NFTs - A masterstroke or minefield for monetizing digital masterpieces?

Transformational, disruptive, innovative – NFTs have solidified their place as part of the mainstream conversation, from brand investment in the immersive virtual Metaverse to the very real art world – but what does the future hold for investors, in particular those who invest in CryptoArt?

A non-fungible token (NFT) is a unique digital asset that can be exchanged for a different digital property; in its simplest form every NFT is a unique token that can be transferred on the blockchain. For clarity, the NFT is typically not the underlying digital asset or artwork, it is a record of “ownership”.

This record is stored on a decentralized blockchain, and ‘acts’ as a certification of ownership of the digital asset. Transactions are stored on a digital ledger, predominantly on the Ethereum blockchain, and provide public proof of ownership and intellectual property (IP).

The issue that arises in the art world, especially for digital artwork, is that digital content is widely available to be replicated. Therefore, authentication of the original is critical for proof of ownership, and NFTs prove that the piece of art is owned by an individual, no matter how many copies of that piece are made.

What this means for investors is that they hold the rights to the artwork – and can sell the rights to the piece in the future. Earlier this year, Mike “Beeple” Winkelmann sold his work “Everydays: The First 5000 days” for $69m. In this instance, the buyer did not buy the physical work, but the rights. Jake Brukhman, founder of cryptocurrency investment company CoinFund stated, “You’re not buying the picture”, “you’re buying the property rights to the picture.”

But, owning the NFT of the artwork does not mean the owner holds copyright, the artist still retains these rights – think of it as the signature on the piece of art.

A recent report from Chainalysis has highlighted that users have sent nearly $27bn in cryptocurrency contracts associated with NFT marketplaces during 2021. So, why the sudden boom in NFT investment in art? 

It’s partially down to it being a (relatively) new concept with large amounts of coverage in the media, and partially down to “collector” instinct, with expectations that the artwork will hold value and sell for more in the future. It follows the same business model as physical art, but there is a wider virtual market where pieces can appreciate – if a piece of artwork goes viral/is shared more, the principle is that the piece will increase returns on investment. Owners actually want people to copy and share their assets to increase awareness and thus the value. But to paraphrase the great Jeff Goldblum in Jurassic Park, “Just because we can, doesn’t mean we should.”

Another feature is that previous owners, and therefore the originator, are able to take commission on sales whenever ownership of an NFT is transferred. This perpetual monetisation also makes it attractive to the artists. The intersection of art and code is also seen as an opportunity for artists; one of the more popular types of NFT is “generative art” that relies on randomness, and sometimes interaction with the blockchain itself, to create the art in question. Because of this, the perceived rarity of certain works is increased.

However, anyone can mint any digital asset as an NFT. It’s as easy as going to a marketplace and uploading a picture, meaning there are no legislation or authentication mechanisms in place for anyone to claim to be an originating artist, or claiming a piece of art as their own. ‘Banksy’ NFTs that have sold for close to $1m raised big questions regarding authenticity, so value must be derived from assurance that the artist minting the NFT is who they say they are, and artists need to use existing copyright laws to protect their own creations.

Additionally, one of the largest NFT marketplaces, OpenSea, has recently come into disrepute following an admission of insider trading, further adding fuel to trust issues.

Sustainability is also an issue that investors should be cautious of. NFTs run on blockchain technology, and transactions consume a large amount of processing power, with some artists claiming CryptoArt consumes more electricity in 10 seconds than powering entire studios for two years. 

It is difficult to tell what the future holds for the crypto-fuelled world of NFTs and digital art. After all, predictions have been made of Bitcoin’s impending demise for years now. One of blockchain’s tenets is that of digital trustlessness, due to the transaction processing and validating mechanics in place.

However, it appears that real-world human virtue of trust will still remain a critical issue. Buyers will need assurances that the NFT seller is minted by an artist that owns the rights to the asset and the role of a centralized marketplace will continue to play a crucial role in building confidence in this virtual sector as its popularity grows. In other words, there’s still a role for trust in a trustless system.