What are NFTs, and why are they revolutionizing the art world?

What are NFTs, and why are they revolutionizing the art world?

The cryptocurrency community’s ability to innovate is surpassed only by its influence in setting new trends, as evidenced by the rise of nonfungible tokens. NFTs are digital objects that are verified on the blockchain and hold features such as uniqueness and non-interchangeability. They can take the form of pretty much any category but are most notably appearing in the form of art, music, items in blockchain-based video games, and video. 

One area that NFTs have taken particularly by storm is the art world, where digital tokens are selling for tens of millions of dollars at major auction houses and beyond. Budding artists who would once post their work for free or sell it cheaply are realizing that they can cash in on their talent through the use of blockchain technology and NFTs. 

It’s still the early days for nonfungible tokens, which were thrust into the spotlight in 2017 with a decentralized application (DApp) called CryptoKitties, where users can buy, trade and collect virtual cats.

After the NFT market ballooned by close to 300% in 2020, to more than $250 million year-over-year (YoY), these nifty digital assets have captured the imagination of traders and creative types alike. Another sign of growing adoption is the number of NFT wallets on which NFT transactions have occurred, nearly doubling in 2020 to more than 222,000 YoY.

You don’t have to be in the crypto space too long before you hear about NFTs — you don’t even have to be in the space at all. When you do, it probably won’t be long before you decide to go down the NFT rabbit hole like the rest of the community, either in an attempt to score a big sale or to scoop up some digital art to diversify your own portfolio. But before you do that, it helps to have a grasp on the NFT ecosystem and what it is all about. 

NFT mechanics 

Nonfungible tokens appeal to collectors, investors and traders alike. They are a digital version of some product, like a piece of artwork, that gives the owner the certified version of that asset. This goes a long way in places like the art world, where owning the real deal — the official, unique version of an item — is much more valuable than owning a copy of it. 

Take the statue of David, for example. Would you rather own the original sculpture or a perfect copy? The answer to that question is subjective and depends on how you value artwork. The same concept holds true for NFTs, where the owners of these digital assets whose proof of ownership is verified on the blockchain hold the belief that the asset will either increase or add immeasurable value to their collection. Fungibility, or the lack thereof, is at the core of an NFT’s value. Like the art world itself, NFTs capitalize on the idea of an auteur or creative genius giving monumental value to an object.

There are numerous marketplaces on which users can issue or buy nonfungible tokens. Doing so generally requires possessing a digital wallet along with digital currencies to direct toward the purchase of the token that you want. There are also various ways to buy such tokens, either from a direct sale or an auction. Buying NFTs does not only happen in digital platforms but also in several renowned auction houses like Sotheby’s, which can sell NFTs, purchased with crypto. 

Nonfungibility 

The value of NFTs revolves around the nonfungible nature of these digital assets, which is the feature that sets them apart from cryptocurrencies, as NFTs and cryptocurrencies are not the same things. Each NFT has its own unique set of attributes — such as size, scarcity, creator, etc. — and therefore cannot be interchanged with another asset. By way of comparison, Bitcoin (BTC) is a fungible asset. If you are fortunate enough to own 1 BTC and you exchange it for another 1 BTC, nothing has changed. You still have the same amount of Bitcoin to use or hold, or “hodl,” onto.

The same holds true for fiat currencies, such as the U.S. dollar or euro, and other examples of fungible assets. One dollar or euro note is interchangeable with any other dollar or euro note, regardless of characteristics, such as the serial number or whether you’ve got the note in your pocket or in a bank account. Where you get into a gray area is if you have a coin that’s considered to be a collector’s item, in which case this item fits the bill as a nonfungible item.

Another real-world example is baseball cards, which are more closely related to nonfungible tokens, considering one card is not equal to another. Incidentally, the concept of nonfungible tokens is not lost on Major League Baseball (MLB), the National Basketball Association (NBA) and other sporting organizations, individual teams and athletes. 

Blockchain or bust 

By some accounts, NFTs first appeared in the cryptocurrency industry in 2012/2013, depending on how wide of a net you cast for the category, though they didn’t make their way to the Ethereum blockchain until 2017. Since then, however, most tokens live on the Ethereum blockchain. While Ethereum isn’t the only blockchain on which the tokens can be built and traded, it is the most popular one. The main standard for NFTs on the Ethereum blockchain is ERC-721.

When a transaction occurs on Ethereum, the wallet starting that process must pay what’s known as a gas fee to the miners for their work. The problem with nonfungible tokens on the Ethereum blockchain is that it is an expensive network, and these gas fees can reach unreasonably high numbers when the demand to make transactions is high. 

For example, the price attached to an NFT might be as little as $60, but half of that could be spent on fees to make the transfer of that token possible. This pretty much dampens the fun out of the experience of using Ethereum for engaging with NFTs. In some rare cases, the gas fee can exceed the cost of the asset, so it could be worth waiting for the demand on the blockchain to lower, thus paying lower fees to transfer the collectible.

