By Kenji Saito (Professor, Graduate School of Business and Finance, Waseda University)
1. What are NFTs?
The acronym NFT stands for “non-fungible token.” Breaking it down word by word, “tokens” function as money substitutes and as representations of assets. The term “fungible” simply denotes interchangeability. For example, paper currency is fungible. Although each banknote has its own unique serial number, we accept that it is “worth” its face value and would readily exchange any bill for another of the same denomination. By contrast, “non-fungible” refers to something that is non-interchangeable. Therefore, we can understand each NFT to be a unique asset that cannot be directly exchanged or replaced.
In 2021, Ryuichi Sakamoto gave only one performance of his 96-bar composition, “Merry Christmas Mr. Lawrence” The composition’s right-hand melody consists of 595 notes, each of which were digitally isolated and converted into 595 individual tokens, for sale as NFTs. Each note thus represents a unique and irreplaceable piece of the composition.
Of course, this raises a philosophical question: do isolated sounds still
Presumably, we can make the distinction that the notes were not being sold as “music” per se, but rather, as commemorative memorabilia. The same applies to the auction of an NFT affording the rights to an original manuscript score by Sakamoto, in the sense that the auction constituted the tokenization of a physical piece of memorabilia.
If that’s the case, it would seem these NFTs warrant classification as “collectibles.” As such, perhaps the project should be contextualized as an experiment, one which sought to probe a new relationship between fans and collectibles.
2. How are NFTs made?
Collectibles can also be cultural assets. This distinction compels us to consider some more thorny questions: can assets outlive their owners, whether private individuals or corporations? And what about the free trade of private property, which has become an expected tenet of modern society? Both points have been problematic when digitizing collectibles via conventional methods. When assets are stored in a database, they will inevitably die with the database. The database will also require administrative intervention, which inhibits free trade.
In 1984, George Orwell writes, “who controls the present controls the past.” Although it would be an exaggeration to suggest we live in the dystopia of 1984, there is still something pertinent to be gleaned from this quote. Namely, those who control the database have the power to delete and overwrite the data. Databases are clearly not a secure environment for storing private property.
Cue the blockchain. The blockchain was created to allow people to remit
payment of their own accord to anyone, at any time, while leaving an
immutable record of the transaction.
Beyond sending payments, the blockchain can also be used to execute a wide range of transactions through something called “smart contracts.”
On the NFT marketplace, the term “contract” refers to a program that runs on the blockchain. NFTs are powered by these contracts, which can be commanded to mint an NFT on the blockchain and assign it to an initial holder. The holder can then command transfer of the NFT to the next holder.
3. Why are NFTs easy to counterfeit?
In popular discourse, NFTs are often described as being “one-of-a-kind” (i.e., “uncounterfeitable”), or discussed in terms of “ownership” as it pertains to conventional art collecting. These are misconceptions.
3.1 The illusion of ownership
In modern society, ownership of an asset entails the right to disposal of that asset. To that extent, perhaps it’s fair to say that tokens can be “owned,” as they can also be relinquished through transfer to another party (even a non-existent party in the event that one wishes to snuff out the token.) However, that alone is not enough to give up an artwork. A separate agreement would be required to ensure disposal of the artwork contingent upon disposal of the token. But such a contingency is rare. As such, multiple tokens can be made for a single artwork.
As artworks are cultural assets, we do not have the right to “delete” them from existence. This leaves much room for debate on the very concept of the “ownership” of artwork itself.
3.2 The illusion of uniqueness
As a rule, NFTs are created with a unique token number per each contract on the blockchain. It’s possible to create a large number of NFTs for the same artwork, each with its own unique “serial number.” But it would also be possible to create an NFT with the same “serial number,” using a different contract. (This could be achieved by creating multiple contracts with different content, or you could even set up a separate contract for identical content, and it would still be treated as unique.) Ultimately, there is infinite potential to create fake NFTs across the various blockchains.
The 595 NFTs project was also affected by counterfeiting. Many of the fakes were made using a different blockchain.
In order to combat counterfeiting, it will be necessary to make clear in which contract the authentic NFTs were stored on which blockchain and stipulate a unique serial number for each. Someone will need to publicly announce this information to preserve a record for posterity.
4. Concerns and potential for the 595 NFTs Project
4.1 Concern 1 ─ The ephemeral NFT
In the context of the present project, the NFTs will not actually exist at the time of purchase.
