So you can be a pretentious art snob in two different universes
What are NFTs
The blockchain provides us with a way of reliably holding digital ownership of something without fear of it being stolen. The most prolific use case for that so far has been in cryptocurrencies such as Bitcoin and Ether.
But ownership doesn’t have to stop there. What if you could own other kinds of digital assets through the same mechanisms as cryptocurrency?
Well, in short, you can. Non-fungible tokens, which is often abbreviated to NFTs, are collectible items that can be bought and sold through the blockchain. The token represents ownership of a digital or real world asset, like an artwork.
What makes them different from cryptocurrency coins is that each token is non-fungible, which means unique. Cryptocurrencies are fungible. If you sell a bitcoin and replace it with another one, it will be identical – as if nothing has happened. It doesn’t matter which bitcoin you have, and in fact, the blockchain doesn’t distinguish between them.
On the other hand, each NFT is different and distinguishable. This means that NFTs usually have different and variable values. While the price of a Bitcoin is ubiquitous, meaning that it is the same for everyone, each NFT has its own value which can rise or fall depending on what it is. This is similar to assets like a house, although many houses may be similar, each one is in fact unique, has its own characteristics, and for that reason is priced individually.
What types of NFT are there?
So, what are the existing types of NFT? What do NFTs look like?
Well, because artwork is by nature both unique and collectable, it has become a prime example of NFTs. Many pieces of digital art are now available as Non-Fungible Token. For example, one piece by the American artist Mike Winklemann, who is known by the internet alias ‘Beeple’, was sold by the British auction house Christies for $69 million.
However, it is not just visual art that can be turned into NFTs. There are NFTs which are pieces of literature, music, film or games. In fact, even tweets have been sold as Non-Fungible Tokens since their invention in 2014. Provided that something is unique and that there is a market for collectors of it, either by fans or investors, it can be an NFT.
NFTs can also provide utility, not just as pieces of art. NFTs could have an interesting role to play, anywhere that a unique digital asset could be useful. For example, NFTs have been used as certificates for proof-of-ownership for expensive jewelry. Other NFTs like the Bored Ape Yacht Club collection (BAYC) offer yacht parties as an exclusive perk to holders of their NFTs.
Why own an NFT?
When you buy a piece of NFT artwork, you become its owner. However, these typically don’t come with the copyright. Anyone can still download or view the artwork on the internet. They just can’t own it.
This sounds weird until you think about the real world art industry. The Mona Lisa is owned by the Louvre Museum in Paris. It was painted by Leonardo da Vinci. However, it didn’t get sold directly by Da Vinci to the Louvre – it had several owners, including King Louis XIV in between.
Moreover, if you type ‘Mona Lisa’ into Google, you’ll be able to see it. Some people even have copies of it in their house. So why bother owning it? Well, often collectors want either the social standing that comes with owning the original copy of a famous or valuable work, or they hope the art work will appreciate in value, so they can sell it at a profit. It is the same with NFTs.
Another benefit of NFTs is that they allow access to a community. Many NFT collections, including CryptoPunks, one of the first NFT projects, have private areas where owners can hang out together offline and online, work together as a community to promote the value of their tokens and even self-identify on social media using the same profile pictures.
What makes an NFT special?
The way an NFT works is that the asset itself, meaning the image or piece of music, is not stored in the blockchain. After all, simply being able to show people a copy of an image doesn’t prove that you own it. I could show you a picture of the Mona Lisa but it doesn’t mean that it belongs to me.
Instead, the token acts as proof of the ownership. Usually, it is digitally signed by the artist or creator so that its authenticity can be verified. For example, the NFT of Beeple’s famous work of art only has value because it was signed by Beeple. There might be a copy of the image on the blockchain, or the image might be stored somewhere else and linked to in the blockchain. However, it is the signature by the original creator that makes the NFT unique and valuable. It is that enduring connection to the original artist that makes NFTs so popular with fans of the artist.
Like cryptocurrencies, at some point a Non-Fungible Token has to be created before it can be bought, sold, traded, exchanged or gifted. So how does this happen?
‘Minting’ an NFT is the initial process of calling a smart contract that generates art based on a predetermined set of variables. When those variables are called, a unique combination is created, an asset is deducted from the user’s wallet and exchanged for the newly created NFT. This NFT may have extensive metadata embedded, but frequently links to an external location with a multimedia asset file . All of this information is stored on a blockchain, frequently Ethereum, but Solana and Polygon host many NFT collections as well.
Because minting an NFT is calling a smart contract, the user still must pay gas fees, which can be quite expensive depending on the computational complexity of the minting contract. Currently, it costs up to $60 to mint an NFT using OpenSea, which is the most popular NFT wallet on the Ethereum platform.
Sometimes, ownership of an asset can also be split or ‘fractionalized’. For example, three different people could each own a third of an artwork. These fractionalized pieces of the art may remain indefinitely or may be destroyed to reunite them into the single original piece.
