Observations on NFT Licensing: Fact and Fiction

What do you actually own when buying an NFT?

Most people refer to buying NFTs as “purchasing jpegs,” the avatars we see online and image files on marketplaces like OpenSea, but in reality the issuer of the NFT still retains ownership of those images . We looked at the licensing of all the top NFT projects, and in almost all cases, the issuer only offered licenses to NFT buyers, ranging from permitted use to highly restricted commercial rights. In most cases, publishers are not being candid on this point, and often they are marketing content omissions that create a common “you own the art” misconception. Due to the lack of user ownership, coupled with widespread misunderstandings, the hope that NFTs can usher in a new era of digital ownership and property rights remains elusive. Without correcting this, the Web3 vision will remain elusive.

introduce

Non-Fungible Tokens (NFTs) open the stage for building scarcity applications on the blockchain. These unique tokens have come to represent access rights, liquidity positions and artwork. NFTs seem poised for a bright future in innovative applications within and outside the crypto-native ecosystem NFTs seem poised to have a bright future with innovative applications both within and outside the crypto-native ecosystem. Today, outside of certain DeFi use cases, NFTs representing works of art have the most adoption, with over $118 billion worth of transactions on Ethereum in the past year alone.

Observations on NFT Licensing: Fact and Fiction

Despite this “big money” and the NFTs that will revolutionize ownership, the reality leaves a lot to be desired. Contrary to the spirit of Web3, today NFT holders have zero ownership of the underlying artwork. Conversely, NFT issuers and holders contain opaque, misleading, misleading and restrictive licensing agreements, and popular secondary marketplaces such as OpenSea do not provide buyers with such substantial disclosures.

Over the past few weeks, the cryptocurrency community has become more aware of intellectual property ownership and the fragile nature of NFTs, with two prominent issuers drastically changing the licensing of their NFT projects. Moonbirds, the eighth-ranked NFT collectible by implied market value, changed its license to Creative Commons (CC0) a few months after falsely claiming the holder “you own the intellectual property” on its website. And Yuga Labs, by far the largest NFT publisher, accounting for more than 63% of the market value of the top 100 NFT series, has released new license agreements for the two most original NFT series, CryptoPunks and Meebits.

In this report, we explain the difference between terms of service, licenses, and intellectual property (copyright) ownership.We look at major collections of NFTs by implied network value, categorize the most common licensing agreements, and highlight iconic examples. We found discrepancies between issuer marketing materials and legal terms of service that, in some cases, were substantial and misleading. Finally, we believe that for the Web3 dream of NFTs to become a reality, token holders must claim ownership of their NFTs or at least seek to increase transparency for issuers.

In this report, we explain the difference between terms of service, licenses, and intellectual property (copyright) ownership.We look at the major collections of NFTs by implied network value, categorize the most common licensing agreements, and highlight iconic examples. We found discrepancies between publisher marketing materials and legal terms of service that, in some cases, were substantial and misleading. Finally, we believe that for the Web3 dream of NFTs to become a reality, holders must claim ownership of their NFTs or at least require greater transparency from issuers.

key takeaways

  • The vast majority of NFTs have zero intellectual property ownership of their underlying content (art, media, etc.).
  • Many issuers, including the largest, Yuga Labs, appear to have misled NFT buyers about the intellectual property of the content they sell.
  • Only one of the top 25 NFT collections by market capitalization has even attempted to give intellectual property to its NFT buyers (World of Women).
  • Creative Commons licenses, although seen as a solution to the restrictive licenses used by most projects, from a legal perspective, because NFTs transfer intellectual property entirely into the public domain, NFT holders cannot defend their ownership in court. In a way, NFT ownership is outdated.
  • The broad vision of Web3 will not be realized without improved on-chain representation and transfer of intellectual property from NFT issuers to NFT token holders.

What exactly are NFTs?

The distinction between NFTs and the digital content that NFTs point to is not widely valued or understood, even by the most experienced and sophisticated NFT holders. Most people think that when buying an NFT, we are buying a digital image associated with that NFT — an image stored on some blockchain, such as Ethereum or Solana. but it is not the truth.

