Non-Fungible Tokens: Painting the Way for Digital Art

If an artwork is intangible, does this make it any less an artwork? Must it hang in a museum behind a velvet divider, under the piercing gaze of security personnel? Artists whose work is performative or conceptual would have a few things to say about that. Art, or more generally, self-expression, has the versatility of taking on a medium or taking none at all. But a challenge that comes uniquely with intangibility is capitalizing on something that does not hold a physical form. Digital artists have struggled to gain a footing in a world where their creations are so easily copied and downloaded without remuneration or recognition. Now, thanks to blockchain technology and a wave of trend-hungry investors, artists can profit from their craft while keeping their individual signature tied to their work. A non-fungible token, or NFT, is the driver behind the wheel of this creative revolution. 

An NFT is a virtual stamp of approval of the underlying artwork’s authenticity. By purchasing an NFT, a buyer is made the legitimate owner of the work, and the NFT itself becomes proof of this transaction. Christie’s made headlines in early March for selling the first-ever piece of intangible artwork through an NFT for a whopping $69 million. Musical artist Grimes sold audiovisual artworks that earned her approximately $6 million in under an hour, and a clip of LeBron James blocking a shot sold for six figures on the digital collectibles site, NBA Top Shot. Although these mammoth sales reflect a skewness towards famous artists and pop culture trends, many NFT marketplaces such as Foundation and SuperRare were exclusively designed as platforms for individual artists to showcase their work and connect with potential collectors. The growing popularity of these instruments over the past year has helped construct a digital art market where creators are accredited and compensated for their work. Whether investors deem themselves curators or thrill-seekers, their contributions have revolutionized the digital art space and remodelled the internet into a virtual Museum of Modern Art.

The use of NFTs in the digital art market bears resemblance to a purchase made in a traditional art market. Auctions are held where buyers can place bids, and the buyer that places the highest bid gets ownership of the digital artwork by purchasing the ownership certificate: the NFT. There is also the option for the artist to set a list price directly for their work, in which case interested buyers can attempt to negotiate a lower price that remains within both parties’ bargaining zones. Two notable differences with the NFT market are that the auction houses exist primarily online, and that the purchased artwork resides in a digital wallet in its token-form rather than framed above the fireplace. When one purchases an NFT, the information about the purchase, artwork, and ownership are stored in a blockchain, which is essentially a digital ledger. Blockchain technology permanently encloses all information and associated transactions into a digital record. This record acts as proof of the artwork’s value, authenticity, and quality, which are frequent victims of subjectivity in the art world. Moreover, blockchain technology protects against the possibility of forgery by encrypting all data records, making the system very secure against potential hackers and art thieves plotting an NFT heist.

Each piece of artwork put on auction has a unique NFT representing it, hence its title of non-fungible token. A fungible item can be exchanged for something else while still retaining its original value. A non-fungible item, on the other hand, cannot be traded for something else or broken up into smaller parts because it is one of a kind. Translated into art language, only one authentic Guernica painting by Picasso exists, and it hangs in the Reina Sofia museum in Madrid; a Guernica poster purchased at the museum gift shop does not have the same value. Non-fungibility, then, creates a degree of scarcity and exclusivity that creates an excess demand in the market and puts upward pressure on NFT prices. This positively affects digital artists because their work increases in value as it gains more traction and recognition amongst collectors.  

From an artistic perspective, the most important characteristic of the NFT market is that artists lacking an established reputation as creators can still make a decent profit on their work. This is very different from the exclusivity and barriers to entry that are often present in capital markets. Anyone can ‘mint’ an NFT token to their work and put it up for auction in the same way that anyone can scroll through the offerings and invest in whatever artwork captures their attention. Of course, this is no guarantee that a piece will sell for millions and that every investor will be willing to pay such an inflated price. But markets, by convention, are the meeting grounds for sellers and buyers with varying budget constraints; much to the dismay of the media, not every buyer wishes to spend a vacation home’s worth in NFTs. For instance, based on prices listed on SuperRare, several artworks have sold for under $50 dollars whereas several others have sold for over 15 Ether, which is over $22,000. Some creators have even managed to sell NFTs for hundreds of thousands of dollars. Clearly, artists can make tremendous amounts of money while even the most frugal collectors can find an NFT at a reasonable price. Lower, more accessible prices have the ability to attract more retail investors into the space, which would further diversify the investor pool in the market and positively impact future profits for artists.

Despite the bubbling excitement surrounding NFTs, there still remains a lot of skepticism with regards to their role in financial markets and their relative safety as investment vessels. First and foremost, there exists the general perplexity of paying 69 million dollars for a JPEG file that could easily be downloaded onto a hard drive and be stared at for a cost of zero dollars. That’s what an investor would receive upon investing in an NFT, correct? Yes, duplicating something on the internet requires surprisingly minimal technical ability and can be done entirely under the radar. A person wanting to replace their laptop’s wallpaper, for instance, can do so with a quick screenshot. The ultimate benefit of owning an NFT comes down to how much an investor values ownership rights. A copy is just as good as the original from the standpoint of a nonchalant onlooker, but the owner of a Gucci bag owns a Gucci bag, and the owner of a knockoff owns a knockoff. An NFT guarantees the acquisition of an original piece with a blockchain entry to prove it. Art collectors in traditional markets purchase original artworks in the hopes of increasing the value of their collection; digital art collectors purchase NFTs with the same finality. But like any financial investment, there exists no real guarantee that this value will materialize. At the end of the day, an NFT is only as valuable as the underlying asset it represents. Nyan Cat would not have sold for nearly $580,000 via NFT if it did not hold global meme status. The challenge for art collectors, then, lies in predicting if an artwork has future masterpiece potential. For traditional and digital collectors alike, this evaluation relies on previous experience, educational background, and personal opinion. In other words: the process is a semi-calculated game of chance. Uncertain futures call for educated guesses; the art world, whether in its tangible or intangible form, has yet to be an exception. 

Similar to other puzzling successes, NFTs have ascended to the big leagues in very little time. Risk-averse investors have expressed concerns about whether this momentum will continue steadily in the long-run or die down once the enthusiasm subsides. NFTs bear risk with regards to their underlying asset, whose value can be unpredictable and volatile. The GameStop frenzy proved that investing for the sake of following a trend, without strategy or market knowledge, can result in significant losses. This pattern remains true for any investment in any market, however; investors ultimately agree to some risk when putting money forward, no matter the product. In this sense, NFTs differ from similarly risky investments in their potential to revitalize the market for digital art. Artists can now legitimize their craft in an online format where they retain artistic credit. Curators can increase the value of their collections with pieces that are more in tune with a younger generation of art lovers. And finally, individuals have a way to support their favourite creators while benefiting from the ownership of their artworks. NFTs have, in short, redefined the artistic process in an era of volatile markets, behavioural finance, and emerging technologies; the future of intangible art has never looked more promising.