On March 11., a piece of digital art created by Mike Winkelmann, also known as Beeple, sold in an online auction for $69 million. Anyone can view the image for free, and anyone can save it to their device with a simple “right click, save”. The difference is the buyer owns the original, and they can prove it. It’s all there on the blockchain.
So how did this digital image, titled Everydays: The First 5000 Days, which is so easy to view and copy, become the third most valuable piece of art ever sold by a living artist?
Welcome to the world of NFTs. It’s about to get weird and wonderful.
NFT stands for non-fungible token. They’re all the rage right now. But what exactly are non-fungible tokens, and are they really worth the insane amounts of money they are selling for?
To understand the concept, it helps to start with the word “fungible”.
A fungible asset is interchangeable with an asset of the same type. For example, I could swap one Bitcoin for one Bitcoin. Both have equal value. Likewise, I could swap one $10 note for another $10 note, or one 24k gold bar for another 24k gold bar, or one bag of sugar for one bag of sugar.
Non-fungible assets are each completely unique and are therefore not interchangeable. They have their own value and their own meaning. An original piece of art falls into this category. So do NFTs.
Non-fungible tokens (NFTs) utilize blockchain technology to offer proof of ownership for unique digital assets. The asset could be an image, video clip, music track, digital trading card, or even virtual land.
If all that sounds a bit jargony, here’s how it’s works for buyers and sellers: A content creator makes something in the digital realm, let’s say a 10-second animation. They mint their artwork on the blockchain, and an NFT is born. The artist sells this token, which represents ownership of the animation clip. Whoever owns the NFT, owns the art.
The potential buyer notices the animation clip online on the artist’s websites, or on a site like Opensea, the Ebay of NFT. They like the artist’s work and want to own the clip, so they pay the artist the agreed amount, 0.1 Ether ($175). The transaction is recorded on the blockchain, and the buyer now officially owns the original clip, and can prove it.
All fine so far. A simple transaction between content creators and buyers. Here’s where it gets interesting. The buyer could already have listened to the clip for free. It’s right there on the artist’s website. Click and play. They could already record it, share it, replicate it endlessly, save it, all without ever buying it.
Which begs the question, what makes NFTs valuable?
You could go online right now and print off any piece of fine art you want, in enhanced quality and on canvas, then frame it to look identical or better than the original. But that’s not the same as owning the original piece of art. The ownership itself is what holds a lot of the value.
Purchasing a non-fungible token means you actually own a digital asset. Although the image or video can be replicated indefinitely, the authentic, original digital asset belongs to you. The NFT is your proof, and the record of the transaction on the blockchain is your receipt.
Ownership itself is not enough. People have to want to own the object of desire. The value of NFTs has to do with the value of art itself.
It’s time to get philosophical. What makes art valuable? What makes the pyramids more valuable than the bricks they were built with, or the Mona Lisa more valuable than the canvas she was painted on?
Even in the highest of arts, value is subjective. It has to do with our perception of what is beautiful, enjoyable and important. Having said that, and always keeping subjectivity in mind, here are several factors that make NFTs valuable beyond ownership:
Social identity and kudos – Physical art and assets provide a sense of identity, personality, and social kudos, especially when they are aligned with our interests. They help us to know ourselves and show ourselves to others. The same is true of digital assets. Owning one of Gronkowski’s Super Bowl moments for yourself is one more way to demonstrate your fandom.
Scarcity – NFTs are released as one-offs, or as limited editions. In the case of limited editions, one NFT represents one edition, and so is still unique. You might own #30/100. The rarity of the asset is encoded in the blockchain using smart contracts so that the buyer knows how many editions will be minted. Scarcity creates demand that is higher than availability, which drives up the value.
Quality – The quality of the offering itself also counts for a lot, or at least it should. How much effort did the creator put into the work, and what is the outcome? Higher quality art, and/or creations from prestigious artists tend, in the long run, to sell at a higher price. In some ways quality is subjective, but a complete disregard for it could cause a bubble crash. The product itself needs to have value.
For the last three hours straight, I’ve been scrolling through the Ebay of NFTs, seeing what digital products are available. It’s been an exciting and terrible journey, one that has thrown up more than a few conflicts between belief and skepticism, hope and dismay.
I started my adventure on OpenSea, the first and largest platform for user-owned digital goods. Categories include digital art, trading cards, collectables, sports, utility, and virtual worlds. No word of a lie. I can buy and sell land – and it only exists within the virtual realm of Decentraland.
As I browse the digital assets for sale and auction. Some of the artwork catches my eye. It’s beautiful. I can actually imagine it projected onto a digital photo frame, swaying slightly in my windowsill. Others look like pixelated trash.
For 5.5 Ether (a little under $10k at the time of writing), I can buy Mona Vir, the world’s first digital woman. Better than nothing, I guess, but at this point I’m starting to wonder just what world we’re living in.
And just when the whole industry seems like a hilariously lucrative joke, I find the word “Thanos”, which I can own on the blockchain. If someone happens to invent a new word that contains “Thanos” and patents it on the blockchain, they will have to pay me royalties for the privilege. ThanoswhatImean?
By this point, I’ve seen it all and my life will never be the same. I’m toying with the idea of remortgaging my house to buy up Cryptokitties, but settle for a $50 spend on the Kings of Leon’s new album in NFT form.
Along with the high profile sales and inexplicable non-fungible token examples, there are thousands of more accessible and affordable NFTs; assets created by aspiring artists who are selling their work for hundreds or thousands, rather than millions of dollars.
The world of NFTs is vast. The value, like the value of art itself, is highly subjective. But is the market inflated? That’s a different question…
With such seemingly inflated prices, it’s reasonable to speculate as to whether NFTs represent the latest bubble that is ready to burst.
The shortest of answers would be to say “Yes” and walk away. There would be no shame in that. There’s been some pretty ridiculous examples of NFT transactions so far that more than make you wonder.
Is ownership of Jack Dorsey’s first Tweet, which reads “just setting up my twttr”, really worth the $2.5 million it sold for? Clearly someone thinks so.
But it’s difficult to escape the feeling that people are paying a lot for what is, sometimes, not very good content. A digital inkblot (read; ugly stain) of colors is exactly that, even if it is a one-of-a-kind, and even if I can own it.
But hey, one person’s ugly stain is another person’s rainbow. If someone is willing to pay for it, then it has value. The question is how long does the value hold? This is what will define the extent of the crash, if there is to be one.
In the long term, the answer may depend on the content. It would be unfair to to say all NFTs will go one way or another, because each is, in its nature, completely unique. Some will fall and some will rise, and future trends may ultimately come down to each NFTs individual value in the marketplace.
Non-fungible tokens are more than just a fad. Popular artists and musicians are releasing exclusive material as NFTs and everyday creators are finding ways to make their mark and monetize their content. Artists and fans can connect and transact directly, without the need for a middleman. And that’s a good thing for everyone involved.
Non-fungible tokens and blockchain technology have decentralized the marketplace of digital assets, and allow proof of ownership for original artwork. Inflated as the value might be, and as ridiculous as some NFT examples undoubtedly are, they seem to have a serious purpose in an increasingly digital world. Our prediction: NFTs are here to stay.