Can it be done? What are the pitfalls? Would you even want to?
Source: Shutterstock
There are many reasons why I choose to avoid Facebook.
In part it’s because I prefer to maintain my relationships in conventional ways and don’t see the need to do so on a public forum. I’m also fearful of wasting time doom-scrolling and have found it easy to get sucked in by the never-ending feeds of social media.
The feature that pushed me away for good was when people started selling things on Facebook Marketplace. I found myself getting needlessly irritated by posts from distant cousins and friends-of-friends, selling old Nintendo games and kids clothes on the social network.
“What’s wrong with Ebay?” I’d think to myself.
And so I did the only sensible thing — I deleted the app and moved on. I’ve wondered recently if this is the direction we’re headed with NFTs — where the tokenising of commodities on the blockchain becomes a means and a justification for selling anything and everything?
Legitimate use-cases for NFTs are undoubtedly still emerging. While Ethereum gas charges might discourage sellers from indiscriminately minting NFTs for low-value items, there are signs of NFT marketplaces being used to sell physical items and real world goods already. Is this a good thing? Is it even viable?
NFTs — A quick overview
Non Fungible Tokens (NFTs) broke into the public consciousness when artist Beeple sold a token representing his digital collage of 5,000 artworks to the pseudonymous collector Metakovan for $69 million.
Nothing attracts participants like a rising market. In the aftermath of Beeple’s success, numerous creators have been exploring ways of using NFTs as a means of reaching audiences with their work.
I’m a firm believer in the potential of blockchain technology. As a relative newcomer I’m keen to expand my ‘beginners mind’ and have been trying to learn more while adopting the skepticism and naivety of someone in need of persuasion.
The extreme edge-cases of NFT (like a piece of digital art that can command $69m or the thriving investment market that has sprung up around NBA Top Shot) are effective in grabbing public attention. But average creators are more likely to be moved by ways that they could modify what they do today to exploit NFTs, rather than having to learn entirely new skillsets.
With that in mind I’ve been researching and experimenting with NFTs and documenting my experience in the hope of helping others to figure out the potential.
I’ve created and minted my own NFTs and offered them for sale.
I’ve researched their place in the world of art.
I’ve explored how NFTs could be used to sell limited edition runs of prints.
I’ve documented ways that NFT could present opportunities for creatively managing and funding careers and projects.
I’ve even bought an NFT from a creator who read and followed my process — thanks Sven!
Imagine my excitement when I read of a real estate agent in California who has minted an NFT and is selling it along with an actual house in Thousand Oaks, California for $1.4 million. The experiment was conceived in response to the hype created by Beeple and other notable cases, but it’s raised some interesting questions about the further utility and limitations of NFTs.
I will explore some of these within this piece.
An NFT with a house included in the price
On April 27th, CNN reported the case of California real estate broker Shane Dulgeroff who had the idea of using an NFT auction as a means of selling an $800,000 home in Thousand Oaks, California. Steve was inspired by the recent successes of Beeple and had been impressed by the $500k+ sale of a digital rendering of a property ‘Mars House’ created by artist Krista Kim.
His idea — to commission a digital rendering of the property in question, to auction it as an NFT and to include the house itself along with the NFT. He engaged an artist, Kii Arens to produce the artwork (named ‘Flying in Colors’) and listed it on OpenSea with a starting bid of 48 Ether (at the time, around $110,000) with a reserve of equivalent to $2million.
Here’s a screenshot of the listing:
Screenshot by the author of the listing
So far, so good.
What‘s included with an NFT?
The key principle of NFTs is that they are non-fungible — completely unique. While a creator is largely powerless to prevent anyone from taking unofficial copies of a digital media file such as an image, they can mint an NFT for the file which can be used to irrefutably denote the one, original copy. This token allows them to sell the original and to ascribe ownership of it.
