How hard forks destroy the uniqueness of NFTs

The upcoming chain merger and possible Ethereum hard fork poses a number of problems for the community. One of the most difficult, though not obvious, aspects of a hard fork can be faced by holders of non-fungible tokens. Since its inception, unique (non-fungible) tokens, known as NFTs, have been positioned as existing in a single copy.. At least within the native blockchain. NFT standards (ERC-721, ERC-1155) imply that two NFTs with the same content cannot exist on the same blockchain. But what happens if you copy not a token or a collection, but the entire blockchain? How NFTs are different from other tokens Unlike most tokens that exist entirely within the parent blockchain, many NFTs are there only as a kind of display, avatars of external objects.. In some aspects, they can be compared to stablecoins, which reflect the value of external assets (for example, a bank deposit in dollars) on the blockchain.. The transfer of tokens does not mean the physical transfer of dollars, although in most transactions it is conditionally equivalent to it. If stablecoins are not tied to the blockchain economically, then NFTs are essentially outside of it in the legal plane.. The basis of the value of NFT is the copyright and property rights to the image or other work of art associated with this token. These rights are tied to the object itself, and not to its hash in a particular blockchain. This even applies to digital art originally created on the blockchain.. On the other hand, most NFTs are only valuable because they are stored on the blockchain. Without delving into the creative mess of the different types of NFTs, they can be divided into three broad categories: Digital art objects that originally exist on the blockchain. These are the most popular and actively traded collections, such as cryptopunks (and technically they are ERC-20 tokens), bored monkeys and the like.. This also includes the creativity of AI sewn into the NFT and the works of “digital artists” who created immediately with an eye on NFT. Collectible and game tokens. These are sets of tokens issued and distributed by commercial organizations under certain conditions.. This includes tokens from various sports clubs and associations, as well as in-game items purchased or earned by players.. The legal intricacies of owning these tokens are, of course, described in license agreements, but few people read them. Tokenized artwork from the real world. This includes, for example, the collections of the Hermitage and other museums, creative teams, individual authors and performers. Generally, ownership of tokens does not confer ownership of the tokenized object itself.. The rights here are also regulated by the issuer's offer or other agreement that exists outside the blockchain. Even a non-specialist understands that such a legal zoo is extremely complicated and without any hard forks. The absence of high-profile lawsuits so far means, rather, an insufficient degree of awareness of possible contradictions. In practice, they have not yet had time to accumulate, but over time they will definitely appear. What will happen to NFT after the hard fork The situation described here is speculative and not related to a specific project or collection of tokens. All this can happen both as a result of the impending hard fork of Ethereum in connection with the transition to PoS, and after the hard fork of any blockchain for any reason.. If there are enough valuable NFTs on it. From a legal point of view, all blockchains look similar, and the precedent set will most likely apply to all similar situations. Legal Basis for NFTs Copyrights, which include most NFTs, are regulated in a similar way in most countries.. The beginning of the modern approach was laid by the American DMCA. In Russia, the regulation of intellectual property rights, including works of art, is concentrated in Part IV of the Civil Code of the Russian Federation. The definition of NFT and its legal status is still missing in Russian legislation, so for now only general rules of intellectual property law can be applied to NFT. The right to own a work (text, image, audio or video) arises at the time of creation, but if the case goes to court, the author must prove his priority. And then the blockchain with its timestamps and the impossibility of rewriting became a very convenient tool. From the moment the NFT is created, its “creator” becomes the author and copyright holder. Yes, this terrible word is familiar to anyone who downloaded (or, God forbid, distributed) pirated films or software. Copyrights are for life and inalienable, they cannot be transferred. But property rights are a common commodity. The copyright holder has full rights to the work and can do anything with it – sell, donate, exchange, issue a license for limited use (this is what all copyists do); finally destroy and/or prohibit any public use of the object. The main thing is to express your will in accordance with the current legislation. Which is also outside the blockchain and is controlled not by the protocol, but by people far from perfect. Bifurcation of