NFTs are not just hype, they may be the essence of art sale
Huge buzz has arisen over NFTs -- non-fungible-tokens -- due to the purchase of a token representing a piece of digital art by "Beeple" for over $69 million. Is it a craze, or does it make sense?
The Beeple sale may have some artificial nature to it, as it was done with crypto-wealth not for the artwork but because the buyer felt the first big NFT would be of special value -- ie. the idea of NFTs was paid for as much as the art. At the same time, reports suggest over $500M has been spent on the tokens.
NFTs are just special recordings on a blockchain, such as the Bitcoin blockchain. Bitcoin supporters say that bitcoins are "fungible" -- they are all alike and you can trade any one for any other -- but that's not actually true. Each bitcoin transaction (which is what gives you "some bitcoin") is unique. It is only convention that makes people happily trade them as fungible items with value equal only to how much bitcoin they represent. They are even more unique than dollar bills with serial numbers.
Because of that, you can make a special transaction that includes some text declaring it represents something, like a certificate of sole ownership something, like a piece of art or even a digital file. If you trust that certificate, you can pay to get title to it transferred to you. It's not unlike the provenance papers that might come with physical artwork which can be more important than the artwork in an art sale. It's more trustable than those papers in many ways, though that doesn't make it inherently trustable. An artist could promise you they are selling you the one and only token for the art, but they could also sell it to somebody else with the same promise. Of course, if the two buyers were to meet...
There is some analogy to the idea of "signed, numbered prints" which are common in the art world. Prints are just manufactured items, but the artist promises to make only 50 of them, and that yours is number 4 of 50. People have been convinced to value that and pay lots of money. Unlike digital files, though, signed, numbered prints were at least touched by the artist, which people seem to put some value on.
Several years ago, I gave talks on the future of value once physical scarcity goes away thanks to things like nanotechnology manufacturing and digital economies. I identified some key sources of future value -- raw materials, services, cool locations, intellectual property and uniqueness. In spite of having spoken about this, I was still surprised by the quick rise of NFTs, much sooner than I expected.
Today we are almost at the point where a robot could create a copy of a physical painting or other artwork that it would take a microscope to distinguish from the original. Eventually we'll reach the level where you can't do it with the microscope. Of course, works reproduced by machine (like prints) and digital works already have indistinguishable copies.
When somebody pays millions to hang such a painting on the wall, they are not paying that money for the experience only given by looking at the true painting. Some of it is for that right now, but the bulk is for more intangible things. Collectors of course want to know they own something special. People emotionally attribute value to the "original," in particular the thing actually made or touched by the artistic creator. Most of the price is simply to know that what you own is special.
NFTs are only that declaration of uniqueness. For a jpeg image, which can never have any other uniqueness, the NFT is the only source. Yes, you can imagine owning the original hard disk on which a digital work was recorded, but it's a stretch. For many, a personal, irrevocable statement from the artist fits the bill, and that can be digital thanks to blockchains.
As artists have moved digital, they have been keen to find something to represent this, and it seems collectors have been looking too. NFTs seem to have met the need from both ends. Once the novelty has worn off, they will be just like certificates of provenance, for that is what they are. The value will be in the item they certify. NFTs simply allow a whole new class of items -- intangibles -- to be easily certified and sold in a secure way. Due to smart contracts, they also allow some new functionalities. For example, some NFTs demand a cut to the artist if the NFT is sold at a profit to somebody else.
There is risk to an NFT. If somebody steals your keys, they can steal your NFT. Like many bitcoins, the keys can be lost, though if you can convince the artist of this, they might create a new one. If the blockchain on which the NFT is recorded withers away and becomes valueless, somebody could break its security. (A good NFT will provide a mechanism to transfer what it represents to a different blockchain, which you want to do before the existing blockchain dies.)
Something similar to this could have happened in the law. For example, a digital artist could have sold the copyright to a digital artwork, which is unique. Though that expires 70 years after they die.