Instead, what you buy when you buy an NFT[1] is actually a combination of two different things:

  1. A digital token, usually governed by Ethereum’s ERC-721 standard, that has a unique encrypted address and contains certain metadata stored on the blockchain. However, this metadata is not an image; it is data describing the location of the image, typically off-chain, in places like Amazon Web Services or in the Interplanetary File System (IPFS).
  2. A license issued to the NFT owner by the NFT project that created the image, granting the owner the right to display (and in some cases commercialize) the image to which the NFT points.

digital token

Fundamentally, like all digital assets, non-fungible tokens are just a few lines of code written on the blockchain. The difference between NFTs such as Bored Ape Yacht Club NFTs and fungible tokens such as LINK, UNI or WETH is that the former is governed by the ERC-721 standard, while the latter is governed by the ERC-20 standard. The ERC-721 standard specifies certain criteria that a token must adhere to in order for it to be “non-fungible”. Of these standards, the two most important are tokenID (a unique identifier generated when a token is created) and contract address (essentially the address of the smart contract that generated the token). This data, along with other data such as “original creator”, “owner”, and “tokenURI”, is stored on-chain as metadata.

The third element typically associated with ERC-721 tokens of particular relevance here is the tokenURI, which is metadata containing a link to a JSON object stored on the network, which itself contains the URL of an IPFS link, which is the same as the NFT Related digital content is stored here. It is tokenURI that provides protocols such as OpenSea and TwitterBlue with instructions on how to display the “art” associated with NFTs.

Observations on NFT Licensing: Fact and Fiction

license

The fact that an NFT “points” to an image does not, by itself, give the NFT owner any rights to that image, just as the NFT that minted the Mona Lisa gave the Mona Lisa’s minter rights. Something more is needed, and this “thing” is the image owner, known as the “copyright holder” – a legal agreement with the NFT holder that dictates what rights the NFT holder has in that image. If the NFT buyer has ownership, it does not come from his ownership of the non-fungible token, but from the terms of the license issued by the NFT project party regarding the purchase and use of the image by the NFT holder. So for the vast majority of NFT projects, owning an NFT does not mean you own the corresponding digital content.It turns out that the content is owned and retained by the copyright owner (usually the NFT project party) associated with the digital content.

In the United States, copyright is the only recognized legal form of ownership of digital content. Without copyright, the purchaser of digital content does not own the content, but “licenses” the content from the copyright holder on terms specified by the copyright holder. In this sense, the copyright holder (ie the licensor) is the landlord of the digital content; the purchaser of that content (ie the licensee) is the tenant of the digital content.

Granted, for most digital content, this digital landlord-tenant relationship isn’t particularly problematic; for example, no one thinks that buying a DVD or Blu-ray of the movie “Young and Dangerous” means you’re buying “Young and Dangerous.” The exclusive copyright of the content. We know very well that buying a DVD or Blu-ray Disc of a movie is buying a copy of some digital content owned by the studio that made the movie, not a unique collectible that grants exclusive use of that content .

But NFTs are different, NFT projects claim to sell unique digital collectibles that no one else can own. In fact, the NFT project has created a unique collection of 10,000 pieces, where each image represents a completely different work of art than all others. No one thinks they are buying a copy of an NFT with a super rare trait, they are buying the “rare trait” itself. In fact, the whole concept of “rarity traits” that became popular with many NFT projects last year suggests that buying a specific NFT with a “rarity trait” means buying a piece of art that is unique and that no one else can own.

But others do “own” the rare property: they are not NFT buyers, but NFT issuers (NFT projects). All the buyers have are tokens that contain images of rare features. In this sense, NFT buyers are at best renting the copyright of the art from the true owner of the feature (Bored Ape Yacht Club, CryptoPunks, and MeeBits’ Yuga Labs; Moonbirds’ Proof; Azuki’s Chiru Labs, etc.).

To truly own that rarity, it’s not enough to own the digital token that entitles you to a license, which can change at any time. You can’t prevent others from showing art related to your NFT without copyright. Only the copyright owner has this power, unless the copyright owner expressly states otherwise in the license terms.

After reviewing the most commonly used licensing agreements for NFT projects, it is clear that NFT standards and smart contracts do not recognize off-chain laws. To conceptualize this idea in more detail, we first introduce some basics that define legal concepts of ownership.

NFT ownership

Owning an NFT means owning (1) a non-fungible token and (2) a license that entitles the NFT holder to certain rights in the NFT image, which raises questions about the nature of NFT ownership relative to copyright holders . Those interested in NFTs must understand the basics of copyright.

copyright

U.S. copyright law protects “original works fixed in any tangible medium of expression,” and once the author has fixed an original, creative expression in tangible form, copyright automatically vests in the author. This means that any artist who expresses the work in a tangible form automatically obtains an enforceable copyright without having to do anything.

Copyright law recognizes eight categories of protected works: (i) literary works; (ii) musical works; (iii) dramatic works; (iv) pantomime and dance works; (v) pictorial, graphic and sculptural works; (vi) cinematographic and Other audiovisual works; (vii) sound recordings; (viii) architectural works. Therefore, images related to NFTs are protected by copyright under (v).

