NFT: Tokenized art and collecting
How blockchains realize artificial scarcity by fueling real desires (and a profitable market)
A digital collage by artist Peeble, “Everydays — The First 5000 Days”, sold at a Christie’s auction for 69 million dollars. A simple, auto-generated pixelated figure sold for around $7,5 million (in the cryptocurrency ether). Musician and artist Grimes has made hundreds of thousands of dollars by selling her collection of digital works. Twitter CEO Jack Dorsey auctioned his first tweet, reaching million-dollar quotes. Blockchain-based NBA player trading cards generated $230 million in revenue.
This boom in digital art and collecting has a name: NFT, Non Fungible Token. Let’s deepen the topic, trying to understand the genesis, philosophies, opportunities and problems related to these blockchain-based tokens.
What makes an artwork unique? The answer is apparently simple. The fact of being… unique. A painting by Klee or a sculpture by Giacometti are an original and non-duplicable physical expression of a creative thought. Uniqueness creates value.
There is also a “weak” version of uniqueness, scarcity. The graphic works in painting, the multiples in sculpture are examples of objects that contain value not only for the fame of the artist but also for the fact that they are specially made in a limited edition. Although designed to “democratize” art and to give everyone (or almost everyone) “the opportunity to enrich their visual culture”, as Italian designer Bruno Munari argued, these objects also satisfy the pleasure of owning something exclusive.
Not only does art cultivate “artificial” scarcity: design, fashion, music, the audiovisual industry create limited or special editions for enthusiasts, fans, collectors or people who want to “stand out”. Photography is another example: we will use it later to explain some mechanisms that come into play in the attribution of value of apparently similar objects.
In the digital age, where “replicability and duplicability “ad infinitum” are the rule, artists who create works by brushing pixels have found themselves having to find different ways to make them unique and desirable.
A turning point took place with the creation of blockchain technology and non-fungible tokens or NFTs.
What are NFTs?
A fungible good is an interchangeable good with others of the same type: money is a fungible good, a one-dollar coin is equal — in terms of purpose and value — to all other one-dollar coins. An author painting is not a fungible asset because it cannot be duplicated or replaced with another: each asset is unique. There is actually a subjective component that will be important in explaining NFTs. A stamp can be considered trivial and interchangeable for some, but unique for a collector.
To extend the concept to the digital world, a non-fungible asset is also a specific internet domain. However, this example constitutes a sort of exception, because in general digital objects are easily duplicated: let’s think of a jpg image of which we can make an infinite number of identical copies.
Owning a digital image is therefore a fleeting concept as well as the certain attribution of the image (or video, mp3 or any other bit-based artifact). This has always been a limit for digital art or for the creation of virtual collectibles: value and the possibility of buying and selling are compromised.
Blockchains, like Bitcoin, are distributed, decentralized and immutable registers in which data are stored. This data represent cryptocurrencies, transactions but also other digital assets (pure or representative of physical assets) identified by tokens.
In 2017, the Ethereum public blockchain saw the birth of a specific and open standard, ERC721, which allows the creation of non-fungible tokens. We can imagine one of these tokens as a contract — indeed a smart contract — that implements a certificate of authenticity and ownership associated with a certain digital (or physical) asset.
With this system it is possible to create uniqueness or scarcity even for purely digital objects, making them collectible.
Let’s imagine that we are an artist who creates a digital work like an animated gif. Through a dedicated platform, he proceeds with the “minting” of this work, indelibly adding to the file the metadata that guarantee its authorship and uniqueness. The resulting token, the certificate, can be sold, for example through an auction. Whoever wins it will become the owner.
Be careful though. The value of the work now resides in the token. Copies of that GIF may exist, but it is the NFT that certifies the uniqueness of that particular version. If another collector (or a museum) wants that very “signed” work, they must purchase that NFT from the owner. Moreover, since the chain of owners will be stored in the token, the GIF will be able to acquire more value over time because, for example, for a certain period it was in Lady Gaga’s digital collection.
With the ERC721 standard and with others that were born later it is also possible to generate limited editions and this makes them perfect not only for artistic works but for any type of collector’s item, such as the highly profitable (digital) figurines of the Spanish Sorare company.
Another feature that makes these tokens particularly interesting is the possibility of coding in the contract a percentage in favor of the artist / creator for each subsequent sale: which is why NFTs are under observation among the operators of the music and audiovisual industry.
Artificial scarcity fuels (natural) desirability
At first glance, this algorithmic generation system of scarcity (and therefore desirability) of a digital work can raise more than one perplexity: how can a set of bits similar to many others turn out to be desirable only? Why some metadata (other bits) certify it in some “special” way?
But let’s think about a pair of basketball shoes. A model that is the same as thousands of others but with one difference: an accompanying certificate stating that they were worn in a certain NBA final by Michael Jordan.
Let’s take a more sophisticated example, photography. Starting from the negatives, many copies of a certain photograph can be obtained. But some copies are worth more than others. Why? Maybe because a signature or a certificate ensures that those are the first copies, developed directly by the artist.
The streak of absurdity that can emerge in art (and marketing) world obsessed with authenticity was, however, already exploited by Andy Wharol decades ago. In an ante litteram tokenization process, he invited the public to bring any object into his factory, so that it could be certified as a “Wharol work”.
In the case of NFTs, it is a different exercise in abstraction, always linked to the desire of many to possess something rare.
