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Inframarginalism Miscellany Monopolization

Notes on the Frysian Theory of the NFT

My colleague Brian Frye has been busy reducing the non-fungible token to theory. Herein some thoughts inspired by Brian’s work.

But first, a definition. An NFT is a ledger entry in a blockchain that (1) indicates a purchase and (2) describes the subject of the purchase, often just with a url link to a picture of the subject. As an approximate matter, when someone posts a digital photo on the Internet and you purchase the NFT to that photo, you obtain a ledger entry in a blockchain that indicates that you made a purchase and describes that purchase using a url link to the photo.

Now for those thoughts.

  1. As a legal matter, the NFT is nothing special. It can be one of two things. It can either be a legally-valid transfer of title to the underlying subject. Or it can be a legally-valid purchase of the service of updating the blockchain ledger to reflect a “purchase” of the underlying subject (without that purchase being legally valid in any way with respect to the underlying subject).

    In other words, the buyer of an NFT clearly pays for the service of having the blockchain ledger updated to reflect a purchase. If the seller’s act of indicating a purchase can be considered a legally-valid expression of intention to transfer title to the subject, then the NFT buyer also gets title to the subject. Otherwise, the NFT buyer just gets a hollow incantation on the blockchain, and nothing more.

    The NFT is a digital version of Berry taking a piece of paper, going up to Apple, and saying to him: “I’ll indicate on this piece of paper that I’ve sold you my Y, if you pay me X”. Apple pays the money. Berry writes on the paper: “sold to you one Y.” Has Apple purchased the Berry’s service of writing “sold to you one Y” on the piece of paper or has Apple purchased Y?

    As a general matter, a manifestation of a present intention to transfer title will transfer that title (which is why when someone says, “it’s for you,” you can legally keep the gift). But the law imposes all sorts of qualifications on this rule that are designed to make sure that the intention really was there.

    Does the blockchain-equivalent of shouting “sold” and tendering a url link manifest a present intention to transfer title to the link alone (which is generally not owned by the NFT seller, but rather the platform upon which the NFT is sold, in which case there can be no sale)? If the link leads to a digital photo, does shouting “sold” and tendering the link manifest a present intention to transfer title to the thing depicted in the photo? Or does it manifest a present intention to transfer the seller’s intellectual property rights in the photo itself? If so, which rights? Does the buyer get the right to make a copy of the photo, or does the buyer get the entire copyright?

    Judges will decide these questions.

    If the answer is “no” to all of them, then all that we can say is that purchase of an NFT gets you the service of having a ledger entry placed in the blockchain indicating that you have made a purchase and describing the subject of that purchase. But not title to the subject itself, whatever that may be.

    (Technical note: The foregoing considers the simplest possible form of an NFT transaction, one that is not complicated by any advance written agreement between the parties providing further detail about the character of the transaction. The seller simply makes a promise, expressly or implicitly, to indicate, on a blockchain, sale of some description of a subject if the buyer pays a certain price. This is a unilateral contract offer. The buyer then pays the price and the seller is legally bound to carry out his promise to make the ledger entry in the blockchain. The key question is whether the carrying out of that promise manifests a present intention to transfer title to something, or not.)
  2. If it turns out that the NFT does not transfer title to anything, and instead represents the purchase of the mere service of indicating a sale on a digital ledger, then the NFT is rather interesting as a social matter. Because in that case the market for these things—tens of millions have changed hands for individual NFTS—is a market to buy and sell ledger entries, nothing more. It is for this reason that Brian calls the NFT “the ownership of ownership.”

    In this case, we have in the NFT a further step in the familiar human chain by which a practice that starts out as necessary for survival is progressively abstracted until it persists only as ritual or play. First, men hunted to survive. Then they hunted for fun, though they did not need the meat. Then they played paintball, and took home no meat. First men bought and sold things they needed to survive. Then they bought and sold things that served no practical or spiritual purpose (contemporary art). Then they bought and sold NFTs.

    Nietzsche saw this coming, in a way:

Commerce and Nobility.—Buying and selling is now regarded as something ordinary, like the art of reading and writing; everyone is now trained to it even when he is not a tradesman exercising himself daily in the art; precisely as formerly in the period of uncivilised humanity, everyone was a hunter and exercised himself day by day in the art of hunting. Hunting was then something common: but just as this finally became a privilege of the powerful and noble, and thereby lost the character of the commonplace and the ordinary—by ceasing to be necessary and by becoming an affair of fancy and luxury,—so it might become the same some day with buying and selling. Conditions of society are imaginable in which there will be no selling and buying, and in which the necessity for this art will become quite lost; perhaps it may then happen that individuals who are less subjected to the law of the prevailing condition of things will indulge in buying and selling as a luxury of sentiment. It is then only that commerce would acquire nobility, and the noble would then perhaps occupy themselves just as readily with commerce as they have done hitherto with war and politics . . . .

Friedrich Nietzsche, The Gay Science: With a Prelude in Rhymes and an Appendix of Songs (Walter Kaufmann trans., 2010).

The same information age powers that have given rise to the NFT—making possible a publicly-accessible and (mostly) immutable global ledger system—are also swiftly rendering markets—buying and selling—obsolete.

