NFTs and the Future of Intangible Art
Throughout history, humankind has lived in a world that has been dynamic with ever-changing geographies, cultures and financial systems. Even today, we are preparing ourselves for one of the biggest technological advancements in the history of humankind: blockchain. Blockchain is revolutionizing the whole world, even though its full potential is yet to be discovered. It is now an entire ecosystem in itself and has displayed immense promise with regard to systemic change. Blockchain could revolutionize our finance, healthcare and defence systems, making processes more democratic and decentralized. It has already started happening, and we are lucky enough to witness this in our generation. In addition to this, blockchain is now transfiguring the way we view, buy and sell art by bringing in a new advancement that can help digital artists who were often overlooked monetize their work, and make their digital art unique. These are known as Non-fungible tokens (NFTs).
Anyone following cryptocurrencies lately must have heard the term ‘NFT’. One might be a believer of NFTs, a sceptic or think of it as just another hype, but surely cannot be indifferent towards them. NFTs are gaining traction, making headlines all over the world, witnessing their moment all-around akin to cryptocurrencies. Months ago, the news of Jack Dorsey’s first tweet being sold at around $2.9 million as an NFT was going viral. This begs some questions to be answered. What is an NFT? How is it gaining so much traction? Why are people even betting on it? Should we as an individual care about it? This article is an attempt at answering all these questions.
What are NFTs
Most discussions around NFTs start with introducing the term fungibility, which has its origins in economic and accounting literature. It can be defined as the ability to be readily replaced by another identical item. For example, the currency we use is fungible in that you can replace and substitute Rs 100 rupee with another Rs 100 note. On the other hand, a non-fungible asset is one that is unique and cannot be replaced, such as the original painting of the Mona Lisa or your favourite guitar that you played for years. These things have a certain value associated with them which makes them unique. When you buy an NFT, you are buying the rights to its ownership. You own that thing in a digital format, and your name would be there, but everybody else can see it too. You cannot prevent anyone from seeing that NFT on the network, nor can you make any changes to it. This might make one wonder what the point of buying an NFT is. What value is it yielding? The following section tries to break it down in a systematic manner.
NFT is a unique string of characters that can be tracked on a blockchain, usually the Ethereum blockchain. The text is called a token. It is also described as a way to track ownership of a unique digital asset. When you create or “mint” an NFT, a new token is created and recorded on the blockchain’s ledger. Instead of a fungible cryptocurrency unit, the token is unique and can be bought or sold using blockchain. Although the digital image connected to an NFT can be easily copied, the NFT is unique, as is the private key used to prove its ownership. Today, the NFT ecosystem is a tight-knit group of incredible innovators, including enthusiasts, developers, gamers, entrepreneurs and artists.
From Art to NFT
Art is a creative activity – a fusion of a person’s imagination and technical skills, aimed at expressing emotions, conceptualizing ideas through visuals and performance art. There is no general definition of art that everyone agrees upon, and the definition of art has not only changed but also become broader over time. People have been trading art for hundreds of years now, and traditional art markets were used for this purpose, but many significant artworks were sold outside this framework of the art market by private players or individuals like patrons, craftsmen, or artists. Auctions, which were rare before the 17th century, are now the major determinants of the value of artworks. In addition, the market has expanded enormously through horizontal development as a result of globalization and increased international connectivity with the advancement of the internet.
In the digital era, art is going digital as almost every other thing, and this is where NFTs come into the picture. NFTs weren’t invented overnight. They were developed over the course of multiple experiments. Experiments in NFTs began with the emergence of coloured coins on the Bitcoin network. In 2014, technologists Kevin MacCoy and Anil Dash created monetized graphics, the first version of a blockchain-backed means of asserting ownership over an original data work. In June 2017, Matt Hall and John Watkinson of Larva labs launched CryptoPunks, a collection of 10,000 unique images inspired by the London punk scene. They used smart contracts to trade these images on the Ethereum blockchain. In November 2017, Crypto Kittens, an experiment created in a hackathon in Waterloo, took this idea even further and stated that digital assets aren’t just tradeable on the blockchain but ‘breed’ over time, based on code written into a smart contract. The project also pioneered ERC721, one of the major standards for representing NFTs on the Ethereum blockchain. A year later, the project had raised $28 million in venture capital. In Feb 2021, creators of Nyan cat sold NFT of the animated meme for 300 ETH ($580,000), a clip of Lebron James dunking clip sold for $200,000. And in March 2021, the digital artist Beeple sold his artwork for $69 million, the most expensive NFT purchase at the time of this writing.