uniqueness After the fork, different events will occur in the final chains, and with the right technical “divorce”, there will be no intersection of transactions and arbitrary migrations of assets back and forth. With each block, these chains will move further and further away from each other and become more and more different.. However, the legal problem of rights to copies of “unique” tokens will eventually rise to its full height. The risks described below may materialize if both branches of the fork prove viable.. That is, they will retain active development teams, a community comparable in size, and at least some of the projects that worked on the original blockchain. In order not to plunge into the horror of multiple copying, we will focus on a single hard fork. When the blockchain is forked as a result of a hard fork, the owners of all the “unique” NFTs stored in it will receive a copy of each of their tokens for free. And without asking or notifying. There will be a completely similar (as at the time of the fork) blockchain with all the contents. And there can be an arbitrary number of such forks, and therefore copies. In the case of Ethereum, the entire ecosystem will be copied, including connections to sidechains and other blockchains, all decentralized applications and, of course, tokens. Thus, even one hard fork with a fork creates a massive legal incident, and far from being limited to NFTs.. Many intellectual property objects are copied without the consent of their copyright holders, although without transfer of ownership. In both blockchains, the token will be owned by the same wallet that owns it in the original. However, such a copy is not a reproduction, but a completely identical object.. It destroys the uniqueness of the original. The worst thing is that the hard fork does not legally determine in any way which of the two copies of the NFT is original and unique, and which is just a useless copy of the masterpiece. Andrey Tugarin, Managing Partner at GMT Legal: Let's take the example of NFT, which transfers the rights to a real work of the material world to the holder. In the event of a hard fork, a serious question arises from a legal point of view: which of the two NFTs will retain the rights to the real work? Or will both NFTs retain the rights to the original work, which means that in the future, when selling, both new buyers of such NFTs will receive equally similar rights to the original work of art? So far, there are no answers to these questions. The value of both copies of the same token will be determined first by the market, and then by lawyers. The subject of the dispute may be, for example, the transfer of rights when changing owners of tokens in different blockchains, if they are sold to different people. Or if one of the NFT marketplaces recognizes tokens after hard forks, while the other does not. Scenarios for different types of NFTs For the types of NFTs indicated above, approaches to resolving contradictions and the consequences of a hard fork may differ. Let's try to predict what might happen. Digital art objects. A few years ago, it was completely ridiculous to suggest that a small pixelated avatar could be worth several million dollars just because no one could create the exact same one on the Ethereum blockchain.. But it happened, and pictures of punks and monkeys at the top of 2021 were selling for seven figures.. This is the price of a mansion in a prestigious area of a metropolis or a rare sports car. The owner of the token is rightly proud of his “unique” acquisition. And suddenly he suddenly finds out that there are now two such monkeys. They are exactly the same. And maybe even more. Which monkey is worth millions, and which one can be given to a friend as a funny souvenir? Or split the price in half? Or maybe in total they will cost more than one? Or will both depreciate? Everything will be decided by His Majesty the market. Both NFT marketplaces and collection developers have to make a choice. They can support one blockchain or both. But the decision of the marketplace cannot serve as a basis for changing the rights to tokens belonging to their right holders, regardless of the number of copies.. However, the choice of marketplaces can significantly change the availability, and hence the liquidity and price of tokens.. The rights of the creators of the collections are somewhat broader, but even they cannot order the owners of the tokens to consider one of the copies to be true and the other to be false. Centralized collections of tokens on the example of a sports club. With collections of tokens whose value rests on the prestige and popularity of the organizations that issued them, and not just anonymous developers, the situation will become even more confusing. For example, a fan of a football club honestly bought a collection token on the official website. It would seem that he is its rightful owner. But the club itself owns the rights to its symbols and other attributes used in the token. And if the club decides to prohibit the use of its collection on one of the blockchain branches resulting from the fork, then the owner of