This copyright protection, once obtained, gives the copyright holder the monopoly right to (1) reproduce (2) distribute (3) publicly display (4) perform works and (5) create derivative works. Most importantly, copyright gives the copyright owner the right to do any of the above.

first sale principle

The second right listed above (the right of distribution) gives the copyright owner the exclusive right to distribute copies of his copyrighted work, including in the commercial realm, and prohibits others from participating in any such distribution.However, this exclusive distribution right of copyright owners to their copyrighted works is subject to an important limitation – the first sale doctrine (“FSD”). Under the FSD, a copyright owner’s exclusive right to a copyrighted work ends when it transfers ownership of a specific legal copy of the copyrighted work to a third-party purchaser.

There is one exception to the FSD when it comes to digital works. Under the Copyright Act, the FSD does not apply to anyone who acquires the right to use a copy or phonogram from the copyright owner by rental, lease, loan or other means but does not acquire ownership. Because FSD does not apply to rentals, an entire intellectual property framework has been created over the past 30 years for licensing (rather than selling) digital works, allowing copyright owners to retain their monopoly over the distribution of copyrighted material.

Therefore, when you buy an eBook on a Kindle or a movie on an Apple TV, you only buy a license to use that product under the specific conditions set out in the terms and conditions of sale. Since e-books and movies are not tangible products and exist in the digital realm, it is easier for the original owners of these goods to restrict use and withhold intellectual property, especially when the platform that issues the license is controlled by the publisher (Amazon, Apple).Clearly, the lack of FSD implementation in the digital world makes the concept of true ownership extremely complicated, especially when it comes to NFTs.

This is important: most NFT buyers believe that when they buy an NFT, they own what the NFT points to. In this report, we looked at several top NFT collections and found that the vast majority of projects do not actually grant unique ownership of content sold to NFT holders. Several projects are extremely misleading in giving NFT buyers intellectual property (or copyright) rights to the content they purchase. Some projects even explicitly state that NFT holders “own” the content, but then deny that fact in their terms of service.

Copyright and Trademarks

Under U.S. law, copyright provides protection for the benefit of authors of copyrighted works, and trademarks provide protection for the benefit of the public. In the United States, trademarks protect brand-related aspects such as name, appearance, logo, design, or all combinations that distinguish one’s brand from other brands. The establishment of a trademark is mainly to protect the entities and consumers who own the trademark, and the main function of the trademark is to reduce the confusion of consumers.

Observations on NFT Licensing: Fact and Fiction

How copyright is transferred in the real world

The rights of copyright holders to distribute copyrighted works include the rights of these holders to assign, transfer or sell their copyrights to third parties. In order to effect this sale, assignment or transfer, the copyright holder must comply with certain statutory rules to demonstrate proper transfer of copyrighted material. Pursuant to Title 17, United States Code, Section 204(a), a valid copyright assignment must be (A) in writing and (B) signed by or on behalf of the assignor. While there is no statutory requirement to use a specific form to transfer legal title to copyright, most copyright transfers are effected through so-called “Intellectual Property Transfer Agreements”. For example, when Larva Labs sold its intellectual property in CryptoPunks and MeeBits to Yuga Labs, they executed the same type of agreement.

Types of NFT Licenses

We looked at the top NFT collections by their underlying market capitalization (floor price * project size). From our observations, NFT licensing agreements fall into four categories:

  • commercial rights

    Monetize your artwork freely – no income caps, in any location or format, for any time.

  • Limited commercial rights

    Monetize artwork within a certain income range, or in a limited format or venue, for a specific time period. Usually this license only applies to low-price sales ($100,000 limit) of merchandise (i.e. T-shirts).

  • For personal use only

    Cannot profit from artwork in any way and has limited display rights.

  • Creative Commons

    Artwork can be used by the public.

All these licenses, regardless of level, are from the Web2 era. As we’ll discuss in this article, Web3’s promise that users will actually own digital property rather than rent it out remains elusive.

commercial rights

An example of a license granting monetization rights to NFT holders is Chiru Labs’ Azuki on the Ethereum network.

The Azuki license grants unlimited monetization rights, no caps on earnings, and no restrictions on venue, format or duration. While Azuki is an example of a more permissive license than many other projects, Chiru Labs still grants NFT holders zero title ownership. Chiru Labs may change and revoke the license at any time for any reason or no reason.

While Azuki owners can use and create derivative works, but not in another NFT project, Chiru Labs can also modify the base artwork at any time for no reason, or create author works that are similar to your own adaptations, derivative works, and modifications .

