NFTs: The What, How, When and Why?
On 11th March 2021, an artist who goes by the handle Beeple auctioned a collage at Christie's for 69.3 million USD. This was the third-highest price ever paid for a work by a living artist, and the sale made headlines all around the world. But there was something even more remarkable about this collage, something that made the sale a historic moment for both the art and the tech worlds. This was a fully digital piece of crypto art. The winning bidder is now named in a digital record that certifies that they are the owner of this artwork.
The novelty of the sale, however, is overshadowed by its strangeness. Except for this digital record, the owner receives no physical artwork. Nor do the millions of digital instances of the piece disappear from the internet. The product of this sale is not material, it is non-rivalrous and it certainly not excludable—so how can the buyer own it? More pertinently, who would pay 69 million USD for this nominal privilege?
How Does Crypto Art Work?
The basis of value for a work of crypto art is a non-fungible token (NFT) associated with it. Let’s de-jargonize.
It helps to begin with a general understanding of what fungibility means. A fungible asset refers to something that is interchangeable with another unit of that same asset. The most obvious example would be your average fiat currency, say the Indian Rupee. If I exchange your ₹100 note, for my ₹100 note (or even 2 notes of ₹50!), nothing really changes. Of course, they are all different pieces of paper (just ask the creases and the doodles and the serial numbers), but fundamentally, their purpose and value remain the same. But what about assets where this is not the case? What if there are no two units which are exactly the same, like your old scarf or your family’s car? Sure, there are other scarves and old Tata Nanos, but they are not the same as yours; exchanging them for another unit would not capture the distinct value your assets held for you. These assets are, therefore, non-fungible.
Great. Now let’s use this to tackle our final piece of jargon: a token. One of the chief implements of blockchain technologies, tokens are units that can be created, distributed, and logged on blockchains. Bitcoin is a famous example of a fungible token. The possession of one Bitcoin is proof that someone owns the value represented by one Bitcoin, something that is uniform to all Bitcoins. This enables the creation, trading, and storage of this cryptocurrency.
Now, a non-fungible token is roughly the same: it is evidence of ownership of a specific value, and the blockchain enables the creation, trading, and storage of this record. But there is one important difference: this value is unique to the item associated with the non-fungible token. It cannot be exchanged for another by default. And the most fascinating part is that this item could be just about anything: videos, audios, tweets, articles, and yes, artworks. As these tokens are stored on an open and distributed blockchain, their embedded metadata and transactional history are verifiable by anyone in the world. This means that your (wallet’s) ownership of a particular token is visible to the whole world, at all times.
But Why Should Anyone But It?
By now it is clear that the ownership of crypto art is mostly just symbolic in nature. And given its place in the public blockchain, it is bound to be copiously copied. Why would someone pay 69 million dollars just for bragging rights?
Once an artist creates an image, they mint it on the blockchain which is simply converting it to an NFT. By doing so, there is proof of authenticity for that file that exists on the blockchain, securely housed in the creator’s digital wallet open to anybody who wishes to verify. The creator can sell it to anybody through whatever process they want. However, why would buy it if they can simply ‘screenshot’ or ‘copy’ it on their computer a million times over? This was the initial question that boggled everyone. But remember, NFTs are unique, and the creator of this artwork is the only individual who owns the authentic version of this artwork. It is as simple as the fact that you can take a picture of the Mona Lisa and print it out, but can your smartphone photo ever hold the same value as the original painting? While anyone can replicate it, there is only one true piece of art. And the more people emulate it, the more prized it becomes. (This works wonders for the artist who is trying to sell their artwork as this drives up prices in an auction).
So we have now answered the question of why a buyer might think an NFT might hold value. But the question remains: is this nominal authenticity, this originality enough to justify such exorbitant prices? Sure, the original Mona Lisa holds more value than a perfect replica--but is there anything concrete about this value?
