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When Blockchain Meets Art: The Funky World of Non-Fungible Tokens (NFTs)
- Minerva Singh
- Sep 26, 2021
- 6 min read
The booming crypto space has made possible all the things we hitherto believed could not happen at all, including seemingly sane people shelling out hundreds of thousands of dollars for bits of pixelated art (that incidentally, anyone can download off the web). Well not quite, but this is the mad and crazy world of non-fungible tokens (NFTs). Before understanding what NFTs are, it's important to understand what 'fungible' means. Essentially fungible refers to an asset with units that can be readily interchanged, for instance, fiat money. NFTs, on the other hand, represent the ownership of unique items. In a real-world context, something like the Inverted Jenny or Mona Lisa would be an NFT. However, in the cryptosphere, NFTs are "one-of-a-kind" assets that can be bought and sold like any other piece of property. However, these have no tangible form of their own and the digital tokens can be thought of as certificates of ownership for virtual or physical assets. NFTs started in 2017 with CryptoKitties (a game to breed and trade digital kittens) and CryptoPunks and gradually increased over the last years, but it exploded in 2021 (i.e. in 2020 the market was estimated to be $250 million over the whole year, while in the month of February 2021 alone already $360 million of NFTs were traded). The business of these digital assets is booming- an animated Gif of Nyan Cat - a 2011 meme of a flying pop-tart cat - sold for more than $500,000 (£365,000) and musician Grimes sold some of her digital art for more than $6m. Of course, NFT powered games such as Axies Infinity are well known.
How Is Owning an NFT Different From Owning a Rare Asset?
Traditional art items such as rare paintings or stamps have big price tags because they are rare, or even one of a kind (think Mona Lisa). At the first glance, it seems incongruous that a digital asset (which anyone can download) could have any value. However, with NFTs, digital artwork can be "tokenised" to create a digital certificate of ownership that can be bought and sold. And blockchain contains a record of who owns what is stored on a shared ledger that can not be forged. Additionally, NFTs can contain smart contracts giving the artists a share of the future earnings. Given the authenticity and ease of transaction, NFT facilitate, it's no surprise that NFTs are being seen as lucrative investment opportunities.
Of course, art is not the only entity that can become an NFT; the real estate (both virtual and real) business too can benefit from being tokenized. For instance, The current transfer of property ownership is extremely labour-intensive and expensive. Even an equity line requires a significant amount of paperwork. By “tokenizing” the property rights, it becomes much easier to trade and manage them. With blockchain technology, real estate tokenization to NFTs can be utilized to bring real estate investment to regular investors. By tokenizing properties, its value can be divided into shares that can be sold at a fraction of the cost. This means NFTs can facilitate partial or fractional ownership of assets, which is similar to what we see with the sale of most NFT digital arts.
However, on the downside, NFTs are just digital certificates on a blockchain. The blockchain does not even contain the digital asset, but just a link to a location where the digital asset is stored. The record on the blockchain and the actual asset do not reside together. This can potentially create issues when the underlying digital asset is deleted or changed on the platform on which it is hosted. Unlike real-life non-fungible objects such as Mona Lisa or a rare stamp, their digital avatars can be reproduced infinitely; thereby becoming fungible. In the physical world, we, therefore, have copyright's "first sale" doctrine, which says that a copy of a work that has been embodied in a physical object can be bought and sold in a secondary market without the original author retaining any control over the secondary sales. The owner of the physical copy, however, gains no interest in the underlying copyright for the work. With actual physical objects, we can separate out the intangible work of art or authorship which is protected by copyright law from the tangible copy. Owing to the reproducibility of digital assets, courts in the United States have refused to recognize a "digital-first sale" doctrine – under copyright law, there is no such thing as a unique digital media asset that can be bought and sold on a secondary market because media files are essentially treated as fungible. However the legal downsides apart, NFTs are growing. In fact on OpenSea, one of the most popular NFT platforms out there, the sale of these digitized tokens has soared from January 2020 to June 2021.
Figure 1: Monthly NFT Sales Volume
The period from January 2021-June 2021 recorded $2.5 billion in sales. up from just $13.7 million from Jan 2020-June 2020. The NFT space does offer the potential for artists to monetize their work and exclude the middle operators such as art galleries, studios and agents from the process. And one does not have to be an artist to benefit from the NFT boom.
Which Are the Most Popular NFT Marketplaces?
One of the biggest NFT marketplaces is OpenSea and it recorded $3.4 billion in sales in August 2021 alone (although this peak was followed by a 67% decline). However, OpenSea is not the only NFT marketplace out there. Some of the other common NFT marketplaces include Rarible, SuperRare, Foundation, Myth Market to name a few. Figure 2 shows the top 10 NFT marketplaces by trading volume (as of July 2021)
Figure 2: Top 10 NFT Marketplaces By Volume (July 2021).
Two of the biggest NFT market places, OpenSea and Rarible are open. This means anyone can mint and potentially earn from their artwork. However, the burgeoning NFT marketplaces come at a cost (literally), in terms of burgeoning Ethereum gas costs with NFT marketplaces being amonst the biggest gas guzzlers. This gas guzzling results in higher transaction costs when buying and selling NFT assets. The primary currencies used on common NFT trading platforms include Ether, WAX, and Flow. On most NFT trading platforms, users are responsible for paying for the computing energy required to process and validate transactions on the blockchain. The gas fees fluctuate depending on the time of day.
EHT's escalating gas fees is one of the reasons why so many other blockchain projects such as Solana are gaining traction. Indeed Solana ($SOL) made headlines owing to its spectacular gains in September 2021.
Figure 3: SOL in a Neck-to-Neck Race with ETH on Google Trends (Sept 2021)
This record-high activity in digital assets spilled over to Solana NFT dApps. Among these, the top performer is Solanart, which has been carried on the back of the success of Degen Apes Acadamy.Additionally, Solana has its own version of the CryptoPunks collection called SolPunks. Solanart.io is a popular Solana NFT marketplace. Ofcourse other blockchain projects besides $SOl offer NFT capabilities; notably ADA's CNFT.io platform (https://cnft.io/) also known as cNFT. cNFT takes a 2.5% commission on each NFT sale with a minimum fee of 1 ADA, but that’s taken from the seller’s account. Unlike, ETH, Cardano (ADA) has the ability to natively mint assets on its ledger and has much lower blockchain transaction costs. ADA is potentially an attractive option for those looking to create their own marketplace. Users can use their Binance.com account to buy and sell NFTs on the Binance NFT Marketplace.
For those who are starting out and don't have the artistic flare to mint their own NFTs, fractionalised NFTs offer a potential way of dipping their toes into this highly speculative and volatile world. Given the high sale price of some NFTs, emergence of fractionalization is not surprising. A collection of fifty CryptoPunks, which are early, now valuable NFT pixel art collectibles, have been fractionalized into millions of tokens. Fractionalized NFTs (F-NFTs) mean that purchasers can hold onto an F-NFT in the hope of seeing investment gains or realizing dividends, or else sell the F-NFT (from a technical perspective, referred to as a “shard”) to another investor. For example, the NFT trading platform Niftex states that it allows owners to break NFTs into shards for purchase at a fixed price, with the fractions able to be subsequently traded in the market. Ultimately whatever route one takes- be it creating one's own digital assets, holding onto a shard or creating a new marketplace, there is no dearth of options. So its a question of exploring the waterfront and getting started.
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