The high prices are a function of the popularity of NFTs, coupled with the lack of scalability of the current version of the Ethereum blockchain. This scalability issue is poised to change as the project moves from the proof-of-work (PoW) consensus algorithm to proof-of-stake (PoS), in what is known as the shift to Ethereum 2.0 (Eth2). Until then, token creators have to decide whether the lofty fees are worth it, or if they should give another blockchain a try, or abandon NFTs altogether. 

NFTs rock the art world

Prehistoric cave art dates back as far as the Lower Paleolithic Era, or the Old Stone Age somewhere between 290,000 BCE and 700,000 BCE. Art has come a long way from cave paintings and rock carvings, however, and NFTs are giving creative types new ways of generating income from their work and capturing new followers.

If you are wondering how nonfungible tokens have changed the art world already, look no further than Christie’s, an auction house with a history of more than 250 years. That is where digital artist Mike Winkelmann, aka Beeple, famously sold one of his pieces — “Everydays: The First 5000 Days” — in a JPG format for $69 million. It was a sign of the times that proved just how much the blockchain space has influenced modern art. 

This price tag places Beeple among the top three priciest living artists in terms of the amount generated through an auction. And while you may see NFTs hanging in a museum, like some of Christie’s other famous sales, you can be assured that the owner gets to enjoy bragging rights while the art can be verified on the blockchain. Beeple’s story is also significant because his participation in the fine art world only began when he stumbled upon NFTs, showing how quickly a new artist can become a phenomenon in this age of digital art.

Once Christie’s announced that it was auctioning off a Beeple NFT, Asian investors were first in line, with nearly one-fifth of the 33 bidders for the digital art coming from the region. Singaporean cryptocurrency investor “MetaKovan” ultimately prevailed in the auction. 

Beeple is not the only one making it big from NFTs. Take CryptoPunks, a collection of 10,000 24x24-pixel eccentric characters — including zombies and aliens — built on the Ethereum blockchain. CryptoPunks, which claims to have created the maiden NFT on Ethereum and served as an inspiration for the market, has caught on like wildfire. 

Like Beeple, these digital artists have made it big from their NFT artwork, including the sale of nine portraits that went for close to $17 million — also at the Christie’s auction house. The limited-edition nature of CryptoPunks makes them so valuable. For example, CryptoPunk 635, which was part of the group of nine, dons sunglasses and has a blue face. It is one of the mere nine alien portraits in the lot.

Not to be outdone, musician Grimes jumped on the NFT bandwagon, making roughly $6 million from selling a collection of digital artwork and videos. Her top piece was a video dubbed “Death of the Old,” of which there is only one of its kind. This NFT alone went for close to $389,000.

Gaming and NFTs, perfect together

NFTs have also left their mark on the cryptocurrency gaming industry, already making an impact on the overall gaming scene. CryptoKitties was the first to combine the features of gaming with NFTs in 2017, issuing digital cats on the blockchain and giving users the ability to interact and trade with them. The model was so successful that it caused the Ethereum network to be clogged by a high volume of transactions for a short while.

Since then, gaming has become a key use case for NFTs, which isn’t too much of a stretch given the nature of in-game sales for products like skins and more that has already gripped the traditional market. 

When it comes to NFTs, there has been a crossover between traditional gaming companies and decentralized startups, as both sides look to capitalize on digital cards, artwork and even fashion on the blockchain. NFTs fit gaming like a hand in a glove, and the pairing is sure to continue to disrupt the industry as gamers seek not only to score as competitors but also as investors. 

Security and functionality 

Just because there is no physical safe from which to steal NFTs doesn’t mean that security isn’t an issue. Similar to the cryptocurrency industry itself, the NFT industry remains a nascent market in which developers are working out some of the kinks and users are getting educated. 

In the interim, there are sure to be some bumps in the road. NFTs have made it into the limelight even as the architecture is still being built, which could be a recipe for disaster if it falls into the wrong hands.

Newbies in the cryptocurrency industry may still be struggling to send Bitcoin or Ether (ETH) to the right addresses. With the rise of NFTs, they now have to learn about MetaMask wallets and the various blockchains on which NFTs can be built. It can all be overwhelming to the new user, and could lead to mistakes that cannot be undone in the decentralized world where there is no third party to return funds or products to their rightful owner.

Meanwhile, there are also security issues at play. While the immutable nature of the blockchain is meant to prevent fraud, that hasn’t stopped scams from happening in the NFT space. Bad actors find a way to infiltrate budding markets, and NFTs have been no exception, including when it comes to copyrights.

According to social media accounts, scam artists managed to capture the tweets of some accounts, and turn around and sell them as NFTs of their own. While the industry caught wind of this behavior and Twitter has since cracked down on it, it is an example of the scams that can still run rampant in a budding market.

Future outlook

The NFT market has achieved much of its impressive growth over a one-year period. In 2020, most of the popular NFT platforms weren’t even around yet, while the start of 2021 was met with an unprecedented surge in activity and trade volume. Even if this trend continues at a slower pace, the overall rate of adoption of NFTs will still likely be unprecedented in years to come.

While nonfungible tokens can be difficult to value, features such as uniqueness, tradeability, talent and whether the original artist is behind the sale all play into the price. The next wave of the NFT market could see the tokens make their way into yet another craze that has taken the cryptocurrency market by storm: decentralized finance (DeFi).