It started with CryptoKitties. In December 2017, the dopey-looking cartoon cats, created by Canadian company Dapper Labs, debuted as tradable collectibles, like Pokémon cards for the bitcoin era. Each image was associated with a unique string of digits—a cryptocurrency “non-fungible token,” or NFT—that could be traded on the Ethereum blockchain platform as a title deed granting the holder ownership of a particular kitty.
The trading game quickly caught on among the crypto-initiated, so much so that CryptoKitties-related transactions clogged and slowed down Ethereum. That was eventually solved—and that was, for most people, the last they heard of CryptoKitties. But the process the goggle-eyed cats set off did not end there. Its end point is an auction that started on Thursday, in which a token associated with a digital collage of 5,000 images by graphic designer Beeple went under the hammer at auction house Christie’s. Cryptocurrency payments were of course accepted.
NFTs are selling like hotcakes, and this time the Ethereum network, which has been upgraded since 2017, is better equipped to deal with the endless sloshing. One recent report by NonFungible.com, a company releasing market insights on NFTs, says that in 2020, NFT trading was worth over $250 million, an increase of almost 300 percent from the previous year. On online platforms such as Rarible, OpenSea, and Nifty Gateway (backed by twins Tyler and Cameron Winklevoss), people are shelling out big sums of cryptocurrency and legal tender to buy tokens representing ownership of digital objects, which are then often reauctioned at higher prices. Some of these NFTs are stand-ins for collectibles in the tradition of CryptoKitties—like Non-Fungible Pepes, a postmodern bid to reclaim the meme frog from the alt-right; others are objects intended to be used in video games. But more and more they are linked to pieces of digital art designed by honest-to-God creators such as Beeple—who, two months ago, sold a token for $777,777 on Nifty Gateway.
If all of this sounds bizarre, that’s because it is. The idea of paying for the symbolic ownership of a digital image that lives somewhere on the web and can be captured on a screenshot or right-click-download within seconds, is so alien it seems either idiotic or ironic. Yet NFT proponents purport to be solving exactly that problem: the near-impossibility of monetizing digital artworks. “As a mechanism, NFTs make it possible to assign value to digital art, which opens the door to a sea of possibility for a medium that is unbridled by physical limitations,” says Noah Davis, a specialist in postwar and contemporary art at Christie’s.
Currencies and cryptocurrencies (like the US dollar or bitcoin) are by nature made up of fungible—that is to say, interchangable—units: My two bitcoins are worth the same as your two bitcoins, and if we exchanged them, neither of us would feel stiffed. Currency and cryptocurrency units are also, usually, fractionable into smaller units—dollars can be broken down to cents, bitcoins to particles called satoshis—which can be spent separately. On the contrary, NFTs—cryptocurrency assets developed according to special Ethereum standards ERC-721 and ERC-1155—are unique and indivisible. Where a bitcoin is comparable to a dollar bill, an NFT can be likened to a cat, a sculpture, or a painting: You can’t sell part of it without spoiling the whole, and its value is rather subjective. Those characteristics render NFTs a good metaphor for art. Now, the crypterati and a waxing portion of the art world are asking us to take a leap of faith and believe that by buying an NFT we should feel like the owners of whatever artwork an artist has decided to link with it.
This cannot credibly apply to physical artworks. If you are after a Jeff Koons balloon dog sculpture, you will likely not be happy with a cryptocurrency token. But when it comes to intangible digital art, NFTs might just do the trick. Sure, everyone can download Beeple’s images from his Instagram feed, but that is missing the point, says Vincent Harrison, a New York gallerist who counts the Winklevosses among his clients and is helping Nifty Gateway attract more established artists onto the platform. “Anyone can see pictures on the internet of the most expensive artworks; posters are sold in museums,” he says. “But it's the ownership that creates value. So with NFTs, not only do you have ownership, you have ownership on the blockchain, you have ownership that is transparent for everyone to see.”
NFT technology, Harrison says, provides a way to attach a price tag to digital art, tapping into that primal high-quality hoarding instinct—the quest for status-affording Veblen goods, coveted only insofar as they are pricey—that is behind many collectors’ urge. Mix that with a frothy community eager to trade and meme any new shiny blockchain-adjacent construct to considerable prices and the trick is done.
“In this digital world, we have accelerators: Suddenly you could get three or four times what you paid for something—tomorrow there is someone ready to buy it,” Harrison says. Even better, blockchains are also able to keep track in a secure, immutable way of how a token originated and changed hands over time. “Provenance is obviously an important part of the value of art,” Harrison says.