A collective called Injective Protocol wanted, in a provocative way, to extreme the concept of value that an NFT guarantees to a work connected to it. By purchasing and then burning a NFT-certified Banksy certified print, the collective argued that now the value of the destroyed physical work has been entirely transferred into the token. The NFT, which certifies a work that no longer exists, was sold for $ 382,000).
At this moment, moreover, the rarity is also manifested in the awareness of experiencing the childhood of this collecting; it is assumed that the first NFTs will acquire greater value over time, such as the first daguerreotypes or the first Bibles printed with the Gutenberg system. The CryptoPunks, among the first collectible digital objects, are simple figures of 24x24 pixels generated algorithmically. Born in 2017 from an idea of Larva Labs, they use a modified ERC720 token that inspired the successor ERC721. They therefore have a “historical” value and the sale of the cryptopunks we wrote about at the beginning could be linked to this phenomenon.
Due to the bizarre psychosocial dynamics that can be activated, however, there are those who do not exclude that a digital work acquires all the more value the more people decide to have a copy. This mechanism where many people want to own what many people already have is called “fashion” (sometimes “psychosis”).
For all these reasons, however, there has been a boom in NFT market volume and auction sales in recent weeks.
Since 2017, according to the site cryptoart.io, they were sold almost 135,000 digital artwork via certified NFT (no account is taken of collectibles)for a value of more than 375 million dollars.
Other blockchains such as Eos, Neo and Tron are also releasing their NFT tokens to encourage developers to build applications and marketplaces.
Let’s see in more detail what is the process that associates NFT tokens and digital artifacts.
Where is my digital artwork? On-chain, off-chain
The work and associated metadata can be stored in the same blockchain (on-chain) during minting. In this case the token and the work are permanently “fused” into the code and decoupled from the life cycle and ultimate destiny of each related application, site or platform. An important thing for an “artistic” asset, which mainly aspires to have a long life span.
Furthermore, the metadata can change according to the evolving logic of the blockchain.
In brackets, the fact that the digital artwork is replicated on all nodes of the blockchain (due to its distributed nature) leaves room for some further consideration on the concept of uniqueness or scarcity.
Indeed, this solution is not feasible, if not for extremely simple and “light” images.
Why? Using Ethereum as a storage system is expensive. To memorize a kilobyte you need 640k gas, where the “gas” is a unit of measurement linked to the value of ether (the Ethereum cryptocoin): currently a kilobyte costs about 120 euros. Storing 1 MB would therefore cost 120,000 euros!
Autoglyphs generative artifacts, another Larva Labs project, are among the few examples of on-chain NFTs. Their aforementioned cryptopunks are instead stored on a proprietary server.
The platforms dedicated to NFTs prefer the off-chain solution. The work is stored outside the blockchain. The NFT contains, as a “pointer”, the URL of the image file.
This system gives rise to a whole series of problems.First, the URL can change, for a variety of reasons. Whose turn is it to update the pointer? To the creator? To the current owner? External storage can be a cloud, a centralized server, a service like Google Drive or Dropbox, or even a home server. If something happens and the file with the artwork is modified or deleted, what happens? In the second case, it remains an NFT without an associated work, like a certificate of ownership of a painting that was destroyed in a fire. Who is responsible for the custody of the work? What is the control that the owner of the NFT has over the work, if it resides on a centralized server owned by a company (as in the case of the famous Cryptokitties?) Virtually nil, according to some opinions. Questions and doubts that will keep lawyers and regulators busy for a long time.
A solution more in line with the philosophy of blockchains lies in IPFS or other decentralized storage networks.
The IPFS (Inter Planetary File System) is a protocol and a peer-to-peer network for storing and sharing data in a distributed way.
On the Internet, every object, such as a website, can be traced through an address; on IPFS the search is based on the content: not “where” but “what”. A file is identified by its fingerprint: a function called hash, starting from the content, creates a unique identifier made up of a string of fixed length. Just change a single bit in the file to completely change the string. There cannot be two identical files (with the same hash) on IPFS and this makes it ideal for NFTs.
Even with some limits that will probably be overcome with the advent of the long-awaited Filecoin (improved version of IPFS), this solution is more in line with the decentralization and disintermediation philosophies conveyed by blockchain and NFT.
At the moment only Foundation paltform adopts the storage of NFT certified works with IPFS.
It’s not all gold …
Other specialized platforms, including NiftyGateway, SuperRare, Rarible, KnownOrigin or collectibles like OpenSea adopt the off-chain model on external servers or clouds, even if it’s not always easy to get this information: opacity and optional transparency represent one of the critical issues in this tokenized world.
Those mentioned are marketplaces for buying and selling: a user adds a digital “item”, this is certified through minting with an NFT and then put up for sale usually with an auction. Whoever wins it can then resell it, fueling a secondary market.
Everything simple? Yes and no. Users must be familiar with cryptocurrencies, with ether in particular, so they must be able to use wallets such as Metamask at least. Only Nifty Gateway currently accepts credit card payments.
I used the word “user” and not artist intentionally: while different platforms make a selection between those who want to guarantee digital works with NFT, others, such as Rarible, allow anyone to certify anything, including for example tweets and colors, or worse, works produced by others or under copyright.
This aspect is a sign that this sector needs to be regulated in some way, as happens when the new, in digital, passes from niche to mainstream or almost. The case of ICOs, the equivalent of initial public offering in the blockchain world, protagonists in past years of scams and litigation, should be a warning.
