NFTs – an Insight into the Deep, Open, Murky Seas

#art market #blockchain #cryptocurrency #digital art

NFTs are hailed by some as the future of the art world, but in what way are they really changing the existing system? Guest post by artist and computer scientist Julia Schicker.

NTFs, we’ve heard a lot about them during the first mainstream hype in February and early March this year (2021), culminating in the sale of Everydays – The First 5000 Days by Beeple through the auction house Christie’s for 69 Million Dollars (the third-highest price ever paid for a work by a living artist).

There are many different things at play when looking at NFTs, making it a very dense topic. Technology, ecology, economy, the art market, and digital culture all have a role in this. Within this article, I am going to quickly touch upon all of these interlinking topics.

But first, a very quick explanation of NFTs:

NFTs are Non-Fungible Tokens, meaning they are a unique digital thing. They are stored on blockchains (which are explained later in this article). NFTs are not only art but can represent any digital file (video, image, etc.), like NBA Top Shots (videos of the most notable moments of basketball games), tokens in online games, or digital collectibles (just like baseball cards). (For an extended explanation see https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq)

Beeple, Everydays – The First 5000 Days NFT, 21,069 pixels x 21,069 pixels (316,939,910 bytes). Image courtesy of the artist and Christie’s

The Technology Behind NFTs

NFTs are stored on the blockchain, a data structure that has been around for a bit more than a decade with quite some media attention in about the last seven years. The blockchain allows people to save information (mainly about financial transactions with cryptocurrencies) which is not changeable anymore after it has been saved, making it very secure. A blockchain is decentralized, meaning that there are many copies of this data structure saved on many different servers and these servers are owned by different people. Blocks of data are added to it regularly. These blocks are authenticated, for which the authenticator receives a financial reward (this is called mining and it’s how people make money by investing in servers to authenticate new blocks).

Important to know is that most NFTs only contain a code that authenticates their uniqueness and the link to the artwork, not the artwork itself. The art is therefore not saved on the blockchain. If the link to the artwork (that can be saved anywhere on the internet) breaks, the entry on the blockchain affirming its uniqueness is no longer connected to it.

By buying an NFT the buyer receives the digital rights to the artwork in question. What these digital rights are is not entirely clear as of yet though, for example Christie’s states in the Terms & Conditions of the Beeple sale that they actually don’t quite know what exactly they are selling right now.

A very important and much-celebrated advantage of NFTs is that artists can profit from secondary sales by deciding how many percent of the resale price they want to receive. This counters the often-seen problem where artists do not receive any of the profit made by resales of their work.

Google Search for ‘Ethereum Kurs’, Screenshot

Crypto Economy

NFTs can only be bought and sold with cryptocurrency. Therefore the prices of NFT art are influenced by the price changes of cryptocurrencies. Also, if you as an artist or collector want to sell or buy NFTs you need to buy cryptocurrency first. The crypto economy has its own mechanisms that play quite strongly into the monetary values of NFTs. The bitcoin blockchain, which was the first blockchain, was created in late 2008, early 2009, exactly during the time of a big financial crisis. It is assumed that the blockchain was developed by crypto-anarchists who wanted to create a financial system independent of central banks (but since the original author of the bitcoin implementation, Satoshi Nakamoto, is only known by this pseudonym, it is not entirely clear).

The crypto economy can mainly grow by drawing more people in, by having more people participate in their economy (it is sometimes referred to as a headless Ponzi scheme, meaning that the people that were in early will profit from all the people that join later). Therefore it makes sense to create more options for cryptocurrency to be used. Art is known for creating high prices and artists are known to often be looking for new ways to earn money with what they do. NFTs and especially NFT art are often seen as a marketing stunt by the crypto economy to draw more people in. Art is enticing and has the potential to grab a lot of people’s attention, thus making it the perfect candidate for this.

I do wonder a bit what will happen as certain blockchains go in and out of fashion (I imagine this to work a bit like social media networks winning and losing importance) – will NFTs that are on certain blockchains also lose value or lose interest just because they are connected to a currency that is currently not so much “en vogue”?