the token may disagree with him and sue. Or the club itself will sue token holders using the “wrong” collection. As the market for collectible tokens grows, the likelihood of such contradictions will also increase. Game tokens. Various game artifacts also have a market price, although not in millions of dollars.. In games using the blockchain, they are “earned” by game activity or bought by players with cryptocurrency.. But few of the players think that the possession of these tokens is limited by the license agreement of the game developer. To a greater extent, this applies to the giants of the industry, but all popular projects, even those created by crypto-anarchists, sooner or later come to monetization and the creation of complex legal schemes aimed at protecting this monetization. However, with game tokens, contradictions are less likely.. If a game developer decides to focus on one blockchain (and no one can stop him from doing so), then the game assets on the other fork chain will naturally depreciate. Tokenized works. This is perhaps the easiest option from a legal point of view.. In most cases, token holders do not receive real rights to the original work and, in fact, own a special type of reproduction or just a souvenir.. The rights of the owner of the token are limited to the right to transfer this reproduction, and the rights to the work are reserved by its owner offline. Of course, lawsuits are also possible in this area, but they are unlikely to create precedents that go beyond existing practice. The future is uncertain For now, we can only speculate how the NFT dispute courts will operate.. Moreover, conflicting decisions may arise in different countries.. Blockchain lawyers should now dig into the codes and take care of finding arguments for future processes. Those who promote the high value of NFTs emphasize the uniqueness of each token the most. Indeed, if the token is stored on the blockchain, no one else will be able to create a token based on the same data, that is, completely similar content.. True, if you change at least one pixel in the image, it will be a different token. The blockchain protocol will not notice a difference of only one pixel – for it these will be different objects. This is the technique used by digital artists who produce different versions of the same work. But this is where timestamp priority comes to the rescue. The author of the original can always prove that he created his token before. If it does not lose the private keys of the wallet in which the token was issued. However, the hard fork does something even scarier. It doesn't copy the NFT or even the NFT collection. It creates a copy of the entire environment where NFTs are stored. Simply put, when creating a copy of the blockchain, completely identical copies of all the tokens stored in it are created. Of course, without the knowledge of their copyright holders. And which of the blockchains, or rather, which copy of the token on which blockchain is considered true? Original, on the ETH1 blockchain, stored on the ETHPoW chain? Or a new one that has moved to the ETH2 chain? The first is more original, the second is the Ethereum development team. The very term “merger” used by Vitalik's team should not be misleading – changing the consensus protocol creates new rules, and the community is not obliged to accept them. But the legal battle will take place off the record. This legal collision from a raid is not so easy to resolve. A single centralized solution is not possible. The creator of each token or collection has the right to decide on which chain its “true” product is located. And each copyright holder will receive the same rights to their tokens in both blockchains. Otherwise, it smacks of a dictatorship of developers deciding instead of the copyright holder where his property is located. Therefore, the NFT copyright holder has every right to sue both Vitalik Buterin and Chandler Goh.. Depending on your mood or the sharpness of your lawyer's tongue. Andrey Tugarin, Managing Partner at GMT Legal: Hardfork will create very serious legal difficulties. One way to resolve the issue with the “clones” of the original NFT could be to recognize all rights to the subject of the real world for one “original” NFT. Accordingly, copies of such an NFT do not transfer any rights to the real-world item underlying the NFT.. Another way to solve the problem could be to assume that only ownership of both NFTs created as a result of the hard fork grants all rights to the original work. Which method will eventually be used, time will tell, but in any case, this will undoubtedly set an important precedent for Web3 lawyers. There is another risk that lawyers will not help to avoid. There is a high probability of fraud in the form of the simultaneous sale of tokens on both blockchains, especially if the token did not move after the fork. After all, it is not necessary to trade tokens on marketplaces – direct transactions from wallet to wallet are also possible. In the blockchain explorer, both versions of the NFT look exactly the same. And carelessness or ignorance of the buyer can be very costly.