All digital creations are NFTs. We just don't know it yet.

If you follow the non-fungible token (NFT) news, you may have noticed that the market has recently been coming to terms with the harsh reality that NFTs may not be as good for artists as the creative community first thought.

As NBC News' Kevin Collier noted just a few weeks ago, creators are discovering that the rapid growth in the NFT space has opened the door to rampant piracy and fraud in the creative sector.

Most NFT platforms, including OpenSea, by far the largest NFT marketplace, allow users to create an account and start selling any digital images they want to upload.

Not only does this mean that there is no guarantee that you are acquiring copyright ownership with an NFT purchase, it follows that there is no guarantee that you are purchasing an authentic, creator-approved NFT at all.

A good example of this is that even Melania Trump's collection, the crème de la crème of NFT releases, launched on the Solana platform in late December, is already being unofficially duplicated on OpenSea, a competing platform.

Unless you are a discerning digital collector who is familiar with digital signatures, you probably won't be able to tell the difference between a real Melania and a fake. This is even more true if Solana, the Trumps' preferred NFT blockchain platform, goes down, as it did over the weekend when it suffered a setback of instability and becomes inaccessible for extended periods due to transaction congestion.

Garbage in, garbage out

The relationship between NFTs and copyright has always been murky and unclear. Nonetheless, at the height of the mania, there was an assumption that some kind of value was attributed to someone in the process of an NFT transaction. However, this is starting to unravel as it becomes increasingly obvious that blockchains do not solve the Garbage In Garbage Out (GIGO) problem.

The GIGO vulnerability means that while it is still incredibly difficult to forge or hack a token once it has been created, there is no guarantee that the token itself was created legitimately. (A bit like self-reporting a QR code associated with a self-administered lateral flow test. You still have to trust that the originator or test taker is actually reporting the correct result.)

The irony for a supposedly highly innovative market like NFT is that centralized platforms like YouTube solved this GIGO problem long ago by actively monitoring content for copyright abuse at the point of origin.

According to Collier, while NFT platforms (particularly those with identifiable governance structures) are increasingly responsive to takedown requests from artists reporting copyright infringement, the burden of policing counterfeits still falls on creators, not platforms.

This shows two important aspects of the market. Firstly, that it is incredibly sensitive to being embroiled in a high-profile copyright dispute, and secondly, that the benefits of its decentralized state in giving more power to creators have been massively exaggerated.

The centralization problem

Awareness of these two points gives way to another important insight: that the presence of a blockchain makes little material difference.

As the Solana blockchain network became inaccessible during the peak of crypto activity over the weekend, we asked ourselves out loud what could happen to NFTs if the value of the blockchain they are on goes to zero. Or when the miners who normally support the network head for the exit?

Will such NFTs become internet ghosts? Are they resigned to the Wayback Machine for all eternity? Who continues to fund their review and hosting?

According to Twitter feedback (somewhat skewed towards crypto interests), the answer is no, none of this would necessarily be problematic. The chain would likely continue to be validated by the original entity, meaning the only negative consequence would be more centralized control of the system. In a worst-case scenario, NFTs could be transferred to more functional blockchains.

However, it also means that NFT platforms, like banks, are very vulnerable to runs.

To use banking jargon (JARGON ALERT), NFT platforms are mostly capital-light facilitators of open-source zero-coupon perpetual asset origination, funded exclusively by capital markets, whose performance depends on sustained positive mark-to-market valuations in highly illiquid markets.

If their mark-to-market valuation falls to zero and the market closes to new issues, they also have no incentive to keep the assets verified at their own expense.

A withdrawal of market funding coupled with a buyers' strike, where customers boycott sites to secure long-term lower prices, would leave a platform struggling to survive. In fact, the only way for a platform to withstand run risk is to promise to commit its own capital to supporting the blockchain and assets if all else fails.

But that raises another question. Why would investors in an NFT platform on a dying blockchain be more inclined to burn capital to support underperforming non-cash-generating assets than they would be with a distressed bank?

Cash flows are important

So where does this leave us understanding the longer-term potential and value of NFTs?

We believe it fits with our broader thesis that NFTs are better viewed as a type of advertising market, where valuations reflect sunk costs rather than sustainable long-term value.

So while a traditional advertising market turns creative content into a cash flow-positive asset, NFTs use outrageous upfront cash flows to draw attention to images or messages that donors want to promote. Artisthe advertising. And over time, as with art philanthropy in general, only those images or assets that fulfill the cultural agendas of the hyper-financed classes are likely to continue to do well.

But this is far from a cultural revolution in the making. If anything, it pushes artists to create content that appeals to the existing tastes and agendas of multi-billionaires like Elon Musk or Jeff Bezos.

In times like these, a truly distributed and diverse market for creators - and what platforms like YouTube and NFT platforms don't have - needs cash flows. Cash flows can be used to create properly investable assets and associated markets for such assets, and a much broader pool of innovative art can be brought to the table.

Given that both systems are likely to become just as centralized as the other, the question becomes, why wouldn't YouTube embrace the NFT craze to create a secondary marketplace for the cash-flow-generating content already on its system? It probably has something to do with scaling and liquidity.

Nonetheless, platforms whose reputations are already built around not just hosting content but monetizing it by verifying its authenticity and copyright compliance are far more likely to be successful in converting the non-fungible tokens they issue into assets than those that do not.

Unless, of course, the real point of NFTs was never to create a market for legitimate artistic content, but rather to distribute or disseminate images and messages that would never be noticed (or even accepted as advertising) on ​​more conventional content platforms. .