How the Digital Art Trade Has Captured Minds
Have you ever heard of an NFT (non-fungible token)? The idea is that instead of the interchangeable tokens which are used as cryptocurrencies, NFTs are issued and recorded in the blockchain as unique, non-interchangeable tokens. Such a token is not a currency, but an individual entity, and each has its own price. In this case, the token can be associated with some digital product and the properties of the token transferred to it.
Information about each transfer of the token is also recorded in the blockchain, so it is known who is currently the owner of the product, and you can double the profit. The products themselves are usually digital, but how exactly they are stored and how they are associated with the token is a separate issue, and different platforms solve it in different ways.
For example, look at this fat guy in a bear suit and tell me that paying a little over five thousand dollars for him is a normal, sensible idea.
In the full version, it is animated, but this does not make it any easier to relate it to the price tag. The secret lies in the fact that only ten thousand such “chubbies” were generated and not a single chubby more. Buyers are guided by a simple logic: if there is a limited amount of something, it will only become more valuable — just like, for example, Bitcoin. And if you see a serious flaw in this logic, then do not worry — this is completely normal!
There are many similar stories now. For example, the virtual worlds of Decentraland and Cryptovoxels sell plots in the manner of Second Life, the collectible card game WAIFU Harem sells cards with anime girls, and the authors of the CryptoPunks project came up with the idea of drawing and selling pixel avatars so that the treasure becomes literally the face of its owner.
The sites that sell digital art, the Foundation and Nifty Gateway have had the greatest success. Pictures and animated videos here go for millions of dollars.
How it is that no one sees the catch and people continue to spend a lot of money on these things is not clear. Are there really such people? Let’s figure it out.
What’s inside the NFT?
The technical basis of NFT is most often Ethereum, more precisely, the ERC-721 standard, according to which smart contracts are created that allow the issuance of noninterchangeable tokens. Some sites are considering switching to Tezos, as it requires less electricity.
One of the important features of Ethereum is the need to pay for “gas”. This is the virtual fuel that is consumed during each operation with the blockchain — including the issuance of new tokens. Therefore, an artist can spend $50 to put the work up for auction, and then it might be sold for $5.
What is sold using NFT?
Tokens can be divided into three large groups according to the categories of goods that are sold with their help.
- Art. Analogous to traditional works of art. Actually, we will focus on this category in the article.
- Game items. For example, cards in collectible card games, unique characters, space in virtual worlds, and similar things. They differ in that they can be used in particular ways.
- Collectible items. Specially created for collecting virtual cards, figurines, avatars and other things of dubious utility, but produced in limited editions (and sometimes created algorithmically).
There are also social tokens — so far the most experimental area. Musicians and other celebrities can award personal tokens to their fans, and one inventor last year even tried to sell his time with tokens. Owning tokens can also open doors to certain closed groups — such a mechanism is offered by the Collab.Land platform.
Where is all this sold?
Platforms can be divided into two large groups: supervised and non-restricted. Among the first category are SuperRare, Nifty Gateway, Foundation, KnownOrigin, MakersPlace. And for “free” sites: OpenSea, Rarible, Mintable, Portion, InfiNFT, Cargo. The difference between them is that the first ones monitor what they have exposed, while the second ones allow anyone to issue tokens.
For artists, it is more profitable to get to Foundation or Nifty, because buyers closely monitor everything that appears there. Many platforms of this type (Nifty, KnownOrigin, MakersPlace) specialize in “drops” — that is, limited-time sales of collections of famous artists. Nifty still allows the artist to earn royalties from resales.
As for sites like OpenSea and Rarible, they are more likely for those who advertise themselves. At the same time, OpenSea generally stands a little apart, since it not only allows you to issue tokens and trade them, but also acts as a backend for other platforms.
What is Metaverse?
Metaverse is a term by which you can distinguish the craziest of the dreamers of the cyber world. In the ability to create their own digital currencies and sell digital entities and digital “space” for them, they see the potential for an amazing new entirely digital world. Or more precisely, different world,s connected to each other by the market economy.
It is possible that there is something in this. However, using similar words and with no less burning eyes twenty-something years ago, they talked about the Web and bought pixels on the Million Dollar Homepage. An amazing future may indeed come, but some aspects of it may be delayed for another twenty years; and in that time, the current investment will be completely devalued.
Big deals — Big hype
From 2017 to 2021, the NFT world lived on its own and was mostly entertainment for the jaded bitcoin rich. But the first high-profile deals attracted the attention of a wide audience with new money.