When I began researching NFT in the aftermath of Beeple’s sale, I naively and incorrectly assumed that the buyer would receive a digital copy of the artwork as part of the price — and who knows, maybe they did. When I listed my first NFT — a digital photo I took earlier this year — I decided that I’d include the original image file with the NFT and would delete all other copies of it on my laptop. I assumed that the token itself should come with accompanying artwork.
I’ve since learned that while NFTs can include the ‘thing’ that the token represents, they don’t have to.
The Kings of Leon have sold NFTs for their latest album, some of which include front-row concert tickets for life. Others include limited edition pressings of the record. Crucially, the NFTs don’t include the master recordings of the music or the rights to it. The NFTs are the thing in their own right.
NBA Topshot videos are the modern equivalent of collectible sports cards, encompassing digital videos of significant moments of action from NBA basketball. But the video clips associated with the NFTs aren’t the only copy of the action in existence.
However, in the case of Shane Dulgeroff’s NFT for the house in Thousand Oaks, he included the house itself as a part of the sale price.
He didn’t have to, and he could have just sold the digital artwork that he’d commissioned. But he thought he saw a creative way of exploiting NFT technology to sell the house, and who knows — maybe it will come off?
The complex intersection between the real-world and the online world
The regulatory landscape within the world of blockchain and cryptocurrency represents one of its greatest unknowns. Governments are keen to exert control and influence, but don’t seem sure at this stage how to achieve that.
As of now the only decisive step that’s been taken by the US government is to tax the capital gains of cryptocurrency traders who buy and sell crypto and make a profit in doing so. The impending tax increases being progressed by the Biden administration will see top-rate capital gains increasing from 20% to 39.6%.
This hike was one of many reasons recently proposed to explain a short-term drop in the price of Bitcoin. It’s speculated that sellers were keen to crystallise gains made from the meteoric rise in the price of the best-known cryptocurrency in recent years, in advance of anticipated tax increases.
While it’s impossible to say whether this is explains the temporary drop or not, is irrelevant. It offers a useful segue to the intersect between transactions involving the blockchain and transactions conducted in the real world. The same capital gains tax hikes will also be applied to the proceeds of real estate sales and the profits made within them.
This is just the start of where things became a little complicated for Steve Dulgeroff as he tries to sell a house using an NFT.
Photo by Maurice Williams on Unsplash
Who enforces the law?
There are numerous laws and regulations that apply to the sale and purchase of real estate. Regardless of the sale being transacted via an NFT instead of conventional channels, these same rules would need to be followed and applied as part of the transaction.
The capital gains tax would still be due — not inconsiderable given that the house in question had been purchased for $746,000 and Dulgeroff had at one stage envisaged a sale price of around $20 million. Had he really factored this into his plans? I’m sure he’d have been pleased to have even 60% of the profit from a $20 million sale, but the tax would be due nonetheless.
Other questions have come up during the auction which demonstrate the hurdles that would need to be overcome between the buyer and seller.
How would the title transfer from seller to buyer? When will it happen?
How would the legal conveyancing be processed? Who will fund it?
How would prospective buyers go about arranging financing if they didn’t have the cash? Does the NFT exclude buyers in need of a mortgage from a lender in a conventional bank?
It’s important to note that on completion of the auction, a smart contract will automatically execute on the Ethereum blockchain which underpins the OpenSea platform. This would transfer the purchase price from the crypto wallet of the buyer to the seller. The NFT for the artwork itself would move in the other direction. This happens automatically and without human intervention, such is the nature of smart contracts on the blockchain.
What happens about the transfer of the other asset — the house itself?
The listing states the following in its description:
“You are bidding on the worlds first REAL property + NFT. The winner of the auction will have the opportunity to own a piece of history with both a digital and physical investment. Visit www.Dulgeroffnft.com for more details. The real estate included is located at 221 Dryden St, Thousand Oaks, CA, 91360.”
The usual realtors description of the property follows on, describing the quality of workmanship, the number of bathrooms and so-on. More importantly it mentions that the buyer is assumed to be willing to comply with the terms and conditions described on Shane’s website.