The ability of NFT holders to freely commercialize is powerful and differentiates it from many other projects. Having said that, it is unlikely that any holder will make a significant commercialization solely on the basis of a unilateral agreement that the issuer can revoke at any time.

Yuga Labs projects Bored Apes Yacht Club, Mutant Ape Yacht Club, Bored Ape Kennel Club also fall into this category, but we will discuss these in more detail later in this report.

Limited commercial rights

An example is the Doodles NFT series from LSLTTT Holdings Ltd, whose license grants limited monetization rights.

The Doodles license limits NFT holders to $100,000 in revenue from merchandise sales. In addition, the Doodles license also prohibits modification of NFT artwork and expressly prohibits its use in any manner deemed unlawful, fraudulent, defamatory, obscene, pornographic, profane, threatening, abusive, hateful, offensive Sexually obnoxious or unreasonable merchandise. While the terms are very broad and Doodles publishers can basically ban any kind of commercial use, they can update or modify the license at any time for no reason at all, and then make NFT holders comply.

The NFT License 2.0 (“NIFTY”) falls within the scope of the Limited Commercial Rights License. Another NFT family that falls into this category is the iconic CryptoKitties.

For personal use only

The Veefriends NFT collection is an example of a highly restrictive, personal-only license. At the time of writing, Veefriends is the 10th most valuable collection by implied market capitalization, while the VeeFriends Series 2 is the 14th.

The holder of “VFNFT” is granted “a limited license to such VFNFT and its content to access, use or store such VFNFT and its content for personal, non-commercial purposes only.” The license goes on to specify that VFNFT is “based on Limited edition digital creations of content that may be trademarked and/or copyrighted by VeeFriends”. Finally, the license states “Unless otherwise stated, your purchase of VFNFT does not grant you the right to publicly display, perform, distribute, sell, or otherwise reproduce VFNFT or its contents for any commercial purpose.”

Under this license, VFNFT holders have no right to monetize the underlying artwork in any way, shape, or location, but holders may display artwork for personal use.

Other examples of personal use licenses include TIMEPieces, adidas Originals, and NBA TopShots.

The Veefriends NFT series is an example of a highly restrictive, personal-only license.

Holders of VFNFTs are granted a limited license to the VFNFT and its contents to access, use or store the VFNFT and its contents for their own personal, non-commercial purposes only. and expressly state that VFNFTs are limited edition digital creations based on potentially trademarked/copyrighted content, and unless otherwise stated, the purchase of VFNFT does not confer any commercial purpose to publicly display, perform, distribute, sell or otherwise reproduce VFNFT or its content s right.

Under this license, VFNFT holders do not have any rights to monetize the artwork, but holders can display the artwork.

Other examples of personal use licenses include TIMEPieces, adidas Originals and NBA TopShots.

Creative Commons

All the licenses we’ve looked at so far impose a series of restrictions on the licensee’s use and enjoyment of the copyrighted material in favor of the copyright holder. By contrast, the CC0 license places no restrictions on the licensee’s use and enjoyment of the copyrighted work. By adopting the CC0 license, the copyright holder effectively undertakes to waive all copyright and related rights in their copyrighted work to the fullest extent permitted by law. Therefore, the work is actually “dedicated” to the public.

Several prominent NFT projects have adopted the CC0 license with mixed results. While the CC0 model undoubtedly has advantages over the existing licensing regimes described above, it also has significant drawbacks. In terms of benefits, holders of CC0-governed NFTs have no restrictions on commercializing NFTs or using them in any way they see fit. In terms of ownership of NFT art collections, NFT holders managed by CC0 are on an equal footing with creators of NFT projects.

While CC0-managed NFTs may benefit NFT holders by placing owners of NFT projects on an equal footing with NFT holders, they also place NFT holders on an equal footing with non-holders. Because once a work of art is in CC0, no one “owns” the work of art, which means anyone can use it. This raises a question about the value support of CC0-managed NFTs: why would you pay a lot of money for one when none of the NFT projects can preclude non-holders from taking advantage of the art associated with your NFT?

For this reason, many believe that CC0 licensing is problematic for NFTs, as it enables anyone to use CC0-managed images without owning the NFT. CC0 NFT holders can commercialize their NFTs, but so can others. If CC0 NFT holders decide to commercialize artwork, they will also not be able to legally protect such commercialization, they do not own the copyright and have no right to exclude others from using the same image. The “lil nouns” project is a perfect example, neither the Nouns DAO nor the holders of the Nouns NFT can enforce any kind of copyright infringement claims against Lil Nouns or the holders of its NFTs, since Nouns is released under CC0.