Its author Chris Torres auctioned the Foundation specially redrawn and improved version of the animated kitty and earned 300 ETH, or $637,000 at the current exchange rate.
The heroine of the next high-profile episode is the singer Grimes, known among other things for her famous entrepreneur husband, Elon Musk.
Grimes put up for auction at Nifty a series of works by WarNymph, which she created together with her brother, the artist Mac Boucher. Actually, Mac was responsible for the visual component, and Grimes composed the music for the short videos.
Total revenue for WarNymph was in the region of $6 million. Some works were left in a single copy, others in hundreds of copies. Additional PR was provided by Musk.
The real turning point for NFT was the sale of the work Everydays: the First 5000 Days by Mike Winkelmann, better known by the pseudonym Beeple. The transaction amount is still an absolute record for NFT — $69.3 million. This is a lot even outside the cryptocurrency world: among all works sold during the artist’s lifetime, there are only two that ever sold for more. However, it is not only the price tag that is interesting here.
The work itself is also unusual. “The first 5000 days” is not just a picture, but a collage of five thousand images, each of which Beeple spent one day on, hence the name. The result is a giant canvas, the accumulated works of 13 and a half years.
Another difference in this transaction is the participation of Christie’s auction house. Although the Nifty platform was responsible for the technical side, the painting was formally sold in the usual, traditional way for big art. The buyer even received a token designed as a physical souvenir. Apparently, the goal was to convince the collectors of the seriousness of the whole idea.
However, the painting was bought in the end not by some museum or the owner of a private collection of traditional art, but by someone under the pseudonym MetaKovan. It is noteworthy that this MetaKovan is the owner of an investment fund that invests in NFT, and he has previously purchased Beeple paintings. By the way, even before the story with “5000 days,” he had sold his works for $3.5 million.
Shortly before the Beeple story, Banksy became an unexpected participant in the hype around NFT. Although he was not involved in the event in any way, his work Morons (White), created in 2006, was bought by the cryptocurrency company Injective Protocol for $95,000 specifically to put on a show and advertise its SuperFarm platform.
The painting was burned and the process was recorded on video. This partly repeated the trick of Banksy himself, who in 2018 sold the self-destructing painting “Girl with a Balloon.” Immediately after the sale, it shredded itself using a shredder built into its thick frame.
Banksy wanted to make fun of the rich collectors, but the crypto-startups had a different idea — they burned the original, but signed a digital copy using NFT. And immediately arranged an auction, where a digital reproduction of Morons (White) went for $380,000.
“Just setting up my twttr,” wrote Twitter founder Jack Dorsey in 2006, and posted the first tweet. Almost exactly 15 years later, Dorsey put it up for sale through the Valuables platform.
The last offer was 1,630 ETH — in the region of three million dollars. However, trading on Valuables can last indefinitely until the owner decides that the amount suits him.
Another interesting feature of this platform is that the author of the tweet can not put it up for sale himself. Only the reader can make a suggestion about this. He assigns the starting amount and leaves a specially generated link in the comments. The author of the tweet, if he likes this idea, starts the auction.
Dorsey’s historic tweet now leads the price by a huge margin. For example, Elon Musk’s tweets are still only worth tens of thousands of dollars, not millions.
NFT enthusiasts like to answer all doubts with phrases in the spirit of “you just don’t understand”. However, it is not too late to come to your senses and get your savings.
Let’s make an attempt to understand and find at least the most obvious flaws of NFT.
Problem 1. The copy is completely identical to the original
NFT supporters insist that authenticity is important in art and collecting in general. But is it possible to just take it and synthesize it with the help of digital tokens?
For example, let’s take Van Gogh’s Starry Night. People specifically go to New York and pay $25 for a ticket to the Museum of Modern Art, so that they can hang out in front of it, and not in front of a reproduction.
And it is the same with The Garden of Earthly Delights that Hieronymus Bosch painted back in 1500. People go to Madrid and the Prado Museum to see exactly the same triptych that they can see in glorious digital detail on the internet, which would be much more convenient.
And below is the “troll face.” The author of this masterpiece recently sold it through the Foundation for $70,000.
You don’t need to follow the meme anywhere, but you see exactly the same troll face on the screen in front of you. It is completely identical to what the author drew, just like any other picture created on a computer. It was infinitely replicated before the sale and will be replicated after. Even after 500 years, it will still be the same, and no one will be impressed that it has survived and reached posterity through the ages.