The crowd buying NFT-linked art is varied. Some of its members are cryptocurrency magnates looking for the newest thing to plunge their savings into. “People who were early in crypto and have a bunch of ether [Ethereum’s cryptocurrency], they're looking for ways to use it,” says James Beck, director of communications and content at ConsenSys, a blockchain company that has built an app to store and manage NFTs. They want to show, Beck says, that they are “patrons of the art on the internet.”
It helps that some NFT marketplaces allow people to showcase their purchases like in an online gallery or museum. Jamie Burke, founder and CEO of blockchain investment firm Outlier Ventures and an NFT enthusiast, is one of those keen about their newfound role as digital arts supporters. Burke says that he was initially turned off by the early, “self-referential” cryptocurrency-focused artworks—strewn with Bitcoin signs and pixelated memes. But when he got more interested in the space, in summer 2020, he was “blown away” by the new artists.
“This was art in and of its own right that I would buy, and I liked the idea that I could have a unique digital edition of it,” he says. “I just started collecting, personally, and trying to get new artists and professionals who are coming into the space. I'm building a bit of a collection.” That does not mean he turns down a good deal when it presents itself. On February 13, he sold an NFT he had paid $500 for, for $20,000 in ether. Announcing the sale in a tweet, Burke said he would use the return to buy more art.
Harrison says that while the market right now is crawling with speculators who would buy and flip any blockchain-based asset in the hope that it increases in value, bona fide collectors are increasingly getting involved. “It's a combination of people who are just speculative and people who want to collect and have something cool,” he says. “My role is to balance an element of speculation with enough people that want to buy something because they like it, and they want a hot collection habit. If everyone is buying to speculate, it doesn't work, then it just becomes another tradable token.”
Some digital artists are welcoming of the trend. Most platforms are simple to use, allowing them to upload their works, automatically “mint” NFTs, and wait for the offers to rain in—and these are often higher than the sums they would receive if they tried to sell their digital artworks online or as prints. Brendan Dawes, a UK graphic designer and artist who creates digital imagery using machine learning and algorithms, says that a print of one of his pieces would typically sell for $2,000, while his latest NFT sold for $37,000.
The profits don’t stop there. NFTs can be designed to pay their creators a cryptocurrency fee every time they change hands. If a buyer of one of Dawes’ pieces resells it, Dawes automatically receives 10 percent of the price paid. “That's again one of the differences when compared to the traditional world. You get this ongoing royalty.”
Andrea Bonaceto, a venture capitalist and artist who is also creating NFT-backed artwork, thinks that the method might spur new forms of digital art blending digital imagery, music, and technology. “You can create hybrids of art and music, or of art and literature, and link both of them to a token. You can use smart contracts [self-executing routines that can be programmed onto a blockchain] so that the artwork changes over time,” he says. “This totally opens up an artist’s creativity.”
Crypto being crypto, NFTs are bound to produce excesses. Some of the prices paid can be beyond comprehension, the epitome being the purchase of a virtual racing car for $100,000; and the fact that some websites are offering cryptocurrency loans in exchange for NFT collaterals has all the signs of a mini-crash waiting to happen.
At a more basic level, William O'Rorke, a partner at Paris-based law firm ORWL Avocats, says that while the structure of NFTs—modeled after artwork rather than currencies or shares—means they are not subjected to the kind of financial regulation other kinds of crypto assets have to abide by, they still risk falling foul of intellectual property law (for instance, if selling someone else’s artwork as one’s own) and consumer law protection.
Online auctions are another potential quagmire, O’Rorke says, as sellers could potentially leverage fake accounts to tamper with the bidding process. “If you have 10 accounts, you can artificially increase the price of an NFT,” he says. “This kind of practice exists actually also on eBay, on all these kinds of services. But when people participate in the auction with anonymous cryptocurrency, it's much more complicated to find out.” Luckily, he says, there are techniques and methods to detect coordination that could stave off the worst.
In general, O’Rorke sees NFT art as a “spectacular” trend, but at the end of the day, smaller than other sectors in which NFTs are likely to take hold—from gaming to sports trading cards—as more and more brands, including toy manufacturer Superplastic and Nike get acquainted with the technology.
The big question is, then, whether this is just another cryptocurrency fad, or whether NFT art is here for good. Harrison has no doubt that what has been happening is just the beginning of a long-awaited transition, partly triggered by the pandemic-induced closures of museums and galleries. “There's something real here. This is just an acceleration of a cultural shift,” he says.
Federica Beretta, gallery director at London-based Opera Gallery, says that while the pandemic, and a push for sustainability, made turning to digital artwork and digital auctions a “no brainer,” physical art will probably keep an edge in the long run. “The digital world offers extraordinary opportunities to artists, collectors, museums, and galleries, and it could also be seen as a fantastic complement to traditional art,” she says. “I do not believe art will become only digital in the future.”
This story originally appeared on WIRED UK.