The Technology Behind Non Fungible Tokens
Since the dawn of the internet, we have had digital assets such as domain names, event tickets, in-game collectables or even social media handles that could be purchased. These are all non-fungible assets but have different standards or properties and may vary in terms of liquidity, tradeability and interoperability. One can own these assets in a very specific way or a specific context only. So what makes NFTs different from these assets? As stated earlier, NFT is a unique string of characters based on blockchain to track ownership of unique digital assets, which uses blockchain’s central ledger system to record transactions. Blockchain provides a set of unique properties that make NFTs more tradeable, provide more liquidity, and provide provable scarcity and immutability. Smart contracts allow developers to put a hard cap on the supply of Non-fungible tokens and enforce persistent properties that cannot be modified once it is issued because, interestingly, it is the scarcity of the original art that determines the real value of it.
Certain standards determine how an NFT would behave in a specific way and describe exactly how to interact with the basic functionality of the assets. Pioneered by CryptoKitties, ERC721 was the first standard for representing non-fungible digital assets. The core of ERC721 is quite basic. Another standard is ERC1155, pioneered by the Enjin team, which brings the idea of semi-fungibility to the NFT world. It has some advantages over ERC721; ERC1155 is more cost-effective, open and easy to work with. Also, ERC721 is a superset of ERC1155, which means ERC721 assets could be built using ERC1155. Therefore, we are witnessing the growing adoption of ERC1155 over ERC721.
We have discussed how the ownership of an NFT is controlled but what determines how an NFT would look like? What about its unique traits? This is where metadata comes into the picture. Metadata provides descriptive information for a specific token ID. There are two types of metadata associated, namely, on-chain metadata and off-chain metadata. On-chain metadata resides permanently with a token ID. Whether the site used to create the original art is still active or not, on-chain metadata would persist with the token ID throughout its lifecycle. Despite this benefit, most projects store their metadata off-chain simply due to the current storage limitations of the Ethereum blockchain. The ERC721 standard, therefore, includes a method called token URI that developers can implement to tell applications where to find the metadata for a given item.
NFTs: How to Buy and Sell
NFTs have been around for a few years now, but 2021 was the year they exploded in the public consciousness, and a lot of marketplaces have been opening up since then where you can buy or sell digital art or collectibles. There are many major platforms where you can buy or sell NFTs, which include:
- OpenSea: It is a New York-based NFT marketplace led by Anderson Horowitz, considered to be the original peer-to-peer NFT marketplace and by far the largest, with over $6.5 billion in trading volume, offering NFTs of in-game items and collectibles, music, art, GIF, and many more.
- Axie Marketplace: NFT-powered video game Axie Infinity plays host to the second-largest NFT marketplace, with a total trading volume of more than $2.1 billion on Dappradar. It trades exclusively in Axies, which are cute Pokémon-like digital pets that players can buy and trade on the Axie Marketplace.
- Cryptopunks/Larvalabs- One of the earliest examples of NFTs on the Ethereum network, CryptoPunks is a series of 10,000 randomly generated characters with a pixel art aesthetic and unique attributes. While they could originally be grabbed for free, the only way you can own one today is by purchasing one.
- Raible: Headquartered in Philadelphia, the company is a marketplace for minting, trading costs, and other crypto assets. It is also one of the leading marketplaces on Ethereum and is a community-owned platform with a wide range of digital artworks and collectibles
There are many other marketplaces like NiftyGateway and NBA Top Shot marketplace, which also have a massive trade volume and have distinctive innovations. Recently, one of the biggest Crypto Exchange Coinbase has announced the launch of its own NFT marketplace to mainly branch out new revenue streams, which currently rely heavily on exchange fees.