These are presumably the essential legal terms and conditions that govern the sale of a property in such an unconventional way. Can these really be enforced? Would the Californian or Federal legal systems be willing to enforce these terms should either the buyer or the seller decide not to comply? Would the courts be able to do so even if they tried to?
Will Shane Dulgeroff’s NFT sell so that we can find out? I hope so.
Whose rules apply?
If a buyer is found we will see whether the sale that’s agreed on OpenSea (and recorded forever in the Ethereum blockchain) is ultimately completed from beginning to end while complying completely with all appropriate laws and regulations. It seems to me that much of this would be reliant on the compliance of the buyer and seller and their willingness to engage voluntarily with the conventional system post sale on OpenSea.
Paying up-front for a house is unusual
Most conventional house purchases agree a sale price at the outset of the transaction but the money itself doesn’t pass from buyer to seller until the very end. Sometimes it may be held in Escrow between the two until the transaction completes and the keys are handed over.
And yet with the sale of the NFT for the house on OpenSea — as far as I can tell — the money will pass from the buyer to the seller the moment the auction completes (and before all the legalities have even started, let alone completed).
There’s a lot at stake that won’t be dealt with until much later down the line.
How will the contract be enforced?
Those who are unlucky enough to fall victim to a financial scam involving conventional currency will usually have recourse through the police and local law enforcement agencies. When transactions involve decentralized and ungoverned cryptocurrency, the authorities seldom take an interest and have limited ability (or desire) to enforce the law unless other laws have been broken.
This would suggest that the buyer of this house will be reliant on the better nature of the seller to make good on their promise to hand the house over — it seems like quite a gamble given the amount of money at stake.
At least in relation to Beeple’s NFT, on completion of the auction the buyer knew what he would be getting and the smart contract between them sent the funds in one direction and the NFT in the other. There was no anticipated need for any third party enforcement or involvement in subsequent activities to complete or transact the sale.
A matter of trust?
The same issues could apply to the sale of other real-world goods included within the sale of an NFT. Unless the transfer of the goods is somehow written into the smart contract that’s executed at the sale of the NFT, then it’s a matter of good will between the buyer and seller to ensure that each gets what they expect from the sale and purchase.
The Kings of Leon will have to make good on their promise to provide front row concert tickets for the buyers of their NFTs. Presumably the buyer is sufficiently trusting of the band (as a super-fan) and believes that the band will do what they’ve said they will. They’re also gambling that the band will stay together, continue performing and provide the appropriate tickets in the future for as long as the buyer owns their NFT.
There would of course be reputational damage for the band amongst their fans if they didn’t fulfil their promises to fans who’d bought their NFTs. This alone might be the incentive that encourages them to deliver on their promises.
The sale of other real-world goods using NFTs
As I work through the logic behind the sale of a house using an NFT, it leads me to the conclusion that the basic smart contracts that execute upon completion of an NFT sale on OpenSea are likely inadequate as they stand, for automatically processing the sale of real-world goods.
The mainstream marketplaces for NFTs might eventually adapt and evolve to cater for the sale of such things of course. Anyone who has bought or sold a car on Ebay (for example) has likely experienced that while the process of advertising and agreeing a price is much the same as selling a low value item such as a piece of clothing, the process of accepting payment and completing delivery of the item is radically different.
And so it could be with the sale of real-world items associated with NFTs. If marketplaces were able to provide a means for sellers to modify smart contracts prior to the sale to enable additional off-the-shelf terms and conditions, then perhaps it might be feasible within smart contracts.
As things stand however, it seems like there are inherent limitations that mean the sale isn’t transacted from end-to-end on the blockchain. There remains a reliance on trust between the parties, and involvement from conventional legal and financial systems and entities to enforce and process some elements of the transaction.
Price premiums?
A significant factor in the price achieved by some of the best known NFTs is the novelty factor — the technology is still relatively new. Many of those investing are presumably getting in early and buying NFTs in the hope that patterns previously seen in cryptocurrency investments will repeat — that early adopters benefit most from prices increasing as demand increases and supply levels off.
