Blockchain and NFTs: Redefining Art Ownership

AUTHOR: Mainak Ghosh, Amity University, Madhya Pradesh

Abstract 

Blockchain technology marked a new era for the art world, especially with the rise of Non Fungible Tokens or NFTs. This paper explores the ways in which blockchain, and NFT  redefine ownership in art vis-à-vis the implications on artists, collectors, and intellectual  property law. This research will scan the existing literature and case law to outline the  transformative potential of the technology with regards to ownership of art and the challenges  that it poses within this framework of innovation. 

Keywords

Blockchain, NFTs, Art Ownership, Intellectual Property, Digital 

Introduction 

In the past years, blockchain technology has changed many sectors of business life, and this  influence on art life is no exception. NFTs appeared, and this new finding dramatically  changes the way art is created, sold, and owned. An NFT is a digital certificate of ownership  recorded on a blockchain, so authenticity as well as provenance are well ensured. The  following paper presents an analysis of the implications of blockchain and NFTs on art  ownership: a discussion of opportunities along with challenges presented by this new  paradigm. 

Blockchain Technology: Foundations and Why Relevant to Art? 

Blockchain technology is credited with the development of Bitcoin back in 2008 by a  pseudonymous entity called Satoshi Nakamoto. Essentially, blockchain is a decentralized  ledger technology that records transactions in a transparent, immutable, and as secure manner  as possible. Transactions are collected into a "block" form, and cryptographically linked  blocks form a perpetual "chain" of data. 

One of the main features of blockchain technology is decentralization; that is, there is no  one who controls the entire network. This is achieved through a peer-to-peer system in which  each participant-node retailer has a copy of the entire ledger. That is why blockchain as it  stands basically ensures trust and transparency without the need of some central authority and can be a particularly useful tool for such industries involved in forgery, fraud, and lack of  transparency, along with other similar things-the art world is one of the obvious ones. 

Main Features of Blockchain Technology 

Immutability: Once a block is added to the blockchain, it can never be deleted or  changed. This cements the record of ownership as permanent and tamper-proof. • Transparency: Blockchain allows all participants to view the ledger. This can give a  clear record of who owns a particular asset at any given time. Transparency is critical  in ascertaining the provenance of artworks.

Security: The transactions on the blockchain network are encrypted and  decentralized, thus providing maximum security and immunity to hacking or  manipulation. 

Smart Contracts: Smart contracts are self-executing contracts with the terms of the  agreement written directly into lines of code. Smart contracts automate transactions  and can be programmed to reward artists with royalty each time the artwork is resold  (Buterin, 2013).  These features make blockchain perfectly suitable for the art world, because problems with  authenticity, ownership, and provenance have long been hard to track, especially for those  pricey and ancient pieces of art. Traditional methods of tracking proofs rely on paper  certificates or centralized databases, which are as easily tampered with as they are prone to  fraud. Blockchain solves all these problems by creating an immutable digital ledger that  records the whole life story of an artwork. 

Blockchain's Role in Art Authentication and Provenance 

Art provenance is the history of ownership and transfer of an artwork, which often determines its worth. Verifying it, however, was a long and uncertain affair before blockchain  technology because it relied upon physical documents that could either go missing or forge.  Blockchain, however, now has made it possible to create a digital certificate of authenticity of  the ownership from a creator to a present owner. 

For example, blockchain platforms like Verisart and Codex Protocol work on the registration  and authentication of physical and digital artworks. Here, platforms assign unique digital  identifiers to an artwork, which is then stored on a blockchain, ensuring tracing and  validation of ownership history (Verisart, 2020). This mechanism of authentication, however,  is most crucial in the case of digital art, wherein the ease of copying files makes it extremely  difficult to distinguish original from duplicates. 

NFTs: Remixing Ownership in the Digital Age 

NFT is a type of blockchain application, a much-talked-about phenomenon lately because it  can represent ownership over unique digital assets. Non-fungible means that when the tokens  are issued, they cannot have an equivalent or replacement unit. A unit cannot be told apart  from another unit because each NFT stands alone. 

NFTs could bind with digital art, music, video clips, or virtual real estate, and even with  collectibles or tweets. They are in a way certified digital ownership tied together by  blockchain authentication. The uniqueness and scarcity of NFTs made it especially appealing  to artists and collectors. Conversely, anything that falls into the category of a digital asset  could easily be copied or reproduced; what an NFT provides is the verifiable proof of  ownership, which lends it intrinsic worth.

How NFTs Work in Digital Art 

Whenever an artist creates any piece of digital art and mints it as an NFT, essentially, he is  creating a single digital token tied to the artwork. So, the token will be kept within the  blockchain and have metadata about the art itself such as the creator, what it describes, and  even terms of resale afterwards. 