In India, nearly 100 million people own Cryptocurrencies. This widespread adoption of virtual money is paving the way for NFTs. Hence, the NFT marketplace is growing at a rapid pace in India, and several Indian startups are entering the world of NFTs to capture the untapped Indian market. WazirX, one of the major Cryptocurrency exchanges in India, has its own NFT marketplace. Recently, OKEx, the second-largest Crypto Exchange in the world by volume, launched its Defi platform and NFT marketplace in India to enter the mainstream Indian market. They are filling a strong vacuum since there is currently no organized platform in the Indian market to create, trade their artwork in a highly secured manner. Also, companies offering NFTs of their favorite Bollywood artists or sports stars will pave the way for NFTs to enter the Indian mainstream.
Save Thousand Of Lives: Case Study
Noora Health, a nonprofit which is largely engaged in parts of South Asia, launched its NFT, which will help save thousands of innocent lives. It is quite interesting how this new territory of NFTs is being utilized in this manner to raise funds for a good cause, and this way of using them has a lot of potential in the future. Noora runs programs in South Asia to teach new mothers how to take care of their newborns through interactive tools and technology, making sure every family gets equipped with the right tools to take care of their babies. They help in a smooth transition from hospital care to home care. They are currently functional in 165 hospitals and are continuously taking measures to quantify their impact. For every 1000 babies born, they save 9 babies. This number comes from a study of 133,733 families at 28 different hospitals that Noora conducted in collaboration with the Better Birth team at Ariadne Labs.
The cost of saving a life is $1,235, which comes by dividing their budget, including all their R&D and overhead costs, by the number of lives saved. For increased transparency, Noora will issue a public report for their NFT, tracking how the specific tranche of money will be spent to save lives. Interestingly, the NFT gets better as the price gets higher because more lives would be saved and be incorporated into the NFT. There is an anticipation that it would never get resold either. Rather, it would be passed down to one’s heirs or be given as a gift.
The past decade has seen the evolution of digital assets that are ready to enter into the mainstream financial world, and now there is one more player in the digital asset industry that will change the world of art. Non-fungible tokens (NFTs) have gained immense popularity in the last few months. The volume of NFTs that are traded in the market has increased by 43% from April 2021 to June 2021. The fact that NFTs give their owners a sense of unique ownership and digital immortality is fueling this surge. NFT and Crypto enthusiasts think of it as an asset that has an intrinsic value because of its cultural significance. Some think of it as an investment, speculating on rising prices. With NFT sales surging to new heights every quarter, total NFT trade accounted for $2.5 billion in the second quarter of 2021, up from $13.7 million in the first half of 2020.
After exploding in popularity early this year, sales of NFTs remain on the higher circuit, with buyers outnumbering sellers. People are betting millions on NFTs, and one of the many reasons is the security that its underlying technology – blockchain – provides. Recently, Lionel Messi launched a collection of NFTs of his images and is expected to make billions out of it. In India, too, Bollywood superstars like Salman Khan are planning to launch their own NFTs. In fact, Megastar Amitabh Bachchan has already launched his NFT, themed around his life. Besides Bachchan, actor Sunny Leone also launched her NFT collection of unique, hand-animated art. In March, a digital image sold for a record $69.3 million at Christie’s as an NFT. No NFT sale has come close since. The second most expensive NFT sale was a “CryptoPunk” that fetched $11.8 million at Sotheby’s.
Why are NFTs valuable?
There is no doubt about how incredibly NFTs have garnered investors’ interests in the past year. Some think of it as some fad, a bubble waiting to burst, a tulip mania or a speculative asset. Others look at it as a store of value due to its scarcity or cultural uniqueness, believing NFTs to be the future of digital art. Notwithstanding the varied public perception, investors are pouring in millions into NFTs. This combination of ‘scarcity’ and blockchain is pivoted to be a brand new industry.
Factors That Make NFTs Valuable
- Store of Wealth: People are buying NFTs, considering them as a store of wealth so they can sell them in the near future for profits. This makes NFTs a store of wealth.
- Social leverage: When a person buys ownership of an NFT, the whole world can see their name on it and the fact that they own the original piece of digital art. For example, if a person owns the NFT ‘save thousands of lives’, they would be known for their goodwill, be highly respected, get invited to higher social circles, or be interviewed by magazines and newspapers. Simply put, when a person owns an NFT, they get the bragging rights and social media rights that come with it.
- Trade value: People, mostly high net-worth individuals (HNIs), are trading in NFTs and at the same time building businesses around them. For example, when Beeple’s art got sold for $69 million, the auction house named Christie made $6 million in commissions from the sale.
