NFTs, good or bad for art?

By William Entriken

6 minutes

In the beginning there were cats.

A substantial NFT project, CryptoKitties, was released in 2017 which allowed collectors to trade pictures of cats and breed them. Just like the early days of YouTube, sharing on-screen cats proved to be a great exhibition of a coming revolution in digital media. Soon after, many artists and entrepreneurs studied this specific project’s success to learn how they could launch their own similar blockchain products.

These pioneers recognized that building blockchain artwork and other products would require marketplaces to buy & sell, wallets to display collectors’ holdings and good & unified experiences across different products. A standard was created, ERC-721, so that all these pieces could be built independently with the promise that when everybody was done then these part would all work together as one. This specification, is the basis for all modern NFTs and is the reason why NFTs created on one platform can be displayed and traded on other platforms. Starting from zero in 2018, this market now exceeds USD 1 billion in liquidity per week.

The authors’ motivation for working on this NFT standard in 2018 was to make it so that you buy things you can verify product authenticity and other seller claims. NFT and blockchain provide this, and art is one great use case.

How does NFT benefit artists and artwork?

The greatest impact is on newly created art (“digital native”). NFTs give artists new revenue streams, significantly lower gallery fees, and a highly liquid market.

New revenue streams

Nearly all platforms for trading NFTs include a royalty component. This means artists get paid when they originally sell their artwork, and also every time that artwork is resold on one of these markets.

Secondary market sales can be significant, especially a first-edition project from an artist that later becomes well-known. As the piece trades hands two, three, four, or more times, the artist receives a “back-end” commission between 1% and 10% for each of these sales. If the original artwork was priced relatively low, or if the artist gains reputation, this back-end can easily exceed the original purchase price. This transaction fee including the commission is less than half of traditional auction houses and, along with ease of listing, allows for significant market liquidity.

The ease of listing and lack of any curation allows artists to sell artwork NFTs which would otherwise be unable to sell in traditional markets.

Several NFT platforms specifically require artists to directly enroll themselves, without representation or financial intermediaries. The intention and representation to buyers is that payment through the platform goes entirely to the artist, of course less platform fees. Perhaps it is naive for platforms to assume that artists want to directly use these websites; but nevertheless, this is the intention.

Rolling Stone reports that musicians get only 12% of the money the music industry makes.

Platform fees for creating and selling new NFT pieces is typically between 2.5% and 10% of revenue, with 2.5% being the most common. This fee amount can compare favorably to galleries for fine art, and agencies for other creative arts. Payment is also immediate. Of course, artists can expect less services for this lower fee and possibly less exposure.

Highly liquid market

Marketplaces selling NFTs are exceeding USD 1 billion in sales per week. These auctions, and fixed-price sales, can be started immediately at any time or scheduled. And they can happen individually or as part of a “drop” of several pieces simultaneously.

On the sell side, this liquidity is supported by the fact that all, or nearly all, NFTs created using the ERC-721 and related standards can be sold 24/7 on any compatible marketplace. And on the buy side, collectors are able to bid for pieces that are not available yet for sale. In the physical world, it may not be easy to find and contact the owner of a given piece of art. But a main feature of NFTs is that the owner of every NFT is published at all times. A bid made by anybody, anywhere, anytime, will be seen by the owner of a piece even if they did not plan on selling it.

Transferring an NFT to a friend (not a sale) typically costs between a few cents (USD) and USD 20, depending on the network. This is irrespective of the value of the asset, and there are no holding costs.

On top of this, an NFT can be listed simultaneously on multiple marketplaces. An NFT can be on display in multiple physical galleries and for sale in multiple competing digital auctions all at the same time. Gallery owners and the community are still debating if displaying the same NFT art in multiple galleries is acceptable.

Why are people paying money for digital, copy-pasteable art?

From the beginning, non-fungible tokens (NFTs) sent a promise to creators everywhere of a transparent and equitable path forward for releasing art in its many forms. The art market for NFT brings new value propositions specifically because of the direct and verifiable connection to the artist.

