What Is an NFT? Deconstructing the Crypto-Art Craze
Steve Aoki, Grimes, Shepard Fairey, Rob Pruitt, Jonathan Yeo—major artists are getting into NFTs, joining everyone from famed art critic Jerry Saltz to Elon Musk and Angelyne in the crypto-art craze.
Obscure American graphic designer Beeple’s all-digital work “Everydays: The First 5,000 Days” sold for $69 million at Christies last March.[i],[ii],[iii] And collectors who entered the $250-million NFT market early have made millions.[iv]
What is an NFT? And should you invest in one? Get answers here.
What Does NFT Mean? NFT Explained
“NFT” is an acronym for “non-fungible token.”
What is a non-fungible token? A non-fungible token (NFT) is a unit of data stored on the blockchain, which is essentially a digital ledger of all transactions on a peer-to-peer network of computers.[v]
The data in the NFT certifies that a digital or physical asset is unique, meaning it is not interchangeable in commerce. NFT’s aren’t limited to art, either. Residential properties, albums, URLs, contracts, videogame character skins—you name it. Pretty much anything can be tokenized into an NFT.7
So, is Bitcoin an NFT then? No. Bitcoin and NFTs are both digital tokens. Bitcoin and NFTs both live on the blockchain.
But here’s the main difference between Bitcoin and NFTs: fungibility. Or interchangeability. The value of Bitcoin is objective. Whatever value the market assigns to Bitcoin on any given day will typically be pretty close to the price at which you can buy or sell Bitcoin at that time.
A non-fungible token, then, has a unique value. Similar to a work of art, no two NFTs are exactly alike, so you can’t simply trade one NFT for another like with Bitcoin and other cryptocurrencies.
And, similar to art, beauty is in the eye of the beholder. Value is subjective.[vi]
All of the attributes that make each NFT unique and potentially valuable are stored in the digital token’s meta data and embedded with it into the blockchain: the media (music, image, recording, etc.), the creator, the owner, the date, the contract.7
How to Buy NFTs
You can’t use just any cryptocurrency to buy NFTs. Bitcoin won’t work. NFT marketplaces are only accepting Ethereum right now.
So, your first step to buying NFTs is purchasing Ethereum on Gemini, eToro, or Coinbase.[vii] Then you can create an NFT marketplace account where NFTs are bought and sold. Popular NFT marketplaces include Opensea, SuperRare, and Nifty Gateway.
Why Are People Buying NFTs?
“NFTs are the single biggest reorientation of power and control back into the hands of the artist basically since the Renaissance and the printing press.” — Robert Alice, London-based artist.[viii]
Authentication & Provenance
Authentication and provenance are a big part of the appeal of NFTs. Forgery and counterfeiting have long plagued the physical art world, and the problem is only magnified when you create art digitally because it can be duplicated millions upon millions of times. Spotting the real from the fake becomes nearly impossible.
NFTs purportedly solve this problem for physical and digital art. Galleries are offering NFT certificates of authenticity with purchases of physical works.[ix] Digital artists can do the same. It’s all in the meta data.
Financial Protection & Recurring Revenue
If you’re a collector, these digital certificates of authenticity can help preserve the value of your investment.
NFTs offer a long-term financial benefit to artists, as well. Contracts can be included in their meta data specifying that the original creator of an artwork receive a percentage (usually between 2.5% and 10%) of every sale. The artist earns money each time ownership of the NFT changes hands.
Upside Potential & Profit
There is serious money to be made in the crypto artworld, and that is perhaps the biggest draw to NFTs right now. (You could also lose money on crypto art — but we’ll get to that later.)
The NFT market catapulted Charleston, South Carolina-based digital artist Mike Winklemann, AKA, Beeple, to the status of the third most expensive living artist at auction.1
“Everydays: The First 5,000 Days” is a digital mosaic of images Beeple released one by one online every day since May 1, 2007.
“By posting the results online I’m ‘less’ likely to throw down a big pile of ass-shit, even though most of the time I still do because I suck ass,” said the artist of his inspiration for ‘Everydays.’[x]
That “big pile of ass-shit” earned Beeple $69 million last March and will keep generating revenue for him every time it changes hands.
“Silly.” That was David Hockney’s, the first most expensive living artist, response to “Everydays.”
“Speculative” might be a better way to describe the sale of “Everydays”; specifically, the fact that the two men who purchased the digital artwork, Metakoven and Twobadour (pseudonyms), didn’t even look at all of the 5,000 images.
That’s because “Everydays” was nothing more than an investment for them.
“This is going to be a billion-dollar piece someday,” said Twobadour.10
What You Need to Know Before Buying an NFT
As with any investment, there are some potential drawbacks to buying NFTs.
The NFT Bubble
“Frankly, I am concerned that people run a risk of losing money on this. I don't want to see young collectors get burned (and subsequently get turned off from art collecting). I also don't want to see the digital art space, which is a fascinating place, implode if we're in a bubble.” — curator and gallerist Ken Hashimoto
It’s no secret we’re in a financial bubble right now. Stocks, housing, lumber, gold, groceries—asset prices are sky high. And a JPG file by a relatively unknown artist selling for nearly $70 million just because it comes with a certificate of authenticity on the blockchain suggests this crypto-art craze is not immune.[xi]
NFTs Are Bad for the Environment
Then there are other concerns: the environmental toll of NFTs and cryptocurrencies. Some critics claim that keeping the blockchain running requires as much energy as a small country.
And within the crypto industry, many sites are working on converting to renewable energy or, at the very least, giving creators the option to split their royalties with renewable energy charities.[xiii]
NFTs May Not Guarantee Authenticity
Rather than solving the problem of being able to prove the authenticity of digital art, NFTs may make it worse.
Recall that the details about the artwork and creator are stored in the NFT’s meta data, and that data is embedded in the blockchain. What makes the data a unique entry in the blockchain and, therefore, an unalterable testament to the art’s authenticity? The algorithm used to create the data’s code.
If a hacker wants to steal your proof of authenticity, all he or she has to do is use the same encryption algorithm to generate the exact same code. Unscrupulous artists, too, could sell multiple “originals.”[xiv]
NFTs Can Violate Copyright Law
Be careful when buying NFTs that represent the intellectual property of entities other than the artist, especially big brands like Disney or DC Comics.
Just last March, the original publisher of Batman warned its freelancers not to sell digital images, including NFTs, of its comic-book superstars.
Buying an NFT that violates copyright laws could make it difficult to resell later.[xv]
Should You Invest in NFTs?
Yes, you should invest in NFTs. But only if it’s for the same reason you’d buy a piece of art in the real world: because it makes you feel something and think about the world beyond your day-to-day life.
As the original influencer, Aristotle, pointed out over two thousand years ago, holding a mirror to humanity, and the catharsis such reflection can bring, is the true purpose of art. And it’s priceless.
By Auroriele Hans