In an interview, Entrepreneur GaryVee, an NFT enthusiast, emphasized the fact that NFTs are going to change the world of art, especially for musicians, pop stars, actors. Today, many artists are finding NFTs as a way to monetize their work, launching their collections of NFTs, adding an extra income stream in their portfolio of incomes. However, it is not limited to this. Their fans are also benefiting from it. They are finding a way to connect to their favorite artists and support them in a truer sense. Instead of selling the rights to big corporate players and music labels, artists can make a bunch of NFTs and sell them, incentivizing fans who bought them simultaneously. Then can give away royalties and access to them virtually or physically, letting the fans become the record labels. The most important thing, probably, is that the same people who believed in them and counted on them are the ones getting incentivized every time a musician gets on Spotify.
The Dark Side Non Fungible Tokens
Concluding a discussion on NFTs is incomplete without taking the other side of the coin into consideration. While recognizing the varied utilities that NFTs may provide, knowing about their drawbacks is crucial. There is significant criticism against cryptocurrencies and blockchain technology as well. NFTs are no different. Their criticism has rapidly increased after the 2021 surge, with people comparing this surge as a hype manufactured by crypto traders and market makers who are only interested in making quick money. Many believe they are not genuine investors who want to own art or make serious investments, which would eventually make the NFT bubble burst.
Between December 2020 and February 2021, a 1700% surge in sales of NFTs was recorded. NFT marketplaces seemed to be exploding, and it was revolutionary for digital artists. However, there is always an opportunity cost, a trade-off. While there was an explosion in the popularity of digital art, and many artists were becoming millionaires overnight, what was not measured properly was the scope for carbon emissions. Most of the transactions in NFTs are executed via Ethereum blockchain involving processes like mining and using cryptography to validate processes and transactions, a system similar to that of bitcoin, consuming energy at par with a small country. There are estimations that 70% of the energy dependence of these processes are fulfilled by clean sources, but critics argue whether such claims are valid.
The Future for NFTs
NFTs are here to stay, with modern innovations decreasing complexity in the overall NFT marketplaces, paving the path for widespread adoption of virtual art and providing a better user experience. This is crucial, especially in India, which is new to the NFT world and where digital asset space is mainly limited to crypto millennials and tech savvies. In India, Idolization and celebrity worship are very common. Psychologists call it Celebrity Worship Syndrome (CWS). With Bollywood actors participating in the NFT market, this might help NFTs gain widespread popularity and acceptance, encouraging people to think about NFTs and understand the concept behind them. Platforms like BeyondLife.club are experimenting the same, launching NFTs of megastars like Amitabh Bacchan to attract the Indian population. They are also going to list NFTs, featuring the collectibles of South Asian celebrities, artists and athletes.
The dynamics of the NFT system create a simple yet powerful change in the digital art world. This opens up new paths for artists to distribute and monetize content. People all around are experimenting with NFTs, building new businesses around them and commercializing them. Meanwhile, Consumer Packaged Goods (CPG) companies are also experimenting with NFTs. Luxury brands like Gucci and Louis Vuitton, known for selling virtual goods, are planning to launch their own NFTs, to create a unique digital experience for customers. Thus, NFTs are entering the world of fashion, which is unsurprising as both share several attributes like scarcity and the intangible value that they derive from society. Furthermore, several industries plan to leverage this current buzz around NFTs to increase overall engagement, brand awareness and deep-dive into different demographics.
Some startups are working on tokenizing physical products and services to remove intermediaries and go-betweens and thus save up costs and eliminate counterparty disputes. Such usage of NFTs can help decentralize commerce. Another use case is in the world of finance. The convergence of the Defi system and NFTs leads to “NFTfi”, which allows users to leverage their NFTs as collateral for loans. Index funds for NFTs are being launched where people can buy fractions of multiple NFTs. With brands like Taco Bell already using NFTs to promote their brand and products to younger audiences, the future of NFTs looks buoyant and propitious. Before NFTs, there was not a widely accepted way to determine the originality of a piece of art. This system for transferring ownership digitally is undoubtedly taking the world by storm, and there is a lot to explore and create. If nothing, NFTs are opening up Pandora’s box of opportunities. It remains to be seen, however, if the interest in NFTs can sustain in the long run.
Poppular NFT Collections and Projects