One day, perhaps sooner than we think, firms and governments will know enough about what we want in order for firms and governments to be able to make allocation decisions for us that are better than we could obtain by bidding for products in markets. And when that happens, we will enthusiastically embrace central planning and forsake markets.

Where today that last seat on the flight is allocated based on ability to pay—a very imperfect method of determining who places the highest value on the seat—tomorrow the airline (or the government agency regulating the airline) will know, based on reams of data about all those who want the seat and that for which they want to use it, that you (yes, you) actually value the seat the most, even though you wouldn’t be able to bid the highest price for it. And so you will get the seat.

In such a world, most of us will cease to buy and sell as a matter of daily life. But perhaps we will continue to play the buying and selling game, just as some of us continue to hunt.

The NFT will be that game.

(Nietzsche didn’t foresee that America would succeed at democratizing and commercializing all things noble, including the hunt, and so he didn’t foresee, either, that the NFT could be more than just the passtime of an aristocracy.)

  1. Brian argues that the NFT could be a solution to the inefficiency of copyright. It is not completely clear to me how this might be so. But there are some possibilities.

    The problem with copyright is that the only efficient way to sell intellectual property is through personalized pricing. That’s because the marginal cost of copying intellectual property is zero—it costs nothing to make a digital copy of an image, for example—and so there are gains from trade to be realized from distributing copies to everyone who places a non-zero value on the work. If you think it’s worth something, you should get access to it. That doesn’t mean that you should not have to pay for the work, or that the work has no cost of production. It means only that those costs are “overhead costs”—they’re the costs of making the work, not of distributing it—and each purchaser should be charged a price no higher than the purchaser’s willingness to pay, for a higher price would prevent the sale and so destroy potential gains from trade.

    Thus the pricing of intellectual property should always be personalized to ensure that it prices no one out of the market. Everyone who cares should be able to buy Steal This Book, but only those who can afford to pay should be charged a price for it, and that price should be no higher, for each, than what he can afford. But those who actually steal it should go to jail, for otherwise there would be no book to steal.

    The problem with copyright is that copyright holders often do not know what their customers are willing to pay and so they do not personalize the prices they charge to licensees. Instead, they impose one-size-fits all prices that prevent some people who place a non-zero value on the work from getting access to it. The price of the paperback is written on the cover. If you can’t afford it, you go home empty handed. Both you and the copyrightholder would be better off if the holder gave you a discount. But the holder thinks (mistakenly) that you’re lying when you claim you can’t afford the official price, so no deal gets done.

    How can NFTs solve this problem?

    Suppose that purchase of an NFT buys only the right to a ledger entry. The buyer does not obtain a general right to the work, or even a license to use a copy of it. If buyers nevertheless continue to love playing the buying and selling game, they may direct sufficient cash to artists to cover the overhead cost of production of their works, and in so doing eliminate the need for copyright protection. That is, if the NFT craze proves long-lived, and spreads enough cash across the creative industries, then we may no longer need to use copyright to fund the arts. Artists could give copies of their works away for free to anyone who wants them, and make a living selling NFTs to fans of the buying game.

    Of course, it might be the case that NFT buyers have less taste than copyright licensees, in which case this new approach to funding would push the arts in unfortunate directions. But the reverse might be equally true, and we might end up with better art. Or, most likely, there would be no change in quality.

    Suppose instead that the purchase of an NFT buys a license to a particular copy of the work. It buys you access to a copy of the Kaufman translation of Nietzsche’s The Gay Science, for example, though not the full copyright to that work. In this case, the NFT format of the sale doesn’t do anything special relative to any other form of digital sale of a copy of a work.

    But the fact that NFT sales are often structured as auctions—buyers bid for the NFT—pushes the pricing of copies in the right direction from the perspective of efficiency. For auction pricing means personalized pricing. If you require no minimum price in your auctions, and keep selling copies ad infinitum, then you will price no buyers out of the market and will end up selling copies at a range of prices personalized to the willingness to pay of buyers.

    Of course, savvy buyers will take advantage of this format to pay you little or nothing (if you know an infinite number of copies are going to be sold, why bid more than zero for any copy?), but we are at least on the right track. (Or not, if you end up getting paid so little that you give up on producing art in future.) The next step would be to use more complex auction structures designed to force buyers to reveal their willingness to pay, or to acquire data on buyers that would enable accurate dictation of personalized prices to them. But none of this, again, requires NFTs. Indeed, one can expect that, regardless whether NFTs persist or not, the information age is going to make it easier for copyright holders to personalize their prices and so much of the inefficiency of copyright will eventually disappear.

    Personalized pricing won’t solve all problems associated with copyright, however, for copyright also creates a distributive problem associated with excessive pricing, and personalized pricing enables owners to extract the maximum possible value from buyers—value that may be far in excess of the cost of producing art. In that case personalized pricing would exacerbate the wealth distributive problem associated with copyright even as it eliminates the efficiency problem. NFTs, in either their fee-for-service guise or their fee-for-license guise can’t solve the distributive problem of copyright, because there’s always a chance that buyers will pay prices for their NFTs that more than cover the cost of producing the arts.

    But that’s a story for another day.