Tales from the Crypto World: Are NFTs Fads or Innovation for Art?
NFT art is all the rage these days, and the art world is finally catching up with the latest technology. Christie's sold a record-breaking sale for a living artist when Beeples' digital collage, Everydays: The First 5000 Days, fetched $69 million last month. This record surpassed the legendary living artists Jeff Koons and David Hockney (his commentary on NFTs). Unlike traditional art, NFTs are non-tangible assets, and the buyer owns the digital file or link. Many people are baffled by the concept that anything digital can hold any value. Value is as subjective as the taste in art. So what is so unique about Beeples' work when anyone can replicate and download the digital artwork infinitely? What does value mean in this context?
For some, it's validation and a status symbol. After the groundbreaking announcement, everyone, including Jack Dorsey, Elon Musk, Grimes, Kings of Leon, and Tom Brady, is jumping on the NFT bandwagon. In the art world, Damien Hirst is exploring this territory. NFT is not new, it's been around as early as 2012, and the pioneer platforms for crypto art, such as Dada (released in 2012), Crypto Punks (released in 2017), and Cryptokitties (released in 2017) to democratize art and make sure that the artists' copyrights are protected.
WHAT IS NFT?
NFT stands for Non-fungible token, equivalent to a digital certificate of authenticity linked to the decentralized digital ledger, known as the blockchain. Unlike traditional paper or digital certificates, the record on a blockchain is immutable and cannot be altered. Our traditional currencies, such as dollar bills, are fungible, meaning they can be replaced or exchanged with another identical one of equivalent value. NFTs, on the other hand, are unique digital assets, not mutually interchangeable, and no two NFTs are the same.
NFTs are the new form of highly collectible items, similar to traditional baseball cards, Pokémon cards, rare stamps, limited-edition artworks, or other memorabilia. The unique code of NFTs creates scarcity among otherwise infinitely replicable assets, such as photos, videos, GIFs, memes, tweets, virtual trading cards, virtual real estate, and more.
Just as our currency production, creating the NFT process is called "minting," where the seller makes a single, original piece for sale, usually on the Ethrereum (second most popular cryptocurrency) blockchain. The buyer gets the digital file or link and receives a token, exclusive proof of ownership. Sure, anyone can replicate and download the image infinitely; the original file still belongs to the buyer.
Collecting NFTs and Crypto art is similar to acquiring Conceptual Art. Think of Sol LeWitt's wall drawing series, Dan Flavin's fluorescent light sculptures, and Maurizio Cattelan's performance series. These Conceptual pieces come with a specific set of instructions on paper with a certificate of authenticity where the purchaser is responsible for "activating" the work.
WHAT ARE BLOCKCHAIN AND CRYPTOCURRENCY?
Blockchain is an immutable ledger similar to payment platforms using cryptography, and bitcoin is the digital currency that runs on blockchain. The creator of this innovative technology remains a mystery to this day. A person (or group of people) named Satoshi Nakamoto created this revolutionary public payment rail in 2008. Since its inception in 2009, the valuation of bitcoin exponentially grew from $0 to $50,000+ over 12 years and continues to do so. Following bitcoin's success, more coins and brokerage have been emerging in the marketplace. Ethereum (ETH) is a more popular form of cryptocurrency used to purchase NFTs these days. What's radical about blockchain technology is that it prevents double-spending problems on digital assets without relying on a trusted authority or a centralized server. Hence it's decentralized. The ledgers are visible to the public, yet the parties' identity is protected using computer-generated unique private and public keys (think of automated password generator).
THE POTENTIAL BENEFITS AND USE CASES
The immutable nature of blockchain is the key solution to the world of traditional art transactions. One of the many frustrations for art collectors is the validation of authenticity and proof of ownership. Traditionally, an artwork is verified and validated through its provenance or history of ownership recorded on analog ledgers and papers. Over the years, authentication and provenance have been a thorny subject as the records have been muddled or fabricated for fake artworks.
When a work appreciates and sells in the secondary market in the traditional art world, the collector reaps the rewards and profits. However, the artists still retain the copyright; they don't receive any loyalties once the work leaves their studio.
Theoretically, blockchain offers significant advantages in protecting an artist's copyright and the provenance of an artwork.
