NFT 101 For Those with NFT FOMO
Apr 8, 2021
Yesterday my dad asked me about NFTs and what they mean to the art market. Although my dad's an art lover, a collector, and even an artist, he's in his seventies and is lost amongst all of this crypto art hoopla. And I have to admit, I'm not that far behind, as he posed some questions that I could not confidently answer. But thankfully, I know who could provide him, as well as all of us, with a crash course!
So, with this interview, we're doing things a bit differently. My dad, Robert Wehkamp, is going to interview our expert, Claudia Worthington Hess, Principal Accredited Appraiser at Hess Art Advisory. Take it away, dad….
Robert: Great to meet you, Claudia! My daughter says you can help answer a few questions I have.
Claudia: Delighted to shed some light on this the seemingly overnight sensation of NFTs as they apply to the artworld. Initially, I was confused about NFTs and what it means for art, so I researched the heck out of them.
Perfect! So, what exactly is an NFT? What does it stand for?
As a very general description, NFT (non-fungible token) is another way of documenting art in a digital way. It is a kind of token that is unique to the work of art and can do things like document the artist, time of creation, place of creation and other information. It also could give the artist a royalty when it gets sold in the future. Think of something like Spotify for visual creations. Confusion about them mostly comes from people thinking an NFT is an actual artwork. While mostly used for digital art, a physical artwork could also have a token attached to it. Also, current artists could use them to get a royalty from future sales.
As mentioned, NFT stands for non-fungible token.
More precisely, non-fungibile: non-tradeable one for one; unique.
And token: a digital asset of publicly verifiable intellectual property that is authenticated on a blockchain. These assets can be tangible such as athletic shoes, and they can be intangible, such as a concept, a digitally designed piece of visual content.
And finally, blockchain: a digital ledger system that NFTs get registered on.
Ok, makes sense. Then can I buy NFTs with cryptocurrencies?
NFTs use the same technology behind cryptocurrencies such as bitcoin to create a certificate of ownership over a specific digital file that can’t be copied or forged, although there have been issues with theft. So, you could use a cryptocurrency, such as ETH (Ethereum: a competing digital currency to Bitcoin) to buy an NFT.
Then, what's the difference between digital art and crypto art?
Well, here’s my short answer: Crypto art is a kind of digital art that can be treated like physical art due to the ability to have verified ownership of the piece. Just like an original painting signed by Picasso can have its authenticity and ownership authenticated, crypto art can be verified in the same way using an NFT. Just how safe and uncorruptible this system is, is still playing out.
Ok, I get that NFTs are digitally tokenized artworks, so can't I just save a gif, a digital image or video to my computer to enjoy or even own? To me, it seems with digital art, a copy is literally as good as the original. Am I wrong?
You are right. If millions of people can see, download and even replicate digital art, how can it be monetized or made precious? Borrowing from an already established set-up of other collectibles, artists started pushing the concept of NFTs. This is not that new of a concept. The most notable thing that happened, however, is the over $68 million sale of a Beeple design via Christie’s. This work can be still seen, downloaded, saved and viewed even though an NFT attached to it has been sold.
So why was this Christie’s auction different than other ways to already buy digital art?
The run-up and conclusion of that sale brought in cryptocurrency traders into the mix. So, in my opinion, the Beeple sale involved much more than art collectors: It combined currency traders, the auction house, curious people and new-to-the-auction-world buyers. It also racked up proceeds on both ends of the deal for the auction house, the currency traders and the artist.
Allow me to provide a little background: Traders promoted Beeple’s digital design Everydays: the First 5,000 Days, through fractionalized interests on a few of his other designs, before the now famous 5,000 Days work was auctioned.
The run-up in the marketing strategy allowed those traders to hype bidding in cryptocurrencies as it made their own currencies more valuable. Did it have a benefit to Beeple? YES, he received 2% (low by other standards) and a portion on future trading of that work. Further, Beeple also made a cut of the fractionalized artwork the currency traders created before the auction.
But if anyone can copy it so easily (well, easier than to forge an old master in oil on canvas), why is it valuable to “own”?
For lesser known digital artists attaching an NFT is a way to get paid and give a buyer something “unique” as well as potentially get paid for future sales (a lot of people flip their purchases to try and make some quick money). This is also a way to capitalize on an artist’s or an individual’s popularity on the web.
However, since millions can see and download work, digital artistic content creators had to go back to traditional value attributes for art: provenance (historical ownership) and rarity.
They used people’s understanding of scarcity and transformed that concept into a form that might entice a buyer to pay for a widely available image: the concept of a unique NFT. The artwork may or may not be unique, but the NFT is.
This way of “seeing art” is a clash of younger and older ways of seeing art. For many people art means you have something one of a kind in hand. Something to hold and admire and perhaps show off in your home.
For digital art, for the younger buyer, the more “likes” and “views” the better. They have grown up in a click- and-like world and may never have even entered a museum. Now, they can be art collectors and share their collection.
In your opinion: NFTs… good or bad?
Both. The companies, springing up around this technology are still so new. I recommend a lot of research into the companies offering digital currency, how you set up a “wallet” for digital currencies and the companies or individuals that you deal with.
There are good and bad players. The good is for visual artists to potentially get royalties off future art sales like musicians do.
However, a drawback is the energy consumption required to mine crypto currencies, run block chains, etc. is extremely high. For the moment, until big changes are made to the current system (very complicated and involves huge amount of computing power), transacting in this way is not an ecological activity.
So, do you need to jump on the NFT bandwagon yesterday? Will you make millions? Probably only if you are already very knowledgeable about cryptocurrencies, and all of the steps it takes to mine, hold and convert such currency. Also, it’s helpful to know what is currently relevant, as you’ll want to buy such popular tokens. NFTs are changing by the nanosecond. In the future, crypto-transactions will become more explored and safer and hopefully less energy-demanding. This goes for both buyers and makers of digital art.
Got it! I now have a much better understanding of how and why NFTs are shaking up the art market. You’ve truly made future discussions on this topic a little less intimidating! Thank you, Claudia!
Claudia W. Hess, MBA, AAA brings over 40 years of experience as an art historian, curator, entrepreneur, educator, gallery owner, and art collector to her role as CEO of Hess Art Advisory. She is also a Certified Member of the Appraisers Association of America and a veteran of countless blue-chip art fairs.