NFTs are Nifty
I’ve been contemplating on how to write about NFTs for a few weeks now. I find myself having to explain several concepts in order to get to the topic at hand and for an article, this takes away from the comprehension of the focal topic. To be fair, this is true for almost anything related to blockchains or DeFi. In any case, I rise to the challenge and offer you a primer to NFTs that will have you equipped for any cocktail party you’re not attending.
Simply, NFTs are a process rather than a thing.
We used to say “Google is an internet company.” To call anything an internet company today just sounds silly. Every company is an internet company now in any meaningful sense of the word. This will be true with of NFTs. This current descriptor, NFT, will eventually be dropped because any unique digital asset, collectible, or art will be connected to a blockchain in one way or another.
Dissecting Non-Fungible Tokens literally, is the wrong way to understand what they are. The term “fungible” is foreign to us and just obfuscates the importance of what it is. In essence, to “NFT something” is to create something and attach it to a blockchain. That’s it. How that happens isn’t really important. What is important are these 3 things:
- whoever created it can prove when they created it (provenance),
- how much of it was created (scarcity),
- it’s tokenized, meaning you can transfer ownership (marketable)
These features mesh well with things that are digital and unique, like art and collectibles. It doesn’t work well for much of anything else currently. NFTs are disrupting existing ways of creating and distributing ownership of digital assets.
The Starving Artist
An artist, whether a musician, illustrator, or painter, can issue their work as an NFT. Doing so can be more profitable for the artist, add value for their fans, and increase overall organization.
Take for example a local illustrator. They could NFT a specific collection of their work. Say for example they’re completing a 2021 collection of 12 monthly illustrations, each could effectively be minted as NFTs by uploading .PNGs, .JPEGs, or .TIFFs of the work using a Dapp such as Opensea.io or Rarible. The result would be 12 tokens that represent ownership for each monthly illustration.
This way of structuring an NFT collection is called a “1 of 1” (There is only one available). If they wanted wider reach for their artwork, they could issue 100 tokens for each monthly piece (so there are 1200 copies in total). These can then be sold for whatever asking price or can be sold via auction.
One great feature for an artist is the ability to insert automatic commission. When an artist sells an NFT, they get the full amount paid by the collector minus a fee from the Dapp hosting the sale. However, when originally minting an NFT, the artist can select to insert a commission to be paid each time the work is sold in the future. So if the work eventually goes on to get sold many times at increasing values in the future, the artist can get a piece of the pie beyond the initial sale.
There are many incentives artists can also offer through NFTs. I’ll mention a couple and let your minds do the wandering.
Because of the fact that NFTs are minted on a blockchain, once you purchase and own one, you can easily prove it by viewing the blockchain. An artist could offer physical delivery of the original illustration (if done on some physical media) to anyone who has the NFT version. Additionally, anyone holding the NFT may be entitled to a discount on the artist’s merch. The options are really endless.
What makes this superior to the existing model is transparency and efficiency. Artists are dealing directly with their customers/fan base. Anyone can go to the artist’s page and see exactly how many editions have been minted, what they sold for, and buy them with settlement happening in minutes. This can skirt agents, publishers, brokers, and many of the fees and time associated with them like insurance & shipping.
By now we’ve all seen the news of digital artist Beeple selling his 5000 Everydays Collection for over $69m USD at Christie’s. There is something very unique and interesting here underneath all the hype. What really happened here was the embodiment of time, effort, and inspiration into a single file. Beeple, for the past 13 years has produced a piece of artwork without skipping a beat — 5000 continuous days of production. No excuses, just an illustration a day.
The beauty of seeing how powerful compound interest is when it’s applied to a skill like digital illustration. He went from a no one doodling to the most famous digital artist likely of our lifetime. That is what is encompassed in that art piece that sold for $69m. There is only one piece of art that holds all of those illustrations over 13 years and it was tokenized by Beeple and authenticated by his digital signature, which is what an NFT is. Sure, he’s free to go and issue another, but he would be destroying his own brand by diluting his work.
I couldn’t publish this without mention of NBA TopShot, the collectible NFTs of NBA highlights DapperLabs have launched. They have done an incredible job at creating flagship NFT products and a marketplace where they can thrive.
In late 2017, they launched CryptoKitties. About a week later, Cryptokitties transactions were making up 25% of all Ethereum network traffic. That’s explosive growth.
