Defining a Non-Fungible Token
Is it art? currency? an asset? a bubble? It's probably all of the above. NFT’s are the latest market craze riding the crypto, blockchain, and fintech waves. But what are they, really? Short for non-fungible tokens, NFTs are best summed up as unique and unfalsifiable digital assets. Most NFTs are part of the ethereum blockchain, which they leverage to store the information related to that particular NFT. This stored information is what differentiates NFTs from other blockchain assets like run-of-the-mill cryptocurrencies.
Information in this case is not just about dates or file size: the possibilities are endless. The information tied to the NFTs could be an image, gif, song, or even a recording of farts (someone’s gas has a current highest bid of $183). Lately, most of the NFT craze has surrounded digital art NFTs. The fact that the digital artist Beeple recently sold a collection of his art as an NFT for a record setting $69 million at auction should tell you all you have to know about the hype—it’s real.
Lots of celebrities have been trying to jump on this bandwagon too. Kings of Leon recently became the first band to release an album as an NFT. As part of the purchase, you receive a digital album download, a physical vinyl copy, and the album artwork as an NFT.
Paris Hilton was actually one of the first celebrities to release an NFT way back in August of 2020. She raised $17,000 for charity with her drawing of her cat.
The NFT market boom coincides with the cryptocurrency gold rush. As Bitcoin, Ethereum, Dogecoin and many other cryptocurrencies shoot up in value, NFT investors (or speculators, if you like) are looking to get in early on what they see as another emerging trend that will inevitably boom just like crypto did. Some find it difficult to argue with the NFT bulls, especially because they can point to the $57k price tag on 1 bitcoin and say, “The NFT train is leaving the station, and you’re going to miss it just like you missed the crypto one.” Still, many people (including myself) are understandably skeptical that digital art can be worth the current hefty price tags attached to them. So, is the hype justified? Or is it just a soon to be cured symptom of the feverish crypto markets?
The Future of Art? Not so Fast.
Some artists and auction houses, including Christie’s, welcome the NFT revolution. I’m not convinced by Christie’s position on the lasting potential of NFTs, given that their incentive as an auction house is to sell anything possible for as much as possible. The broader pro-NFT argument is that NFTs finally enable digital art to be bought and sold just like physical artwork due to their authentication processes that very ownership. Here’s why the comparison to physical art is misguided at best.
The NFT naysayers claim that you can just download the digital art onto your computer and enjoy its aesthetic appeal for free, and they’re right. You can do just that. Those in the pro-NFT camp say that there isn’t a difference between downloading the digital art and owning a reproduction of an original painting. The NFT bulls argue that the store of value is the ownership of actual painting itself, not the enjoyment of the copy.
The key distinction here is that digital art is not rival in consumption. If you own a Van Gogh or a Modigliani, then you are the only one that can gaze at that painting in real life while enjoy your morning coffee. One cannot replicate the exact painting. That’s not true of digital art. You can download digital art and stare at an exact carbon copy of the arrangement of pixels that appear on the NFT owners’ screen. If you “own” an NFT, you don’t actually “own” anything, because you can’t stop anyone else from consuming it. The only value that the person who bought Beeple’s art for $69M gets out of the purchase is essentially a certificate that says you payed $69M for digital art that anyone can consume on the internet for free.
Comparing NFT markets to the music streaming industry is more accurate. When you listen to a song on a streaming service, you are consuming the music, but you couldn’t care less about which record label happens to “own” the original master recording of the song. Owning the NFT of a digital artwork image or video is even worse than owning a song’s master recording because you can’t even collect royalties on it when someone consumes it on a streaming service. This reasoning points to the current NFT markets as a speculative bubble.
What are they good for then?
Though they may not be a good store of value, NFTs serve some very useful purposes. One good effect is that they democratize art to an extent by allowing anybody to sell their art online in digital form without having to navigate the complex art markets. Another benefit is that they create fair compensation opportunities for original artists. In the art world, owners of art take all of the profits of a sale, even if they did not create the art themselves. On the flip side, many NFT marketplaces require that a percentage of each sale be sent to the original artist as royalties to ensure that they benefit off of the appreciation of their original work. Thus, NFTs do have some redeeming after all. What remains to be seen is how investors and speculators will continue to treat this new form of technology shaking the art world. Will the hype die down? Or are we going to the digital moon?