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Non-fungible tokens (NFTs) are all the rage. Creators can create works for digital art (and other types of digital assets) and sell them online. The sales occur on a cryptocurrency exchange like Bitcoin or Ethereum.

It has been compared to a stock market, where people speculate on assets with the express goal of reselling the asset and pocketing the difference.

But stocks are backed by companies, and the stocks themselves pay dividends to their owners. From what I understand this is not the case with NFTs. This means the only goal with NFTs is resell what you purchase to pocket the difference.

Am I missing something? Can buyers also attempt to monetize their NFT by licensing it out, like an icon or logo?

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  • stocks sometimes pay dividends, there are a plethora of stocks that don't (two notable ones are Tesla and Amazon) (most penny stocks). So in a sense these stocks match the express goal of reselling the asset and pocketing the difference. But you do mention their key difference and it is that stocks are backed by a company, where NFTs are backed by a crypto network saying "you own the original". – rhavelka Apr 9 at 14:39
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NFTs provide artificial scarcity in a market where the assets can be perfectly duplicated.

Consider an original oil painting. It is virtually impossible to perfectly duplicate one, down to the brush strokes and amount and type of paint used at each point. As such, it's easy* to tell who owns the original and who owns a mere "reproduction".

A digital asset, though, can be duplicated perfectly, since the asset is the description of the asset. Buying an NFT essentially amounts to a cryptographically signed record that you bought it, not someone else.

And just like the oil painting, owing the original provides little more benefit than the right to say you own the original. Only time will tell if we, as a society, decide that distinction is worth paying for.


* Good forgeries exist, but given enough effort they can usually be identified.

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    Buying an NFT mostly proves that you bought the NFT. The legal relation to the perceived digital asset is not yet established in court. In particular, copyright on the digital asset in many jurisdictions requires a written transfer, and it is not clear if buying the NFT counts as such a written transfer. And it is exactly this copyright transfer which would make the NFT valuable by granting license rights. – MSalters Apr 8 at 16:22
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    @MSalters The terms of sale on the Christie's auction of Beeple's piece make it clear that no copyright is being transferred. All of the other NFTs that I'm aware of have similar terms. – Nobody Apr 8 at 17:47
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    I wonder if a better analogy is that an NFT is the digital equivalent of a rai stone (or rather, the oral tradition that establishes ownership of a particular rai stone). – chepner Apr 8 at 17:57
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    @Nobody: In other words, you buy neither possession nor a right. So all you buy is a number, literally. – MSalters Apr 8 at 23:02
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    @MSalters Yes, exactly so. – Nobody Apr 9 at 11:48
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But stocks are backed by companies, and the stocks themselves pay dividends to their owners. From what I understand this is not the case with NFTs. This means the only goal with NFTs is resell what you purchase to pocket the difference.

Not all stocks pay dividends. Almost all investors expect to sell their shares for more than they paid for them.

The difference between shares and NFTs is that most people buying shares do so through a well regulated marketplace, that has national regulations. The marketplace for NFTs isn't regulated.

There is debate about what you are buying. The definition I like is that you are buying a window in a museum. Today that window looks of a item that is desirable. In the future, after a reorganization, that window might look at a storage room with no lights. There have been stories that in matter of weeks after buying a NFT, the purchaser found that the "item" had disappeared, and the url returned a 404 error. But they now owned the 404 error message.

The NFT market can be likened to the fad of naming a star in a star registry.

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  • AFAICT the "404" bit does not apply. The NFT is a blockchain token, and that's a cryptographically strong signature. You mathematically can't generate another work with the same signature, not even a 404 error message. But yes, the NFT owner would be wise to store a few backups, precisely because your museum analogy is so flawed. There is no legal counterparty to the NFT token. An NFT is a one-sided assertion: "This is my work.". – MSalters Apr 8 at 16:26
  • @MSalters All that is stored on the blockchain is a URI where the work is located. If that URI goes stale, then you will indeed get a 404 message or equivalent. – Nobody Apr 8 at 17:45
  • @Nobody: That appears monumentally pointless, even more so than I'd initially thought. You essentially buy an URL, but even the domain name of that URL is independently tradeable. In 2022 you can't claim that you bought Beeple's artwork back in 2021, because there's no way to show what resource the URL pointed to back in 2021. – MSalters Apr 8 at 23:15
  • @MSalters It depends a little on the implementation, but that's basically right. In some cases they store a checksum of the work in the NFT metadata, so given an image you can at least verify that its checksum matches the work the NFT was originally minted with. In many cases the storage URL is an IPFS URL, so experts recommend NFT buyers set up an IPFS node and host works they have bought themselves, to ensure that they are always available somewhere in the network, but that advice is buried in the fine print, and not everyone takes it. – Nobody Apr 9 at 11:58
  • Of course, the biggest problem is that nothing in the NFT protocol validates that the original minter actually owns a saleable interest in the work the NFT was minted for, and predictably there have been cases of people minting NFTs for works without the knowledge or consent of the actual owners. This is a specific case of the "oracle problem", which plagues all blockchain applications. – Nobody Apr 9 at 12:01
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Can buyers also attempt to monetize their NFT by licensing it out (like an icon or logo)?