The buyer of the NFT does not have any physical or digital version of the artwork but is  holding a claim to ownership associated with the token. This may include rights to display,  resell, or license the artwork, depending upon terms agreed to within the sale. It is important  to note that NFTs are often accompanied by smart contracts that automatically execute  transactions, like royalty payments to the artist, every time the NFT is resold (Dowling,  2021). 

Evolution and Growth of NFTs in the Art World 

NFTs trace back to some of the very early blockchain projects such as Colored Coins and  CryptoPunks, however were only taken seriously with the launch of Ethereum in 2015 that  made it possible for developers to create decentralized applications and smart contracts  (Buterin, 2013). It was the ERC-721 token standard introduced by Ethereum in 2018 which  provided the basis upon which there would be a myriad of non-fungible assets developed. 

NFTs became a sensation in early 2021 when digital artist Mike Winkelmann, otherwise  referred to as Beeple, sold his NFT artwork, "Everydays: The First 5000 Days," to Christie's  auction house for a staggering $69 million (Khan, 2021). In this sale, the art world witnessed  the first wave in changing the way art would be bought and sold, as well as even owned. The  Beeple sale had spoken to the increasing significance of NFTs in the current art market, in  which digital artists, initially marginalized, had finally found a platform to sell their works  directly to collectors. 

Probably, the most important feature of NFTs is that they offer provable provenance. Artists  can create their own NFTs that could be used as proof of ownership and authenticity. Such  NFTs are transferable easily from one party to another. This solved long-standing problems of  forgery and misattribution in the art world. For instance, the sale of Apple's digital art  "Everydays: The First 5000 Days" for $69 million has been identified as a possible benefit of  NFTs in establishing ownership and authenticity (Khan, 2021). More importantly, Reddy  (2021) argues that NFTs represent a paradigm shift in the way we conceptualize ownership  within the digital era and may democratize access to an art market. 

Artist Empowerment and Royalties 

Through the NFTs that contain smart contracts, Blockchain technology gives the artist a  percentage of sales of their art at each resale. That is very different from other traditional  markets where an artist would have no claim to a further value of this art sold after the 

original sale. Therefore, continuous royalties guarantee artists' power, making them eligible  to reap financial benefits from any appreciation. In this regard, Liu (2021) postulates that  NFTs provide artists with greater unique authority over their output and have a more level  economic playing field. 

Intellectual Property Rights 

Therefore, with this overlap between NFTs and intellectual property law, it has raised the  important questions: rights of ownership. The purchase of an NFT will not involve copyright  over the underlying work of art; instead, it's a token meant to indicate ownership of a digital  asset, not the copyright over it. The judgment of the court in Yuga Labs v. Ryder Ripps  above threw light on the distinction in relation to trademark and copyrights in their  application towards NFT. As quoted by Green, "Intellectual property rights in the digital  domain have to be re-evaluated in the light of new laws.". 

Consumer Protection and Fraud 

With the growth of the NFT market, so are issues regarding consumer protection and fraud  surfacing. It has been observed that even stolen works of art were minted into NFTs, which  has put the entire art industry on high alert. The legal aspects need to be advanced in such a  manner that consumers are safeguarded from such fraudulent practices, and artists get their  rights properly ensured. According to Chohan (2021), as the regulatory actions are still much  

behind the growth of the market, it calls for proper laws for NFT. 

Beeple's "Everyday" 

March 2021 would be remembered, with the sale of Apple's digital art piece "Everydays:  The First 5000 Days" NFT for a staggering $69 million at an auction with Christie's. This  would represent a welcome new chapter for NFTs in the art world, as it would demonstrate  how legitimate and viable as an investment an NFT could be as artwork, and how the  blockchain may help redefine the art world (Khan, 2021). As Sykes (2021) has noted, this  landmark sale vindicated not only digital art but also discoursed future development for  traditional art markets. 

Yuga Labs and Intellectual Property Rights 

The case of Yuga Labs v. Ryder Ripps has brought very significant questions regarding  trademark infringement and the rights of NFT holders. A judgment made by the court  underscored that proper clear agreements need to be established for the attendant rights  pertaining to NFTs, and it only emphasizes the complexity of the legal challenges one would  have to face when venturing into this emerging field (Yuga Labs, 2022). This case is a  reminder of the complexity associated with ownership and rights in the NFT landscape  (Green, 2021).

While blockchain technology and NFTs bring with them many benefits for the art world,  where provenance, empowerment of artists, and efficiency of transactions are among the  most significant, there are also many challenges and weaknesses involved. Most of them are  cross-sectional in nature and include, among others, environmental questions, market  volatility, regulatory ambiguity, intellectual property rights disputes, fraud, and ethical issues.  All these are fundamental issues to be resolved to make NFTs and blockchain technology  sustainable and reliable tools for the art market. 