The decentralized marketplace and built-in smart contracts remove the institution or the "middle man" and provide artists direct access to the collectors. The artist or creators potentially make more sales and gain perpetual profits as the blockchain keeps track of ownership and transactions.
Despite the physical lockdown of 2020, technology accelerated the distribution of art. According to the UBS annual Art Market Report 2020, online sales have doubled from 2019 and raised the overall sales. It's great to see how technology is accelerating and making artworks more accessible. The question still lingers. Is it still accessible to everyone? To whom is the artwork available? The collectors are still frustrated with the old school hierarchy system of waiting lists and private bids. The principle of supply and demand remains the same in the digital world--scarcity and high demand increase the value.
THE POTENTIAL SIDE-EFFECTS
On the flip side of the digital coin, one of the blockchain hurdles is that it's not as easily accessible for the consumer market and real-life scenarios. The technology works well for validating the authenticity and provenance of digital files such as music, videos, games, and digital art; the technology does not apply to physical objects, such as paintings and other tangible collectible items. Another criticism of the crypto world is very similar to the bro culture of Wall Street, and women investors are still underrepresented in this sector.
Blockchain is reminiscent of the early days of computers and the internet. Think of the pre-computer days when typical computers took up an entire room and the dial-ups. Critics of blockchain are concerned about NFTs' environmental impact as it requires massive energy resources to perform many complex computations. For instance, bitcoin mining takes up about 0.58% of the world's energy resources. According to Art Newspaper, Beeple's collage generated about 78,597kg of CO₂ emissions, the same amount of electricity to keep the lights on for more than 13 homes in an entire year. The blockchain proponents hope to create "green" NFTs to make this technology more sustainable and environmentally friendly.
Just because everything is in the digital world, no one gets a free pass from profits generated by minting NFTs and investing in cryptocurrencies. Uncle Sam also wants his share of the pie, and the US government is hashing out more regulations on cryptocurrencies. When a creator tries to mint one of their artwork on the NFT platforms, "gas" fees incur to cover the upkeep cost to run these machines in the background. Unlike our current internet, the transactions are not instantaneous as we expect them to be. It takes several steps to purchase cryptocurrencies from a brokerage, transfer the digital funds to a digital wallet. The whole process can take about 30 minutes or more on average. So a lot of patience is required to navigate the world of NFTs and crypto art.
Because every transaction and asset is unique and all the records are immutable, it's gone for good if you misplace your private key (aka your password). You can't just request to reset your password as you would with your financial institutions. Also, digital assets are not foolproof nor immune to perpetuity in the long run. Suppose something happened to the entire system, such as a technology update, some electrical outage, or the provider goes out of business. In those scenarios, the assets may get lost in the ether (pun intended). Remember what happened to those floppy discs, CDs, audio, video cassettes, and other early websites?
WILL NFT ART SUSTAIN ITSELF, OR WILL IT BE THE SUBSEQUENT BEANIE BABIES FOR THE TECH NERDS?
Think back to all the craze in the 1990s, and Beanie Babies comes to mind (remember those?). What happened to those "collectible" items? Some rare Beanie Babies command some value, while most are worth far less than the original purchased price. Fast forward to today, the famous internet meme, a cat riding on a pop-tart, Nyan Cat, sold for 300 ETH, equivalent to $600,000 at the sale back in February 2021.
The concept of beauty, taste and the value of the artwork is also in the eyes of the beholder. It's misleading to think buying "hot" stock or "next craze" will bring fortune overnight. It comes with risks, just as investments in the stock market. The early adaptors believed in the actual value and benefits, and it took them a while to get to where they are and to make their point. The collectors seeking significant ROIs will quickly re-sell the work, while the artwork supporters will acquire them because they love the work. So it may be worth asking, why do people collect particular artwork? Is it because they love the work or because it's trendy?
In reality, minting NFTs and getting your hands on cryptocurrency is not as easy as it sounds. Making any financial investment requires patience, research, due diligence, and risk assessment. Because of sensationalism and seemingly overnight success, grafters and spammers are on the rise, trying to exploit the hype with a "get rich quick" scheme. Again, NFTs are still new, and the technology needs to be explored further for IRL applications.
(Disclaimer: all ideas and commentaries presented in this post are for information only. These are not legal or financial advice.)