The tokens in this project are being offered for sale on a primary marketplace. The company that operates this marketplace will thus manage these tokens independently (in a database). Payment of a “withdrawal” fee is required to mint the actual NFT, to prevent the tokens from becoming too expensive by discouraging users from wanting to write to the blockchain. The NFTs for the contract address and token numbers listed on the pages of “not yet withdrawn” tokens do not exist on the blockchain.
This technique is known as "lazy minting", in which the operating company can promise to mint an NFT according to the marketplace listing once the token is “withdrawn”. Opinion is divided on this practice, but I feel it is insufficient, because this allows companies in control of the marketplace to have the ability to manipulate the past, and the sustainability of tokens to be dependent on the lifespan of corporations and services.
“Withdrawing” a token allows it to be sold on the wider world marketplace. Some buyers in the 595 NFTs project “withdrew” their tokens, with transaction fees, perhaps for speculative intents. Meanwhile, the true collectors who purchased tokens with the intent of holding may help destroy those tokens when marketplace service ceases. Ironically, it will be the profit-minded individuals who will ensure that these tokens become an eternal part of human history by minting NFTs for resale on other marketplaces (even if the blockchain dies, its data will likely be preserved as cultural heritage.)
4.2 Concern 2 ─ Carbon offset
The 595 NTFs project took the meaningful step of offsetting a portion of the energy required for its NFTs. Specifically, the project’s total CO2 emissions were reportedly calculated upon the close of the sales period, meaning that the ancillary costs of the blockchain (in its current power-guzzling state) were excluded from the offset. The blockchain was not used in the primary sale of the 595 NFTs.
4.3 Concern 3 ─ Potential for forgery within contracts proper
The “serial numbers” of the NFTs in this project were arbitrarily assigned by the marketplace operator. It would theoretically be possible to replicate the same NFTs with different “serial numbers.” The sheer scale of this project — 595 sounds — makes it vulnerable to forgery. It would be difficult to monitor if one of the notes were replicated or if extra notes not in the original composition were listed surreptitiously. This fact does challenge the authenticity of each limited-edition sound for sale.
4.4 Countermeasures and risk awareness
The 595 NFTs project addresses these concerns by providing the contract address and token number (a definitive statement of the item’s authenticity) on a dedicated page on the marketplace. Moreover, the project also made clear up front that the notes would not exist as an NFT on the blockchain before the initial “withdrawal.” As such, the project could be seen as a rather conscientious use of the platform.
Some markets don't even have the concept of "withdrawal" and just replace the user in the holder column on the company's database (or what they insist to call their own blockchain). As such, there can be a significant gap between reality and what NFTs suggest. Users must tread cautiously.
5. A future NFT market for fans and artists
In the immediate future, it will be necessary to deploy technology and rules to solve, or at least alleviate, each of the issues detailed above. I have faith that a remedy is possible.
However, I would posit that the problem lies in the current mentality of the NFT marketplace, itself.
In an extremely cynical assessment, the current NFT market could be seen as allowing speculators to “get rich quick” by profiting off the ambition of other users who also want to, well, get rich quick.
The term “NFT” has a novel cachet, but the underlying principle can be said to be quite old. We can see parallels to the origins of the modern stock market in the early 17th century — notably at a time when the market, in its nascency, was not as regulated as today.
A hallmark of modern society is the ability of private individuals and corporations to own and sell just about anything. Yet in the broader scope of human history, it has been theorized the right to “ownership” can be traced back to the concept of “protection/conservation.” The mentality held that an owner was also a steward with an onus to protect and maintain their property. This perspective might become necessary in the debate surrounding the ownership of cultural assets and might be an important touchstone when thinking about the future of NFTs.
The sustainability of the 595 NFTs as a cultural asset was substantiated by the desire of the buyer. Desire is not inborn, but rather, dictated by society.
At the advent of a new digital world, we must ask ourselves: what will people desire in the new society we are creating?
I think the 595 NFTs project provided a meaningful opportunity to ponder this question.
Hopefully, NFTs will develop into a platform for social good, connecting users driven not by profit, but rather a desire to pay it forward by providing value to their fellow netizens.
Kenji Saito, Ph.D.
Professor, Graduate School of Business and Finance, Waseda University.
He received M.Eng (Computer Science) from Cornell University in 1993 and Ph.D. (Media and Governance) from Keio University in 2006.
Prior to the current position, he was a project senior assistant professor at Graduate School of Media and Governance, Keio University. His research area covers the Internet and Society.
He is Representative Director of Academy Camp. His major works include "NEO in Wonderland" and "New Century of Trust - The Future After Blockchain" (in Japanese).