that hash, you’re able to then tie it to something on what’s known as IPFS (InterPlanetary File System), which is a peer-to-peer server that’s off-chain, but that’s also persistent and immutable. So, what you get with something like Beeple’s NFTs, if you were to look at the actual code and you look literally at the NFT token on the blockchain, it would be kind of an elaborate URL where they call it URI to an IPFS.

It’s basically a JSON file that has fields in it, and one of those fields would be a link to the JPEG, which is the Beeple painting that sold for tens of millions along with other metadata. And so now you have this hash on the blockchain being tethered to this JSON and that provides you with also authenticity provenance ownership, because when someone actually owns that NFT, they could prove that they’re the licensee of the stuff that sits on IPFS.

This can then be used for token-gated content through a process called mint-gating. With mint-gating, the hash could be basically nothing more than a key so that when you want to start watching a video, playing a game, or even entering a private Discord server, it will then look at your Metamask wallet, and if you happen to own that particular NFT with that hash in it, it will then give you access. 

Creators need the freedom to make the decisions they want to make while building their communities, and one of the best ways to combat piracy is to incentivize ownership through social proof, like you see with Twitter’s verified NFT profile pics. By turning collecting into a team sport, it encourages people to own the authentic token to remain within the community.

When the people talk about provenance and authenticity and ownership, that is what they’re talking about. People are usually not referring to something which is obviously off-chain. When a Bored Ape is replicated off-chain, there’s nothing in blockchain technology that can stop it any more than any other anti-piracy measure implemented since computers were invented. Even worse, payments to the residual artists are still handled off chain by a benevolent third party.

Making smart contracts smarter

An NFT on the Ethereum blockchain is tethered to what is essentially a very elegant escrow agreement to create a trustless system. In order for that escrow agreement to create a trustless system, a gas fee is required to pay for the transaction. The Ethereum Virtual Machine (EVM) will burn the gas to implement that transaction on chain. And that’s where the gas fees come into play. 

Even when Ethereum shifts to proof of stake (PoS) to lower gas fees, that escrow agreement will remain the same. Moving to a layer-2 solution like Polygon helps lower gas fees as well, but you’re still stuck with the same rules baked into the current ERC standards. Updating the ERC721 contract to really reward creators and their community is the first step. 

From the platform level, major players like OpenSea and Rarible are doing everything they can to remain vigilant and comply with DMCA takedowns. They are taking every legal step to verify ownership in works that are uploaded to their sites while also ensuring anything that gets through is removed as soon as possible. Of course, as the industry matures, we’re likely to see all sorts of litigation around that.

And in some cases, whether purposefully or not, the artists aren’t getting their residual payments even when everything is done right. We need smart contracts that can at a bare minimum ensure artists are paid automatically while also tracing on-chain piracy and authenticating the good actors from the bad. That’s what the TreeTrunk standard is meant to do; it’s a modified ERC721 contract that automatically handles secondary residual payments and allows for authorized copies to be made, all on chain.

For the first time, the actual licensing agreement can travel with the NFT across platforms within the metadata of the smart contract. This means content owners will be able to enforce those rights in a much more efficient manner while being fairly compensated through automation. Proper implementation of this new standard would not only provide for better consumer protection, but also a better IP protection, including a link to the actual legal license agreement.

This verifies the files much like cloud-based services like Adobe Creative Suite, meaning the NFT creator would be able to better enforce those rights. It acts like a digital watermark used in Hollywood screeners to prevent leaks. 

Exploring new legal waters

NFTs are a new technology, and there’s both good and bad buzz revolving around them. Much of it revolves around instances of copyright infringement, which is no different than when any other technology was adopted. A new NFT standard can help lower the risks using the automation of smart contracts.

Piracy may still occur, but we’ll be able to mitigate in many instances, those areas or infringements much better. At its root, an NFT is just a hash pointing to a file. It’s not much different than decentralized torrents that have been used to distribute  files for decades. 

Blockchain technology won’t fully resolve piracy, and it didn’t create the problem either. Attorneys and AI will still be needed to enforce copyright, but their jobs will be made much easier with a public digital ledger.

Will NFTs last forever?

They’ll last as long as their respective blockchains have nodes. Whether or not people will buy them is an entirely different story.

Digital scarcity has not typically worked out in the past. Although to be fair, neither has manufactured physical scarcity.

People compare NFTs to other crazes, like Tulips and Beanie Babies. Both still exist and are sold every day. Here’s some recently sold listings of Beanie Babies for the same $5–$20 price range they always were.

And tulip prices (which provide only beauty) are still pretty crazy when compared to apples and oranges, which provide actual sustenance.

None of it ever went away. It just doesn’t cost as much as a house to buy one like it did at the height of their respective crazes.

Will NFTs ever replace current technologies in use for things like art, tracking sales, enforcing IP, etc?

God no – the only people who believe those sales pitches are the people who don’t understand what technologies are already being used for these very purposes. Encryption keys are neither new nor unique to the blockchain.

Every single conceivable use case of NFTs can be accomplished with existing non-blockchain technology. NFTs just add more unnecessary steps to convolute those processes.

But they will never go away as long as they have nodes to host the blockchain the NFTs are hosted on. Just because they have no real usage does not mean they disappear.