NFTs explained. Is crypto world developing too fast for the art market to keep up?

By Polina Epinatyeva

‘5,000 Days’ (2021) by Beeple. Image Courtesy of Christie’s.

Over the past weeks, NFT talk has gripped the internet. Everyone is discussing it and everyone seems to have an opinion. Could this step into the digital world of tomorrow be the future of art commerce or is it just another tulip mania? We may like it, we may not understand it or be totally confused by it, but one thing certain - we shouldn’t ignore it! In the last month alone, collectors, investors, and speculators have spent over $85 million on NFTs, a clear sign of a shift in people’s mindsets, thoughts, and actions. Internationally renowned auction houses are also following the trend. In March, Christie’s has auctioned its first NFT by Beeple, which fetched a record price. While, Phillips has just launched an online auction of ‘Replicator’, a multi-generational NFT by artist Mad Dog Jones, which is designed to automatically generate new unique digital artworks every 28 days. This article aims to interpret this revolutionary phenomenon and highlight its positive and potentially beneficial aspects for the industry.

It may be surprising for many to learn that NFTs were around for a long time. Coloured Coins were the very first NFTs, created in 2012, they were made up of small denominations of a Bitcoin. Coins were used to represent real assets on the blockchain, from property to shares of a company, they served as proof of ownership. In 2017, NFTs became more mainstream, with the help of Cryptokitties, a blockchain-based game that allowed players to buy, raise and trade virtual cats. Although, it was not until recently that NFTs became widely accepted and very popular. They began to gain traction among investors and collectors, as the main items currently offered as NFTs are digital artworks, collectables, and rare videos. As an illustration, digital artist Beeple has sold his NFT at Christie’s for $69 million and Canadian singer Grimes has sold her series of digital videos for $6 million. While artists are major contributors to this phenomenon, NFTs aren’t that simple. By the time the art world grew familiar with the concept, Twitter founder Jack Dorsey has put up his first-ever tweet for sale as NFT. Posted back in 2006 and 15 years later sold for $2.9 million. It is just a tweet, not an artwork, not something that required a very long time or a lot of effort to create; for instance, Beeple’s work took him 13 years to make. Hence, many questions arise: what exactly are the NFTs of today, who fuelled this boom, with what purpose, and why now?

Jack Dorsey’s First Tweet Listed as NFT. Image Courtesy of Forbes.

NFT is an abbreviation for Non-Fungible Token. It simply means that a token you own cannot be traded for another one like it. It’s unique, it holds proof of authenticity and ownership. As an illustration, in digital terms, the well-known cryptocurrency Bitcoin is indeed fungible. One Bitcoin can be exchanged for another one, they would hold the same value, the same purpose. One dollar can be exchanged for another, while NFT cannot. Each NFT’s cost is different, as it’s set by the highest bidder. It could be compared to something like rare trading cards. Similar to those you collected as a child and swapped with your friends at school. One Pokemon for two Star Wars, sounds familiar? Although, with more unique and rare trading cards, the ones that appear at auctions, the story is different. They can be sold for real money, thousands or even millions. If one is traded for another, it makes the news, as in the exchange one receives a different unique card, containing another rare character or sportsperson, it will hold different meaning and value. While the principle is similar, NFTs are not simple paper cards. They can be literally anything that is transformed into the digital format: music, pictures, text, videos, tweets, or your latest x-ray.

NFT is a part of the Ethereum blockchain system. If you were curious and followed some of the recent NFT auctions, you might’ve noticed that all of the bids were made in Ether currency and wondered what could it be. Ether is the official currency of the Ethereum blockchain, it's the second-largest cryptocurrency by market capitalisation, after Bitcoin of course. The majority of NFTs are currently based on Ethereum token standards. However, this is changing and other blockchain systems, such as Eos, Neo, and Tron, are also releasing their own standards. Although, by looking at NFT's growth and its impact, we can notice that it doesn’t solely benefit the Ethereum system. On the contrary, it creates growth for the whole industry. All of the blockchains have the same vision for a decentralised digital universe, if one succeeds, the others will follow. Overall, NFTs have a huge growth potential, they can be used for art, video games, music, digital real estate, virtual trading cards, etc. This diversity is attracting many new customers to the digital crypto ecosystem. To take part, they have to learn more about cryptocurrencies and purchase them. This serves as a strong push for Ether, Bitcoin and others.

So what really determines the NFT price and the enthusiasm of the public towards the phenomenon? Like in the traditional art market, supply and demand are the main market drivers. Due to the current scarcity of NFTs and extremely high demand from investors, gamers,  and speculators the prices have skyrocketed. We can only guess whether this trend has peaked or is it set to make new highs? In this crypto world, it’s hard to judge. Even by looking at Bitcoin’s price fluctuations, we can notice that cryptocurrencies are much more volatile than flat currencies or precious metals. Hence, this may discourage more conventional art collectors, while crypto investors and millennial collectors are more likely to take risks.

So once we have explored this phenomenon and its purpose, we should be in a better position to evaluate its benefits for the art industry and beyond.

WHAT ARE THE BENEFITS OF NFTs FOR THE ART MARKET?

First, it’s essential to consider key market actors, those highly important for the functioning of the industry, who are often left out. Artists, musicians, and whoever sells their work through NFT technology are profiting from this trend. Before NFTs were developed, no original digital art existed, it was all available to everyone for free. For the first time in history, artists can create scarcity in the world of online abundance, sell unique digital pieces for the same amounts as physical artworks. Moreover, artists are supplying their digital creations directly to the buyer, avoiding middlemen and commissions. They could also receive royalties every time their work is resold, as blockchain contains information on every transaction ever made with each specific token. Therefore, NFT technologies are opening up many new opportunities for artists to express themselves and earn money. To illustrate, until October, no one in the art world was aware of an artist Mike Winkelmann, known as Beeple. The largest price his work has ever achieved was $100. Today, however, his name is etched in history. 