Many of those minting their own NFTs are pricing them highly in the hope of capitalising upon public interest. This is clearly evident in the case of the NFT for the house in Thousand Oaks — a property worth around $810,000 according to the CNN article, is being offered for sale at around $1.4million (albeit with the accompanying digital artwork) — quite a hefty markup.
Should the use of NFTs enable sellers to charge a premium for real world goods just as is the case for works of art? Art is priced subjectively and the premium paid is a reflection of many factors including status, scarcity and desirability of the artist’s creations.
In the case of property, the premium is often priced-in. This is based on the property itself, its location, facilities, surrounding amenities, rentability and so-on. Is it feasible to expect a vast premium would be paid by a buyer simply for the privilege of executing the transaction via an NFT, even if the house itself were accompanied by a piece of digital art too?
The test of this will presumably come if and when Shane Dulgeroff manages to sell the NFT (or not).
A surprising result from a search for “NFT and House” on Twitter — Source: Twitter
The concept of fungibility
One final thing to consider as a factor pertinent to the use of NFTs with real-world goods, is the idea of fungibility. Remember, NFTs allow creators to denote non-fungibility and uniqueness in the item being purchased.
A digital image, an audio file, a video, a meme or a piece of code can be duplicated, modified and reused — the NFT however remains unique and allows the seller to register the ownership of the original copy of the article being sold. One might question the value of applying such technology towards a physical house.
An exact replica of the property could easily be built by another person using the blueprints and the same materials. It could be decorated in the same way, its gardens landscaped to look identical and so-on. But it will never be exactly the same for it won’t occupy the same plot of land and won’t benefit from the same views, even if it’s built next door to the original.
The NFT is, in this way somewhat superfluous when it comes to individual buildings — these are always going to be unique on some level. A house is non-fungible already, is it not?
An NFT becomes more relevant to physical, real-world items that could be duplicated and forged by those looking to pass off copies as the original article. In this way, an NFT could become the equivalent of a certificate of authenticity for physical items, but locked into the blockchain as a means of tracking the ownership and proving its provenance. This might apply to physical articles like rare bottles of wine, paintings, jewelry or similar items whose value cannot exist as an NFT alone.
Key takeaway
There clearly exist some real challenges associated with the sale of real-world goods using NFTs, but these may conceivably overcome in time. We could theoretically see a market for anything from rare and customised cars, sculptures, art installations, fine wines, antique collectibles or any number of other physical goods, all sold and logged on the blockchain using NFTs.
The sense I get at this point is that the merits of such sales being processed via the blockchain using NFTs, do not outweigh the difficulties that could potentially be encountered in trying to complete the transactions post-sale. This is largely due to the regulatory landscape and the status of transactions involving blockchain and cryptocurrency in the eyes of the existing legal system.
The two worlds seem at present to operate quite discretely and there aren’t sufficient test cases that have proven how they can interact and interoperate successfully. The sale of Beeple’s artwork by Christies auction house may signify the first such step. Another step could be the sale of Shane Dulgeroff’s house on OpenSea (if it ends up selling there) provided the transaction completes successfully and legally.
The key to this working seems to be in allowing sellers to create and modify smart contracts associated with their NFTs in an accessible way that’s also legally enforceable. Currently this requires knowledge of programming languages such as Solidity — a JavaScript-like language on the Ethereum blockchain which can be used to set up contractual terms in smart contracts.
As technology matures and platforms allow blockchain users the facility to quickly and easily design and implement additional terms in binding smart contracts without having to be able to write code, then more complex sales could theoretically be executed and processed exclusively on the blockchain. These sales may end up having to incorporate defined and structured hand-offs to real-world legal and financial systems.
This would be the point that using NFTs perhaps become a more suitable vehicle for the transfer of ownership of real-world goods. For now, it’s fascinating to see where things are going — I will watch Shane Dulgeroff’s NFT sale with interest!
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
This article was originally published here on Medium. Toby Hazlewood can also be found on Twitter or at tobyhazlewood.com/.