Quite a few people have spent between thousands and millions of dollars (USD) to gain ownership and non- exclusive access to what is effectively a profile photo which they can use as an avatar for digital platforms. Several value propositions are at play:

  1. Utility—During COVID-19, a years-long bad hair day, many people are happy to adopt a fictional visual representation of themself. And as we learn more about the impacts of interactive media on self-image, staring at a younger photo of one’s self every day might leave still more people looking for an alternative. Premium profile photos fill this void.

  2. “Flex” (showing off)—Because of transparent NFT marketplaces, it is well known that many profile photo NFTs are valued over USD 100,000. Anybody claiming to own one is representing liquid assets of at least that much. This can be more effective than most dating profile photos that subtly but very clearly show a premium car brand in the background.

  3. Patronage—Nearly all NFT art sales on the primary market are a direct transaction between the artist and the buyer. Buyers can be confident their money is directly supporting the artist.

The good, the bad, and the ugly of NFTs

The good and the bad are intertwined.

Highly liquid markets, zero holding costs and large-scale, free press coverage makes NFTs an attractive asset class for speculators. These speculators provide buying power and support artists with funding. But at the same time, financially-motivated buyers may take away from the art in the art business.

Likewise, the pseudonymous nature of blockchain transactions allows anybody to participate in marketplaces on a no-questions-asked basis. Whereas in traditional art markets, certain people may be excluded due to anti- money-laundering regulations. The traditional art world is not without criticism as to their enforcement of these rules.

NFT platforms typically allow any transaction to go through, totally ignoring regulations in all jurisdictions. But what about market regulations designed to protect and inform consumers? Market and information failures such as self-dealing (buying from yourself to inflate market reported prices), phantom liquidity, “rug pulls” (custodian theft of consigned assets) are all much simpler to execute with NFT than traditional art markets because they are cheaper, and again they are all pseudonymous. While traditional auction houses have hundreds of years of experience and reputation to protect, NFT auction houses have generally relied on their youth as an excuse for ignoring most regulations.

And now to the ugly part.

Originally reported here

Bitcoin, the original Ethereum Mainnet, and other blockchains contribute significantly to carbon emissions. How much emissions? Putting this into perspective, if you purchase a freshly minted Bitcoin and use it to buy a Tesla Model 3, this will contribute more to carbon emissions than if you bought the original Ford Model T in 1908 and drove it on gasoline until today.

The past 12 months

USD 27M in sales in Q1 2018, CryptoKitties were the only thing for sale at that time and so we can compare that market versus today which is up to USD 1B per week.

The NFT art market has doubled in size approximately every 3 months. [kitties]

See Rarity Tools, scroll down, click ESTIMATED MARKET CAP; the top ten of ten are profile photos.

So far this past year we have seen success with “profile photos’’ for sale. This is the largest category of NFTs and includes anything that could be set as your avatar on Twitter or similar platforms. Typically that is a still, two-dimensional image with an aspect ratio of one-to-one and which looks good if clipped into a circle.

This means that people are anthropomorphizing cats (see above) and mostly other animals as their own online presence. There is much room left to innovate on any graphics including eyes and a mouth.

The next year or two

Established music/video artists are represented by levels of management and agencies, so it will take them a little more time to participate in the NFT market, we can expect additional notable NFT releases in 2022 and 2023. In the same way that outsized NFT sales have captured headlines in 2021, we can expect well-known artists across different industries to make headlines with debut releases in the coming years.

The least-inspired artists will take art they already have and resell it exactly as-is as NFTs. A fine art painting can be re-released as an authorized reprint. Those authorized reprints may be re-re-released as yet-again- authorized NFTs. The debate is lively on whether these new series violate the expectations buyers had of the original painting and the authorized, numbered reprints. Also up for debate is whether these additional series of NFTs add to or dilute the value of the originals.

Just when the market starts yawning at yet-another-NFT-copy-of-real-world-art series releases, we will start seeing established artists using inspirations from their own style and adapting to the new medium NFT allows. In other words, artists doing art again.

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