However, in the art world, there has always been something similar to NFT; think of photos signed by the photographer, or books signed by the author. You can print as many physical copies as you want from a digital image, and this is why items signed by the artist are usually sold at auctions. Here, as in the case of NFT, the signature itself is valuable, standing next to the work.
Problem 2. Weak connection to reality
It may seem that investing in NFT is about the same as buying art. Alas, this is only a cleverly created illusion. When you pay for NFT, you do not buy a product, but a token, and you will not own anything but a token.
Do not confuse NFT with copyright. That is also an information entity in its own way, but it is completely different. The rights to the sold work remain with the artist, and if you suddenly decide to use his painting for commercial purposes, the author will be able to successfully sue. It is considered, however, that this is not a bug, but a feature.
*Note: There is a scheme in which the author will receive a percentage of any subsequent transactions involving their work (for example, one fifth). Isn’t it fair that not only the collector will get rich, but also the artist?
Another side effect of the virtuality of what is happening is the complexity of guarantees. Since we are dealing with non-physical entities, it becomes much easier to deceive the buyer. The person selling the token may, for example, not be the author of the work. This seems to be an obvious scam, but since you are buying a token and not a work, this trick under certain conditions will not even violate the law.
To ensure that this does not happen, the platform must also respond with its reputation. But while the platforms are multiplying daily, it’s too early to talk about it. An unscrupulous developer may even collude with scammers.
Problem 3. Technical difficulties
The root of the problem is that the token and the product are stored separately. For example, the Nifty Gateway platform works like this: for a media file of a work, a description is created in JSON format. The most important thing in it is a link pointing to the Nifty server, which, when requested, will redirect the browser to an image stored in the IPFS distributed file system.
The fact is that the token you buy is the hash amount from the JSON file, not from the product itself. The token is stored in the Ethereum blockchain. If something happens to Nifty, the connection between them will be broken. And IPFS is not a guarantee of reliability: information is stored here only as long as it is actively requested.
*Note: IPFS may lose the file, but it leaves the option to re-upload an exact copy of it. The system stores the hash from the original file and verifies it to avoid forgery.
Both buyers and sellers, in fact, are completely dependent on the owners of the site. What if they turn out to be dishonest? For example, they could declare some transaction invalid, and nothing would prevent them from generating other tokens and selling the works again. This has already happened in the world of cryptocurrencies.
Problem 4. NFT may not take off
The CryptoKitties project was one of the first cases when NFT attracted the attention of the public. According to the idea of the developers, players had to acquire and cross cats, bringing out rare breeds. In reality, it turned into a typical pyramid. Only their creators and the first breeders made money on crypto-kittens. And most buyers, as happens in such cases, were left with illiquid assets on hand as soon as the hype subsided and the influx of suckers began to dry up.
*Note: The developers of CryptoKitties (Dapper Labs) avoided high-profile accusations of fraud, because they cleverly came up with the idea of calling what is happening a game. They say that Kittens are bought for fun, and if someone wanted to seriously invest in them and lost money, then that is their problem.
Works of art, unlike endlessly breeding kittens, are at least produced either in a single copy or in a limited edition. However, nothing insures them from oblivion.
Traditional genres of art are associated with similar risks — the paintings of a fashionable artist can also be overestimated. But at least it will not happen that the paintings will be overestimated in principle, or in a couple of years everyone will decide that the sculptures are crap.
How can it all end?
Now the latest forms of digital art are flourishing at virtual exhibitions under the supervision of specialists. The ability to pay talented artists for their work is an important step on the way to this.
NFT is called “a unique phenomenon at the intersection of the virtual and the real,” but its reverse side will be unique problems at the intersection of technical failures and ordinary criminality.
There is no need to go far for examples: both cryptocurrencies and ICOs (initial coin offerings) experienced such a sharp start, which soon turned into a series of high-profile scandals and bitter disappointments. Stories like Mt. Gox ($450 million in Bitcoin disappeared) or The DAO ($60 million stolen in a hack) are sure to repeat themselves in the world of NFT — you can even estimate what seams the gap will go through.
Well, in the end, NFT is a fraud in the broadest sense of the word. If we give a price to something that cannot be immediately used, then it is worth something further simply because we have made others believe it.
People have long been accustomed to these things with artificial value and have learned to use them carefully, often even for their benefit. We call them words like “money,” “stocks,” “originals,” and so on.