Here are the most common misconceptions that beginners have about NFTs and the reality.
1. Misconception: The full agreement between the seller and buyer is recorded on the blockchain
The contract – or agreement – between the buyer and creator can include all kinds of interesting elements such as future free drops, utility, additional licencing, physical objects etc. that are part of the transaction. If the creator customized a smart contract, the agreement may be stored and executed on the blockchain.
However, in reality most NFT projects use the standard templated contract provided by the marketplace on which they have minted their project. The largest marketplace, Opensea, uses very basic contracts, so anything else the creator tells buyers they will do is not actually on the blockchain. Typically, the creators place the other promises and how to access those incentives in the unlockable content field. This information is stored on the thank you page received only by the buyer, and on Opensea’s server, not in the smart contract, or on the Blockchain itself, except as a link to the page on the server. Always check what the smart contract says and links to when paying for other incentives. However, be aware that this part of the agreement relies largely on trust in the creator/seller, and may not be legally executable as part of a permanent record on the blockchain.
This video reviews the buyer’s need to trust the creator when they make a purchase on Opensea, or review the agreement if created using another protocol.
2. Misconception: The digital image referred to in the smart contract is stored on the blockchain.
The digital image transacted by the NFTs smart contract is not itself stored on the blockchain; rather a link in the smart contract points out to the image, stored on a server. If a buyer purchases an image via OpenSea, it will actually be stored on OpenSea’s server network. Best practice for buyers – and creators – is to download the image and also store it on their own server, or better yet, an IFPS, decentralized server network, which cannot “go down” as easily as, say, an unpaid AWS bill by a new NFT exchange provider.
The reason NFT images are not on the blockchain is simply a question of transaction time and cost. Blockchain technology is great for lightning fast transactions, but not for storing data assets, which would slow the blockchain speed of transaction to a crawl. There have been a couple of attempts to put super-simplified art, notably, the Autoglyphs project, directly on the blockchain, but this is the rare exception.
Another restriction on storing NFT digital assets is that OpenSea also only stores up to 100 MB of any digital asset on their own server network, so if the asset is larger, such as a video air music, it will have to be stored elsewhere, typically on an IFPS. Other marketplaces, such as Solsea work the same way.
Here is a video that walks through this common misperception, that the art or digital asset, is stored permanently on the blockchain and why it isn’t.
3. Misconception: An NFT is a copyright
An NFT s’ default status is simply rights for personal use only, unless otherwise explicitly specified.
This is one of the first questions most people have about NFT purchases. Within most NFT templates such as OpenSea, the buyer receives only the rights personal use. They can play the music in their own, or put the image on a T-shirt, a personal avatar, or a screen-saver.
However, the buyer may not legally use the music in a commercial movie, sell the image on Tshirts or iStock, or use it as a logo.
There are a variety of ways to add licensing rights, here are a few:
*Create a separate document that cedes usage rights to the buyer, and link to a way to retrieve it in the unlockable content field on the marketplace platform.
* Use an exchange that has built in the usage licenses you want. SolSea, for example, has about 9 to choose from. Some music marketplaces, such as Audius, have additional licenses as well.
*Think you are on to something? Build your own exchange that solves the problem.
The next question that typically comes up is this: So who does own the copyright?
Legally, the original creator owns the copyright, unless it is work for hire. An artist or musician owns the the copyright on their work; a brand or media company that has paid artists to create owns the copyright on paid-for work products, unless explicitly specified, for example a in the writer’s contract reserves their right to publish their work in a book.
4. Misconception: NFT assets cannot be copied
NFT assets – particularily digital art – can be and are copied all the time.
What, you say, isn’t it the point that NFTs are unique and cannot be copied?
No, it is the record of the transaction and thus ownership, or at least the wallet of the owner of the NFT, that is unique, containing both the wallet of the sender and receiver, and which is permanently recorded and time-stamped on the blockchain.
In fact, a digital asset, say, a Bored Ape, is easily copied. However, savvy buyers who are interested in provenance, proof of the record of ownership, understand how NFTs makes this much easier.
Opensea verifies some of the larger projects with a blue check to make sure the owners have not copied the work from elsewhere, and creators will be banned from exchanges if discovered copying. But even so, anyone can copy a digital image and post it on another blockchain. In fact, no one even has to copy a piece of digital art to post it as a screen-saver, anytime they look at NFT it is already downloaded on their computer.
6. Misconception: The creator mints the NFT, then sells it
The vast majority of NFTs are not minted until purchased.
Take for example, an NFT on OpenSea. It is not actually “minted” – that is executed by a smart contract on the blockchain – until the purchase, which triggers the smart contract and creates the NFT, a process called. Lazy minting, and also solves the problem in which creators would need pay prohibitively huge gas fees to mint, say 1,000 NFTs.
A member who took this course recently asked, so is an NFT on the blockchain before it’s sold? Good question. No, since with lazy minting means that the NFT is not executed and reocorded on the blockchain until purchase (techically, although no one uses language this way, it is not quite yet even an NFT).
The reason for Lazy Minting is that the buyer pays any gas fee, which for ETH used to be $70 to $150 or so, at the time of purchase. Polygon, a fork-off Ethereum, and Solsea, the second largest marketplace which resides on the Solana Blockchain, solved the problem using proof of stake to mint for free or almost free. Ethereum’s ETH2 fork is also less expensive as well.
So why and how are NFTs valuable if these aspects do not apply? See the next module to discover ten ways to create NFT value, whether for art or utility or a combination. Module 3 on Creating Value is a must see for any NFT creator.