Graffiti ‘In Search Of’ (2020) by Misha Most. Image Courtesy of @misha_most.

Another major benefit for artists, especially those involved in street art, is the longevity of their pieces. Graffiti’s life span is usually only a few hours or days if an artist gets lucky. In the case of street art, one man’s masterpiece is another man’s vandalism. Hence, in the majority of countries, it’s illegal. As an illustration, the U.S.A. alone spends around $15-18 billion to monitor, detect and remove graffitis, while in Singapore wall painting results in mandatory corporal punishment. If you aren’t Banksy or Shepard Fairey, unfortunately, your art is doomed to disappear. NFT potentially resolves this problem, as it allows artists to convert their pieces to a digital format, where no one can ever do anything to destroy them. Recently, a famous graffiti artist Misha Most has decided to tokenise his work in Los Angeles as he believes that in the real world ‘street art’s life is ephemeral’. 

From an art collector’s perspective, blockchain technology is a great tool to protect your collection. NFTs are secure, they keep unalterable digital records of provenance and only one account is capable of owning a token at a given time. Hence, unscrupulous traders cannot sell the same artwork to multiple buyers at the same time. Once the token has been transferred all other transactions will simply be cancelled. It’s very hard or even impossible to create and sell counterfeits of existent NFTs, as they will hold no record of validity or ownership history. Equally important, it’s much more problematic to steal a tokenised artwork from its owner, especially in comparison to a physical painting. Blockchain technology doesn’t allow anyone to erase the proof of ownership. Thus, the stolen token will be marked as such. Finally, art collectors can avoid paying gallery fees, transportation, storage, and installation costs, as well as very large taxes that are often imposed on tangible goods, such as paintings. 

WHAT CAN WE DO TO FURTHER IMPROVE THE ADOPTION OF NFTs IN THE ART MARKET?

Although NFTs pretty much can’t be stolen from their owners in the digital realm, theft is still happening in the real world. This NFT mania has resulted in a new wave of scams. Artists who never tokenised their pieces, discover their works being sold as NFTs on various marketplaces. This problem of copyright theft is growing together with NFT’s popularity. Currently, there are only a few curated NFT marketplaces that have the power and resources to stop scammers from stealing pieces created by other artists, converting them to NFTs, and selling them as originals. When it comes to more accessible marketplaces there is much less control or proper regulations, while the only barrier that prevents those pseudo-artists from exploiting the talent of others is the expertise of NFT collectors. No professional collector would consider purchasing something that hasn’t been directly verified by an artist. And yet, many get caught in this trap. Hence, the question arises: how can we further advance our NFT platforms to stop scammers from impersonating artists? Which additional verification checks should be performed in order to completely avoid such identity theft?

Nyan Cat. Image Courtesy of www.nyan.cat.

Furthermore, it is important to acknowledge that the crypto art scene significantly differs from the traditional one. Therefore, collectors who wish to be a part of this new era have to adapt and learn how to operate in this market. They must understand the new ecosystem and factors that are responsible for price determination. Traditional pricing models are not very applicable to the crypto world, as NFTs cannot be exhibited at galleries or museums, cannot participate in art fairs or be published in catalogues raisonné. When it comes to NFTs, provenance is the only foundation upon which value can be built upon. This can refer not only to the collector who currently owns the NFT but to the users who owned it previously as well as the marketplace on which the artwork has been sold and the way it has been sold (fixed price, offer or an auction). Traditional art market players may require time to adapt to the new normal and may at first find themselves unintentionally involved in speculative bidding, which is dangerous not only for the collectors themselves but for the market’s credibility and the confidence of other market participants. It is to some extent the responsibility of the NFT marketplaces, digital galleries, NFT blogs and other successful Art-Tech projects to educate the public not only about the trends but the market structure and its logic. As only completely informed users can lead to the development of a strong and stable market.

Another significant concern is NFT’s energy inefficiency. Each Ethereum transaction’s ecological footprint is equal to 48kWh. This is comparable to almost two days of energy consumption of an average American household. Since NFTs are using the same technology as other blockchains, it requires a lot of computer power. Nonetheless, artists and collectors are thinking of initiatives to offset carbon emissions and reduce the damage by planting more trees or investing in renewable energy projects. Some artists are even cancelling their NFT drops. Those measures are compensating for a significant part of the damage, however, greater reliance on cleaner energy can also be promoted by NFT marketplaces and other Art-Tech platforms to completely reduce the environmental impact not only of NFTs but also from other applications of mining operations.

To summarise, NFT is a fascinating phenomenon that urges all art market players to reflect on their priorities and the choices they make. For digital artists, it opens up new possibilities, brings exposure, international reach, and earnings. It also allows artists with a more conventional style to explore new forms of expression and attract new audiences. The crypto world is greatly responsible for prolonging artworks’ lifespan, especially when it comes to street art. NFTs have the potential to bring new collectors to the art market, those who are open to making new artist discoveries and who are fascinated by a completely new model of provenance that can now be easily verified and can no longer be forged. There are still some more adjustments and improvements that can be made to the crypto ecosystem, however, it is already very interesting to see how the NFT world disrupts the conventional art market. Certainly, with time the crypto technologies will make the traditional art market much more transparent and less intimidating for collectors. It will be fascinating to see how the two worlds co-exist and whether they will complement each other in the future or perhaps will go their completely separate ways.