NBA Topshot is seeing very similar growth, but with an additional key ingredient: Authenticity. Having official support and licensing from the NBA and the NBPA help grow this into a sustainable community of sharing, collecting, and trading. But the overall quality curation of plays, user experience, and the NFT features like player stats, rarity, serial numbers, collection type marks NBA Top Shot as the flagship product in the natural evolution of trading cards or stamp collecting.
Shortfalls and Issues
NFTs and their value will always be subjective. They are unique assets that are not money or a commodity and their use is essentially bragging rights. Much of the hype and current use-case is speculation — being able to sell the NFT at a higher price to a greater fool.
The NFTs that sustain or grow in value will be the ones that leverage the capabilities of a blockchain with that of art and collectibles therefore developing a synergy. That’s to say, a successful NFT will put significant effort into the economics (price, scarcity) and consumer value (features, benefits, capabilities). You would want to foster a strong and engaged community to make buying, holding, and trading meaningful or fun.
We are not seeing a ton of this today. Right now, it’s mostly cash grabs hopping on a hype train headed to the moon.
Authenticity and narrative are what is most important in anything cultural or community-based — a central belief a mass group of people can get behind or believe in.
More existential issues exist too. NBA Top Shot is a licensing deal with the NBA, you don’t own the actual rights to that clip (the same way you don’t own the licensing of a photo on a baseball card.) But what would happen if the licensing deal were to end with DapperLabs? Currently, those NFT assets you purchased cannot be moved outside the NBA Top Shot ecosystem. At this point you wouldn’t want to because the value is derived from the community and marketplace, but it is a consideration.
The most unimpressive, but common argument about NFTs is, “well I can just take a screenshot of it” or, “I can just copy the JPEG.” That’s all fine and true, but would you be proud to hang a forged Jackson Pollock on your wall or wear knockoff Rolex? Meh. Maybe you would. You can take a picture of the Mona Lisa, but no one will pay you for it. I’d suggest that verified ownership or a valid signature from the source brings value through pride and bragging rights. Exclusivity.
The last note I have is a technical consideration not often addressed. When buying an NFT of music or art, the actual file (.mp3, FLAC, .PNG) is hosted elsewhere. This is because it becomes prohibitively expensive to store data on a blockchain for use cases like art. This is a great article that goes into detail on the subject.
So while the NFT represents ownership of that file, minted from the source (artist), the file itself isn’t there. This is usually handled by the NFT containing metadata with a link or a hash of the file in it. The latter is far superior because if the link breaks or is no longer hosted you can check the hash of the file against the NFT’s hash of the original file. This is only true is the file still exists. As an owner of an NFT you must ensure you also store the file somewhere. If the file no longer exists, the NFT is worthless.
While this may be overly technical for a novice, it’s crucial to understand what you are actually buying and what the protocol is for is securing long-term ownership of that NFT. There is currently no industry standard for this. Fortunately, the largest NFT sale thus far did it correctly. I downloaded Beeple’s EVERYDAYS: THE FIRST 5000 DAYS file (300mb) from the internet and checked the hash against the NFT stored hash and it matched.
There are projects building NFTs that put all the data, or instructions, to recreate the art within the NFT itself. This avoids the very expensive issue of storing large files on the blockchain by just including the instructions or recipe to recreate it. LarvaLabs, the same company that created the CryptoPunk that just sold for $7.6m USD earlier this month, has tried with its Autoglyphs project.
More interesting is EulerBeats. They are doing this is with a number of different features within one NFT.
EulerBeats is algorithmically generated art + music limited edition NFT of 27 originals and prints priced on a bonding curve. It’s designed to last a lifetime. Everything needed to re-create each masterpiece is stored on-chain on the Ethereum mainnet. EulerBeats bundles maths, art, music, royalties, and scarcity into a neat digital pack. It’s a first of its kind.
NFTs are really just tradable signatures that confirm ownership of something unique. They work well for digital things, but currently not very well for physical things due to lack of the ability to enforce. One day they could very well be used to replace Land Title Offices so selling your home is as easy as transferring the home’s NFT. We’re seeing the baby steps of NFTs, and like most new and exciting technology, its reputation exceeds it. Sometimes that calls for a painful reality check, but the next time around that may just mean world domination.
In any event, hopefully this has made NFTs slightly less obscure.