The Economics of NFT Scarcity and Digital Ownership

Sometimes, it feels good to own something that is unique.  The low supply - a single unit - makes even a mediocre amount of demand fetch a substantial price.  We see this principle frequently in the market for artwork, where originals (as opposed to reproductions) can sell for thousands of dollars.  Customers will pay a premium to be able to tell others that they own an original.  This may make some artwork a Veblen good, where consumers actually demand a product more because the price is high.  

Although this violates the Law of Demand, in which higher prices lead to lower quantity demanded, it makes sense when one considers that status symbols can greatly increase the demand determinant of consumer tastes and preferences.  People often want to buy expensive things because it signals that they are wealthy, leading to increased social status.  Thus, many expensive luxury goods are purchased as an investment in social status, and may even pay off by granting access to higher-paying jobs and/or leadership roles.

Unique Goods:  Non-Fungible Tokens (NFTs)

Non-fungible tokens, commonly known as NFTs, are unique digital goods whose ownership is recorded on the blockchain similar to units of cryptocurrency.  By being recorded on a blockchain, ownership of an NFT, which is usually an image, is known to all users and cannot be overwritten.  Thus, everyone knows who owns the digital asset.  NFTs can also be digital records of ownership of physical assets, such as a title or deed to vehicles or real estate, that cannot be overwritten.  The first NFTs were created in 2014, following a few years where the idea evolved from creating colored images of cryptocurrency.  In 2017, NFTs were discovered by the broader public, and the famous NFT bubble occurred in 2021, when some NFT artwork sold for outrageous sums of money.

Economics Behind NFT Popularity

Initial Popularity due to Scarcity and Excludability

NFTs are designed to look unique, and the use of blockchain technology ensures excludability, which is the economic principle of being able to block non-payers from enjoying a good or service.  Customers enjoy being the only ones to own specific NFTs and are willing to pay a premium to ensure that others are excluded from owning the same product.  There may be additional scarcity in the fact that NFT purchasers have to possess some degree of tech saviness, giving additional status symbolism to those who own NFTs.

Declining Popularity due to Decreasing [Perceived] Scarcity

Unfortunately for owners of NFTs, the scarcity applied only to the genuine product…not replications.  Anyone could copy an NFT by simply saving the image or taking a screenshot, quickly reducing perceptions of NFTs as rare and scarce.  Sure, the owner of the NFT still owns that NFT, but countless others possess identical or near-identical copies.  This is similar to someone creating reproductions of classic artwork.  You may never be able to afford a Picasso on your living room wall, but you can certainly afford a print.  

Additionally, NFTs quickly lost popularity as they became more common.  Because NFTs were digital assets that could be quickly created via computer, artists and digital creators flooded the market with them.  After an initial period of soaring speculation, with some NFTs selling for millions of dollars, the market bubble popped.  Buyers became aware that it was not difficult to create NFTs, drastically increasing their supply.  By the end of 2024, virtually nobody was willing to pay significant amounts of money for NFT artwork.

Intellectual Property Implications of NFTs

Just like with traditional media, copying an NFT can result in prosecution for copyright violation.  However, legal sanction typically requires that the copier try to profit from the right-click-and-save of an NFT by selling the image as his or her own artwork.  Therefore, individual consumers who copy an NFT and use it for personal artwork are unlikely to be prosecuted.

Value of NFTs as Proof of Ownership for Digital Creators

Ultimately, NFTs may be best used by creators of the media to save proof of ownership for themselves.  In a digital world where it is easy to copy any image and use it for artwork, whether that is to sell T-shirts, posters, or digital templates for everything from e-cards to slide decks, it is worth it for creators to utilize blockchain technology to have an overwrite-proof method of proving ownership.  Theft of digital artwork is very common, with artists’ work typically taken and used, often in edited versions, with zero credit or recognition.

Importance of Teaching Intellectual Property as Part of Plagiarism in Schools

In schools, students are typically taught about plagiarism and the importance of academic integrity.  With the rise of AI, it is easy for students to get software to write their essays and papers.  Thanks to search engines like Google Images, it is easy for students to find pictures and artwork to use in projects and decorations.  Many students may be unaware that taking digital images without proper payment or credit harms the artists, who invest time and resources into creating the images.

With so many images available online, consumers may have a misperception that they are all free for the taking.  While some images are indeed free-use, and can be searched for as such, simple Google searches bring up many images that are not.  

Sampling as a Form of Plagiarism

What if the right-click-and-saver does not use the entire NFT image in his or her own artwork?  The partial use of another’s artistic work is known as sampling, and this can certainly violate copyright law.  Ultimately, those seeking to sample another artist’s work and incorporate those elements into their own work should get permission from that original artist.  Many consumers may be unaware that sampling without proper permission or attribution (giving credit) is a violation of the law.  With most students and consumers perpetually online and prone to creating their own artwork, for personal, academic, or professional reasons, it is important that school curricula include mention of NFTs and the legal ramifications of copying them without permission.