No, they cannot. Buying an NFT does not transfer the copyright to the underlying work, and the copyright is what you need to own to license or otherwise restrict the use of the work. In fact, the underlying work is typically hosted at a public URL that anyone, not just the buyer of the NFT, can view. You can even have multiple NFTs created on the same work. In this respect, buying an NFT is similar to buying a signed, numbered limited edition. Other people can still get the regular version of the work at the going rate (which is usually free for online resources), but your version is "special".

As you point out, buying an NFT isn't much like buying a stock. With a stock you are buying a share of a company that will (you hope) make profits. It will then use those profits either to pay out a dividend or to reinvest so as to grow its business and make even more profits in the future. These revenue streams, and the prospects of future revenue, are what people mean when they talk about the "fundamentals" of a security. NFTs have no fundamentals.

Then again, people buy lots of things that have no fundamentals. The traditional art market is a perfect example. So, it's worth asking, how do NFTs compare to investing in traditional art. The main difference is that with traditional art you actually receive the artwork in question. You can hang it on your wall, and if people want to see it, they have to come to your gallery to look at it. (Various kinds of reproductions may exist, like photos or prints, but they're generally of inferior quality to the original. That's why people still go to art museums.) None of that is the case with NFT art sales.

Likewise, with traditional art sales, the way people know you own the work is that they see it hanging on your wall and not somebody else's. With an NFT the only way they know that you own the work is if they go look up who owns it in the registry stored on the blockchain. Right now, basically nobody ever does that. Will they do it in the future? Who can say?

Am I missing something?

No, not really. NFTs are an attempt to replicate for digital art and music the characteristics, especially scarcity, of physical art, and it doesn't really work very well. If your concern is for artists getting paid for their work, platforms like patreon and bandcamp are a better way to do that. If you're looking for a speculative investment, there are lots of things you can speculate on, many of which are more likely to make money for you, and almost all of which have lower transaction costs (selling an NFT typically involves a 10% payment to the originator, plus whatever transaction fees that particular blockchain is imposing). And if you're just looking for a way to show off how much money you have, there are better ways to do that too. At least if you pay to have your name put on a building, people will see it when they walk by.

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I don’t want to write a whole answer but

But stocks are backed by companies

Stock is not backed by the company it IS the company. One share of a company is ownership equal to 1/1,000,000,000th (or whatever depending on the number of shares issued by the company) of the company’s equity. You have a claim to that much of the company.

Someone “bought” Jack Dorsey’a first tweet. That person didn’t buy the tweet, it’s still on Twitter. That person bought a token containing the tweet. It’s not clear if that transaction, sold by the founder and CEO of Twitter, even includes a license to republish the tweet. When you buy an NFT you’re not buying art or a tweet or a news article or a music album you’re buying a non-fungible token. You’re buying a token, not anything else. It doesn’t innately give you rights to anything other than the token. With a different salt value you can make another NFT of Jack Dorsey’s first tweet, the code just won’t be exactly the same as the other “Jack Dorsey’s First Tweet” token, so it’s not fungible. And I’m not sure there’s anything stopping me from getting on one of these exchanges and selling an Elon Musk tweet, even though I didn’t author it, I didn’t publish it, I don’t host it, I have no exclusive rights to it or any authorization to sell it; because I’m not selling a tweet I’m selling a token.

What’s the market value for an arcade token from the 1980s? What if I laser etch a picture of Elon Musk on it? That’s essentially an NFT, only better, because I can hold it. I have one but I’ll only sell it for $100,000, and no other one will ever be exactly, to the micron, the same as this one.

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