Ecological Concerns

Most blockchain implementations are the direct opposite of environmentally friendly. There are calculations that say that all blockchains together (the Bitcoin and Ethereum blockchain being the biggest ones) use the energy equivalent of Argentina. This is because of a mechanism called proof-of-work. Ethereum (the blockchain where most NFTs are saved on) has already stated years ago that they wanted to change to the more environmentally friendly proof-of-stake technology, but it still is not clear when and if this is going to happen. I do also wonder whether this change would make all the people happy that have invested a lot of money into buying servers to mine cryptocurrency.

The Art Market

The art market has become a very important investment playground in the last fifteen years. Art is becoming more and more an investment object, where it becomes important to turn a profit by reselling art. Making huge profits by discovering young artists and selling them later when their career has developed further started in the early 1970s. Since then, prices have exploded. In the 1970s it was newly rich business people who saw this investment opportunity, with their collection of contemporary art often frowned upon by people whose families had owned fortunes for generations. It seems as if there are quite some parallels to the current development with NFT art, where there are mainly young people who have made money by trading with cryptocurrency and ‘traditional’ artists and collectors being relatively skeptical about it.

The art market is very exclusive, making it hard for a lot of artists to even find a way into it. With NFT marketplaces this becomes apparently more ‘democratic’, as everyone can upload and sell their art there. Furthermore, the market for digital art is not very big and present, as most of the work sold is still mainly painting and sculpture. NFTs are exclusively digital, which directs more attention to digital artists that have been overlooked by the art world for a very long time.

There are two things that are very dear to the art market: authenticity and provenance. Authenticity assures that a work is not fake. Provenance means the hands through which an artwork has passed, so galleries that have sold it and collectors that have owned it. The more prestigious or interesting the collectors (if a work has for example been a gift to the lover of the artist), the more valuable is the work in question. Provenance also helps understand whether a work is authentic or not because the records showing the artwork’s provenance are logically also faked when a fake artwork is sold. The immutability of the blockchain makes the provenance of an NFT unfakeable which solves the very long-standing problem of the art marked about investigating the provenance of an artwork.

If every artist logs their artwork on a blockchain then authenticating artworks won’t be so difficult in the future. But this is also subject to the financial situation of an artist: someone working with a small budget might not be so eager to spend money on creating NFTs. Furthermore, currently is quite a big problem with people creating NFTs of artworks they did not create themselves.

Disaster Girl, NFT

Digital Culture

Many of the NFTs sold for very high prices, such as Disaster Girl (seen above) or Nyan Cat are important parts of digital culture. There is a large number of people, predominantly young, who have an emotional connection to these images as they are being part of the culture they grew up with. Like this, it becomes very clear why they would be valued so highly, especially by people who have made money through a different part of digital culture, namely cryptocurrency. It seems unlikely that NFTs will take over the whole art market, but they will for sure, especially because they make digital culture connect to monetary values, stick around.

Right now, as the dust of the first frenzy is settling, there is space to reevaluate the advantages and promises made by this technology. For digital artists, they are a very interesting option to sell art, but I think many who followed the first hype now have to admit that selling art like this is not as easy as it first sounded. There is still a lot of other work connected to selling art, in this case, it is mostly marketing through social media platforms. In the traditional art market, this marketing and the maintaining of relationships with collectors is taken care of by the gallery representing the artist.

NFTs are a very complex topic and their impacts are hard to grasp. I guess only time will tell in what way they will become a part of the whole system that is the art market. NFTs navigate a complicated space between many highly complex systems and are thus difficult to understand, as a certain amount of knowledge in multiple fields is well advised. Many questions are open, but what we do know, is a lot of flags are pointing in rather murky waters.

Julia Schicker is an artist and computer scientist, she currently lives in Zurich and Brussels, where she is doing her Master of Fine Arts. www.juliaschicker.ch