Why mint an NFT?
But even so, as an artist, why would you mint an NFT? Why is creating an NFT any better than creating a piece of artwork in the real world, especially since there are more art collectors in the real world today?
Well, firstly, it can provide a new medium for sale of artwork beyond what is conventional. When big artists like David Hockney are able to sell their artworks to museums for large sums of money, it allows them to both profit and have their art seen by a large number of people. However, not all artists are able to get big money deals with museums. Instead, they often have to sell to private collectors who might demand exclusivity, meaning the artist can’t publish the work online. This means that the work will have a smaller audience, reducing the artist’s cultural capital. However, with an NFT, the work can be sold while still allowing the artist to publish it for wider consumption.
Secondly, through smart contracts, the artist can manufacture an NFT which gives them continual royalties. For example, an artist can set up an NFT so that they get 5% of the fee every time it is sold. This is particularly important because many artists don’t get recognition for their work until late in their careers. They might sell a painting while they’re young for only a small amount of money. However, when they get famous later they won’t benefit from the resale of that same work for much higher prices. With smart contracts, artists can be rewarded for the quality of their work in perpetuity.
How to purchase a NFT - buying and selling
So, imagine that you are a thriving art collector who has a collection of world class real world assets and you wanted to get into the new Web3 collecting sphere. How would you go about doing it?
Well, like with cryptocurrency, you are going to need to find a marketplace. This is an application, usually a decentralized application (dApp) that exists on the blockchain. At the moment, most NFTs exist on the Ethereum blockchain so that is probably the one you are going to want to use. Once you enter a marketplace, you’ll be able to buy or sell an NFT by listing it and viewing bids on it, just like with eBay for real world items. The largest NFT marketplace is a centralized Web2-style company called OpenSea, but other decentralized marketplaces like LooksRare have arisen to enable censorship-resistant transfer of artwork.
When you buy an NFT, the marketplace will automatically add a block to the blockchain ledger displaying the change of ownership and the amount of money that it has gone for. Often, to ensure simultaneous transfer and to avoid any party being defrauded, this will be done with the help of a smart contract. As a result, as soon as you pay, you’ll receive the NFT.
Case Study: Champagne Avenue Fosh NFT
The most expensive wine bottle in history was sold for $2.5 million in July 2022 to a pair of Italian brothers. But this was no ordinary alcohol sale. Instead, it was bundled in with an artistically designed label, which came with its own NFT. This means that even once the bottle of wine has been drunk, it will still hold some value for its buyers.
Moreover, the brothers see the wine not as a purchase for consumption but as an investment. They believe that it will be able to hold, and even increase, in value as time goes on, potentially ushering in a new era of collectible items.
Case Study: Crawley Town Football Club
Another prolific Web3 story that has been in the news belongs to a fourth-tier football club in England, called Crawley Town FC. Under new ownership from cryptocurrency millionaires, Crawley has issued a new batch of NFTs worth 0.35 Ether, which at the time of minting was worth about £350. So far, they have sold nearly £10,000, raising a significant amount of money for the club. Moreover, the NFT was designed with smart contracts, so each NFT that is resold will make them more money.
However, these NFTs don’t just allow supporters to invest, they also allow them to engage with the club. Crawley fans who purchase the tokens are given both access to digital media, like training videos, and voting rights on key club decisions. For example, the club’s owners have allowed NFT holders to pick whether the club purchases an attacker, midfielder or defender ahead of their next season and have even promised NFT holders future voting rights on the club’s management team.
Like with cryptocurrencies, NFTs have become a new frontier for internet scammers. NFTs are just as vulnerable to things like fake NFT generation and ‘pump & dump’ scams. In particular, many NFT scammers impersonate famous artists in order to try to sell NFTs. This works particularly well with artists who are anonymous or frequently use pseudonyms in real life.
For example, in August 2021 hackers made their way onto the Web2 website of the famous British graffiti artist Banksy and created a new page advertising a Banksy NFT sale. This link then took collectors to a NFT exchange where the NFT was listed. It eventually sold for $293 million. However, Banksy later declared that he had no affiliation with the NFT sale, which made the token itself worthless.
The moral of the story: be careful when buying NFTs, particularly when you are investing significant sums of money.
NFT Scams: the Bored Ape Yacht Club Instagram
Another fake NFT scam occurred in April 2022 when hackers broke into the Instagram account of the Bored Ape Yacht Club, one of the most popular NFT communities. This allowed them to promote the minting of a fake new NFT which they would give out for free and asked users to connect their wallets. Overall 133 NFTs valued at a total of $2.4 million were stolen from 44 people as part of the scam. This meant that it was one of the largest and most effective fake NFT scams in Web3’s history so far.
The moral of the story is that if something looks too good to be true, it probably is.