Environmental Concerns 

It is one of the most highly discussed issues about NFTs and blockchain technology as a  whole-the environmental impact. Almost all NFTs are currently minted on the Ethereum  blockchain, which uses the Proof-of-Work (PoW) consensus mechanism. The latter requires  solving complicated mathematical puzzles to validate transactions and therefore secure the  network, in turn consuming huge amounts of electricity. 

Market Volatility and Speculation 

Another huge challenge is volatility and speculation, which led to some branding current  NFT booms like older financial bubbles. In its turn, there is a dot-com bubble or the crisis of  2008 in the housing market. NFTs frequently go haywire in price in merely days or hours, not  to mention being driven by speculative investment more than the art itself. 

Price Volatility and Financial Risk 

Price in NFTs was volatile in 2021, with high peaks and troughs. There was a digital art  image called "Everydays: The First 5000 Days" by Beeple sold in Christie's for $69 million.  However, many other NFTs experience sharp dips in their price. Yes, for the NFT market,  transaction volume and prices collapsed in the last half of 2021 after having first exploded  with interest in Q1. According to a report by Protos, sales of NFTs had almost dropped by  90% from their peak, which exposes the speculative nature of the market. 

Intellectual Property and Legal Ambiguities 

NFTs introduced more complexities to the intellectual property arena, particularly in relation  to the rights that attach to the digital asset and the underlying artwork. Once a person buys an  NFT, it does not necessarily buy copyright in the associated artwork; instead, it buys a unique  

token that proves ownership of the digital file associated with that artwork. This has caused  much confusion for the consumer and has posed many legal questions as to what rights an  NFT confers. 

Ownership vs. Copyright 

Ownership of the token is granted through buying an NFT, but on the underlying intellectual  property rights such as reproduction or distribution rights unless otherwise stated by the author within the smart contract. Even though the collector owns the digital artwork in the  terms of an NFT legally, he would still not be allowed to reproduce or amend the work or use  it commercially without proper permission from the artist behind the work. This difference  has been particularly illustrated in Yuga Labs v. Ryder Ripps (2022), where the court  discussed the extent of copyright rights associated with NFTs and the trademark infringement  potential if NFTs are made without the artist's consent (Green, 2021). 

This has led many artists to find out that their works are being minted as NFTs without their  consent, generating disputes around IP and calling for a stronger legal framework to  safeguard both the artist and the collector. There have been accounts of IP infringements on  several occasions, where digital artworks were "tokenized" and sold without the knowledge  of the original artist, setting off the alarm in the art community. Even OpenSea has measures  in place against such instances, but this problem is still present, mainly because of the  decentralized nature of blockchain technology. 

Fraud, Scams, and Consumer Protection 

Like any new market, the NFT space has seen its share of fraudulent activities, scams, and  consumer protection-related issues. The decentralized nature of blockchain gives little, if any,  avenues for recourse to buyers who become victims of scams, which means the NFT market  poses a very high risk for new or less informed players. 

Common Fraudulent Practices 

The most common NFT scams include counterfeit NFT, phishing attacks, and rug pulls.  Counterfeit NFTs happen when a scammer mints an NFT of an artwork without the actual  artist's permission, causing unsuspecting buyers to pay for the NFT as authentic. Phishing  attacks usually occur against users of NFT platforms whereby attackers try to steal private  keys or passwords to gain unauthorized access to the users' wallets and digital assets. 

Rug pulls are the most sinister types of scams, where developers behind the NFT project  hype, attract investors, and then disappear with the cash, leaving the buyers holding worthless  assets. As the market for NFT continues growing, more of these scams are emerging. While  OpenSea and Rarely do their best to secure users' funds and assets, it's quite challenging to  control such issues with a decentralized system through blockchain. 

The NFT Market Overgrowth Outstrips Regulatory Framework: In the short time the NFT  market grew, it outpaced the regulatory efforts developed, leaving it in a Wild West type of  scenario with numerous fraudulent activities. There is an urgent need for consumer protection  regulations and industry standards that will put aside transactions to confirm their legitimacy,  thus protecting buyers from fraudulent activities. Marketplaces will have to establish the very  basic verification processes between artists and works and above all requirements of clear  protection of the buyer as it becomes really important to hold scam artists accountable.

Ethical Issues and Cultural Significance 

Moreover, aside from the practical and economic challenges that it raises, there are ethical  issues related to NAFTA's role in the world of art and beyond. A case in point is that critics argue  that the commodification of digital art through NFTs reinforces the wrong capitalist  tendencies built upon profit rather than art itself. Second, as a speculation tool, NFTs may  foster culture for short-term gains rather than long-term sensibilities towards art. 

The blockchain and NFTs would reorder the traditional notion of ownership over art through  verifiable provenance, empowering artists, and creating alternative revenue streams, yet  basically, legal frameworks need to grow according to these new developing grounds. The art  world continues its way of adapting and it is of vital importance that artists, collectors, and  legal professionals deal with this complexity very thoughtfully.