Non Fungible Tokens or NFTs seem to have become an internet phenomenon over the past few months. From Christie’s to Jack Dorsey, everyone seems to be making unimaginable amounts of money from NFTs. They’ve already done more than half a billion dollars in transactions this year. Why the sudden interest in this somewhat niche application of blockchain technology? Well, the answer lies at the intersection of online art, its monetization, and difficult-to-answer questions about what it even means to own something digitally?
Okay, so what are NFTs?
The key to understanding its utility lies in understanding how it is non-fungible and what that implies. Something is fungible if it is interchangeable with something else. The classic example of a fungible object is cash. It doesn’t matter which Rs.500 note you hold, they can be used in place of each other. They aren’t unique. A more relevant example could also be that of Bitcoins or other cryptocurrencies. An NFT represents a unique line of code held in the blockchain that links to the item that is being tokenized. If something is unique, then it should be possible to verify whether that’s the case and, so, NFTs can also be verified through the blockchain they are built on top of.
Since they represent a unique line of code, they can be made for individual pieces of digital art. They essentially work as proof of ownership. Ownership of digital art is complicated (how do you own something that can be duplicated endlessly without consequences?) but an artist can say that an NFT represents ownership of a given piece and as long as people (investors as well as the community around that artist) believe that, NFTs functionally serve as ownership claims. Beeple, an online artist, made news for selling his work “The First 5000 Days” for 69 million USD. In addition to digital art, the other big use case is collectables: people buying seemingly useless items that are valued in a certain cultural context such as trading cards and other merchandise is nothing new. NFTs allow companies and franchises to sell what is essentially the equivalent of digital merchandise.
At this point in the article, if NFTs feel like just the latest fad and the bizarre amounts of money people are pouring into this market appears to be inexplicable, you’re not alone. There are multiple fascinating concerns about the same:
What are people buying?
To be clear, this transaction is different from most that you’ve probably engaged in. You buy good X from person A, person A no longer has ownership of good X. When you buy an NFT of some digital art, it’s likely going to still be available in public. People can still view and potentially download it for free. Another comparison could be intellectual property. You buy the copyright of good X from person A; now, no one can reproduce good X without asking for your permission. That’s not NFTs either. If you buy an NFT of a short story, the author still retains the right to license it for adaptation and whatnot.
Think of it like this, you buy a poster from person A. She still can sell other copies to other people or license them further. But you still feel a sense of ownership over the poster. What you are buying is that sense of ownership and a sense of community.
Ownership of all art is complicated. Let’s run a thought experiment: Say, we developed a machine that could make a 100% identical copy of any piece by scanning it. People scan the Mona Lisa and now identical copies can be made across the world. Is the original painting hanging in the Louvre now worthless? Does everyone now own the Mona Lisa? Most people will say that there’s still value in the original and the ability to claim something as yours. Copyright and intellectual property, critical as they are to the modern economy, are at the end of the day, extremely contextual and only really exist to the extent that we as a society grant them that value. How different is that from an NFT that raises similar questions about the philosophy of ownership?
It’s a speculative investment. Yes, but so is all art
Speculative investment is when you buy something hoping its market value rises in the future but there is very little weightage given to any sort of objective measurement of its inherent value.
When you’re talking about people buying a piece of art as an investment, it always involves a degree of speculation. Despite what the buyer may love about a piece or how well-regarded the artist is, there is no actual objective value at play here. Its value entirely comes from the socio-cultural context: it’s valued at a certain level only because the people who’re interested in it value it to that level.
Given the relatively shaky foundations of NFTs, it has faced multiple accusations of being purely speculative. That criticism falls flat when you consider how common it is for even famous pieces of art to radically change in value swiftly.
It might be great for money laundering
Money laundering is the process of concealing the illegal origins of your money by passing it through certain bank transfers or commercial transactions.
This is not new for blockchain offerings. Many cryptocurrencies have been implicated in various money laundering incidents. It is easy to imagine why people are concerned about bad actors. There is a lot of money involved. The identities of buyers and sellers aren’t necessarily verified. There is little data about how much a good ought to sell for. People can use over-invoicing and under-invoicing mechanisms to fudge where the money is coming from, how much money is being transferred, who’s buying what, and so on.
But the art world is no stranger to money laundering. The difficulty in estimating the economic value of the underlying transaction makes it an inherently attractive tool for money laundering and its use as a tool for laundering money has been known for decades.
Ultimately, my concerns with NFTs are less about the fragility of the transaction and more about the stability of the market in relation to it being a source of income for digital artists. While the sky-rocketing adoption of the Internet in the past two decades has created enormous opportunities for different kinds of artists to build large audiences and find their niche; it has been hard to monetize that audience sustainably. Your digital art may be viewed hundreds of thousands of times on Instagram but does not provide you with a stable income. NFTs offer a lucrative and much-needed mechanism to monetize individual pieces. But it is borderline impossible to separate the hype from the real shift in the market. Even the artist who broke innumerable records by selling an NFT for $69 million thinks that the market will very likely crash soon. Another potential problem is that NFTs are stored in a particular blockchain, if the underlying technology does not survive (as many blockchains haven’t), the token becomes worthless.
Despite much attention in the mainstream, the actual market of buyers and sellers also hasn’t expanded a lot. The NFT market remains a hyper-active but relatively small and insular community. As NFTs start to be used by a diverse list of brands and artists: the NBA, Arca, Elon Musk apparently; the number of people who’ve bought an NFT will also hopefully increase.
Written by: Shivansh Raman (firstname.lastname@example.org)
Edited by: Divij Gera