The CC functions similarly to the CC0 when considering the dynamic relationship between the copyright holder and the buyer. Not all CCs are built in the same way though, and variations often come from commercial and modification rights.Currently, CC0, CC-BY, CC-BY-SA, and CC-BY-ND are the only CCs that allow commercial use, and all CCs except CC-BY-ND allow the creation of derivative works.

Observations on NFT Licensing: Fact and Fiction

A central issue related to NFT licensing agreements is the asymmetric control of licensing by copyright holders. Copyright owners have the right to modify and revoke the NFT holder’s license at their discretion if they believe the license agreement has been violated. This ability to modify the license agreement at any time is a major flaw in the NFT architecture, and each NFT holder’s rights (especially, to the extent available, their commercial use rights) can be legally limited or completely revoked. This would greatly inhibit the widespread use and adoption of NFT artwork. Many of the license agreements we analyzed expressly state that the NFT project (the licensor) has no duty or obligation to notify the NFT holder of any modifications or amendments to the license, and it is the responsibility of each NFT holder to keep track of the project’s license agreement on its website latest terms.

NFT projects can modify or revoke their NFT licenses at any time for any reason, which is a significant underreporting risk for NFT holders. This risk exists with every NFT license, even those whose terms and conditions do not mention modification or amendment. The risks here are largely misunderstood and underappreciated in the NFT community, secondary sales when Yuga Labs increased the royalties on the secondary sale of MeeBits from 0% to 5% after purchasing MeeBits from Larva Labs The royalties will go directly to Yuga Labs. This sudden change in royalty rates was not proposed to the Meebit community prior to implementation, which caused a backlash.

in conclusion

In this report, we analyze top NFT projects and categorize their associated licenses into categories to assess what buyers actually have when they buy NFTs. We found that all but one license (i.e. CC0) retains all intellectual property rights in the artwork referred to by the NFT. In the case of a project attempting to create a collection of NFTs where intellectual property is transferred from buyer to buyer, the design mechanism also raises questions about the validity of this transfer of ownership.

Some issuers have provided misleading statements that contradict the terms of their relevant license provisions. In some cases, the reason for these contradictions may be ignorance of intellectual property and digital rights. Either the issuer intentionally misleads the buyer, or by not explicitly correcting the market’s misunderstanding of the buyer’s ownership of their NFT and artwork.

On the other hand, some projects have explicitly disclosed the fact that the NFT holder only owns the NFT, but has no property rights. While NFT issuers are not required to explicitly grant full intellectual property to buyers, the lack of intellectual property undermines the grand oath of NFT and Web3 originators that the technology will revolutionize digital ownership. If NFTs are to be widely used online, across Metaverses, and for commercial use, a more durable framework for distributing and transferring intellectual property must be adopted. Even in the case of the Creative Commons variant, the issuer does not retain intellectual property rights over the underlying content of the NFT, the NFT holder has no exclusive rights, and the entrepreneur cannot integrate the NFT into their business due to the lack of legal protection. Achieving a true future of digital ownership requires action:

  • **NFT holders should fight for their intellectual property. **Blockchain is very powerful in tracking ownership, not just a license to the artwork where the issuer retains title. If the use of NFT-related content is entirely dependent on the permission of third-party issuers, it is unclear whether a blockchain is required. Beyond that, relying on the publisher’s license puts the use of the content at risk. If the NFT issuer sells the underlying intellectual property to a third party, or is acquired outright, the new owner can unilaterally restrict, change or remove the license entirely;
  • **These protocols must be “resolved” for Web3 to have a chance. **There is also the question of how a limited commercial license (which can be revoked at will and does not transfer ownership of digital content) coexists in harmony with the spirit of Web3. The claim that Web3 stands for is that the internet of the future will be owned by its users rather than big tech groups. However, as described in this report, this commitment is not found in the terms and conditions of most NFT projects today, mainly because these terms do not confer ownership rights to transfer the intellectual property to their holders; Extends the limited Web2 license in , which fails to provide NFT holders with any future say or control over the art to which their NFTs are connected. Since NFTs are still in their infancy, the NFT community must begin to develop a framework to properly grant IP rights to users before mass adoption. In the event that mass NFT adoption begins without addressing these pernicious IP ownership issues, NFTs will form Web2 products, albeit marketed as Web3 products.
  • **A decentralized Metaverse requires intellectual property. **If these issues are not addressed now, the so-called decentralized virtual world is not fundamentally different from the virtual world that Web2 giants like Meta (Facebook) are building. In this case, the decentralized Metaverse will be decentralized in name only, leveraging only public blockchains and tokens to enable efficient off-chain secondary markets, but not passing real property rights.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/observations-on-nft-licensing-fact-and-fiction/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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