In Eric Paul Rhodes’ ‘The Outer Realm’ podcast, Gary Vaynervhuck (a.k.a GaryVee) said that he buys the art not for the sake of owning the art, but for the artist. He wants to endorse and support the humans behind the art. Many artists who have felt excluded by the mainstream art world have found solace here and can finally earn a living. And many share his sentiments; many buyers claim it awakens the 12-year-old in them, like collecting trading cards.
Many analysts also believe there is a social function that crypto art serves. The art in one’s home and gallery signals their tastes, interests, and their self-perceived ‘status’. Crypto art serves the same purpose in the digital realm. Buyers can make a virtual gallery online and communicate with the entire world.
Circling back to BEEPLE
We have spent a lot of time on the supply side of that historic Christie’s sale, but the demand side is just as fascinating. The buyer, who operates under the pseudonym MetaKovan, may appear to give us an even more interesting answer as to why someone would shell out 69 million bucks for bragging rights: it is because they see it as an investment. Months before Christie’s auction house had put the piece up for auction, MetaKovan had purchased other works of the same artists, divided ownership of them into blockchain-based tokens, and sold them to the public, according to MetaKovan’s blogpost from their crypto investment fund.
As bids for this latest piece kept on rising, so did the value of those previously traded tokens. By March 11, when the auction finally ended not only had MetaKovan purchased a new artwork but also benefitted from his previous minting of blockchain. Legal experts say it is not yet clear if MetaKovan’s actions were illegal or unethical. Carol Goforth, Professor of Law at the University of Arkansas says that it’s not against the law for an individual to buy, resell and promote the value of digital assets as long as they do not plan to dump their stake for unethical and quick financial gain. Paul Sibenik, an investigator at Cipher Blade which is a firm that specializes in blockchain and crypto fraud, also argues that it can be seen as a cash grab but there is no evidence of potential or actual fraud.
How Sustainable are NFTs?
When talking about the future of non-fungible tokens, Winkelmann says that this is just the beginning. People can start minting NFTs for things as common as cars, replacing the deed to a house, or even a college diploma. So, it wouldn’t be an understatement to say that this is the ‘next big thing’. In the same podcast, GaryVee draws parallels comparing NFTs to social media in 2005 and Google in 1995: ideas that will stay with us forever. Others believe that this is simply a craze for the shiny, new toy in the world of FinTech and that this craze will soon die down, causing valuations to plummet.
Whether or not we share the same gloomy outlook, no one can deny that there is, in fact, a frenzy right now. Prices are extremely volatile and huge sums are being paid for things that do not appear to have the slightest bit of value. Notable examples include the $2.5 million bid to ‘own’ Jack Dorsey’s first tweet or even the $1000 bid on a photo of a cease-and-desist letter about NFTs. Much of this energy seems to be emanating from pure speculation, causing experts to fear an enveloping NFT bubble; especially since bubbles like these are not new (some of us are yet to recover from the 2017 Initial Coin Offering craze). Just like NFTs, the barriers to entry to make, sell, buy, trade these coins were very low This led to thousands of coins mushrooming and pulling in millions of dollars in no time. This frenzy ended soon, as the public came to terms with the fact that the proliferation of cryptocurrencies had also eroded their value.
NFTs face the same problem. Anyone can create NFTs, even if they are not the original artist (as we have seen). While the Beeple artwork was ‘original’ that means created and sold by the same artist, anyone else could also have done the same. The value is not conferred by the artwork itself, but the digital certificate declaring ownership. This means that instead of artwork, we are trading participation. Individuals can and will subjectively assign values to NFTs, even when there is no objective value.
What makes NFTs’ longevity questionable is not only their financial sustainability but also whether people will continue buying it, even after they have lost their ‘new toy shine’? While technology has crept into almost every crevice of human civilization and replaced its analog rivals, I do believe that material products have not lost their place completely. Digital art can never fully replace the visceral experience of owning a physical work of art. But it is quite possible that they will challenge the dominance of physical artwork, at least for a while.