Why NFTs Are More Than ’Just A Piece Of Art’
The first known non-fungible token (NFT), ‘Quantum’ came into existence in 2014 and was sold for just $41. NFTs started gaining popularity between 2020 and 2021 and since then, interest in NFTs has gained momentum reaching global mainstream media. However, as popular as it has become, there is still uncertainty as to what it is, what the purpose is, what value it holds and why there’s such a surge of NFT art.
As a type of smart contract, an NFT has qualities that make it particularly useful for the storing of ownership information of assets, albeit digital or physical. More or less, what it means is that this NFT can act as an ownership certificate for the said asset, but only that specific asset. And through blockchain technology, the ownership of this can be immutably verified.
An NFT is also completely unique, hence the naming Non-Fungible Token, there can only be one of each. This is opposed to fungible tokens, which means that all the tokens that exist are exactly the same and can be traded typically for the same value. An example of this would be Ethereum or Bitcoin.
Another non-blockchain example of something fungible is the South African Rand. The R100 in my wallet is exactly the same value as the R100 in another and I would have no problem swapping the two notes as the value remains the same.
Now when it comes to Non-fungible items, I might not be that keen on a similar swap. A non-digital example of something non-fungible is a painting by world-renowned artist, Portchie. A piece of artwork created by Portchie that I own might be rarer and hence more expensive than another and as such, I would be reluctant to trade it one for one. I could however be keen to sell my non-fungible painting for something fungible (like Rands).
Not only does the physical world have a use for fungible and non-fungible stores of value, but it is also essential for commerce.
Think about title deeds of properties or car registration papers or tickets to events, they are all non-fungible. It would be hard for the world to function without non-fungible records. Now imagine we could have these immutable records or elements in a digital world. And hence the birth and excitement around NFT by those that understand the long-term, real-world benefit, that this will bring about.
When trading non-fungible items in the real world, one of the biggest problems has always been the transaction between two non-trusting parties. To help facilitate these transactions, lawyers are typically introduced, sometimes on both sides of the transaction, to facilitate the transfer of the non-fungible element in exchange for the fungible item (money in most cases) via escrow and trusted parties (lawyers typically).
Whilst this process has become somewhat efficient for certain types of transactions, the cost involving a lawyer (or other trusted party) has always been prohibitive. This is where the power of NFTs, fungible tokens (such as stable coins) together with smart contracts and blockchain technology, opens up the door for inexpensive and efficient transfers of non-fungible tokens. Now if we let these tokens (or smart contracts) represent ownership of a real-world item, such as art or property, and suddenly you open up the capability to trade with unknown parties in a safe and secure way, without the need to involve trusted parties.
Whilst NFTs have been around for some time, we are yet to see more real-world applications. Stellenbosch-headquartered, Fanfire has built some innovative solutions, piloting the tokenisation of wine.
By buying an NFT that proves ownership of a bottle of wine, the purchaser buys the right to redeem the wine at a designated storage facility. That means that for some time, the wine will remain at the perfect temperature, in a wine cellar and once the owner is ready to consume the bottle, he/she can claim the bottle by exchanging the NFT for the physical bottle. Should the owner of this NFT no longer want the wine, they can sell this NFT on a marketplace which will give the new owner the right to claim the bottle. And given that premium wine prices increase between 9-11% per annum, this is a very interesting alternative investment class that is now accessible to a wider audience and in an environment where it’s easier to create liquidity for the asset through online marketplaces.
But isn’t an NFT a picture on the internet?
An NFT is simply a type of smart contract (typically ERC-721 or ERC-1155 token standard) that in its simplest form, assigns ownership to a specific wallet and has metadata (additional information that is stored on the blockchain). Most of the better known NFT project’s smart contracts point to an image file in IPFS (InterPlanetary File System) or in some cases such as with CryptoPunks, the image is stored on-chain (in the metadata) hence the reason for the low quality of those images. What’s more, each image is then typically used by its owner as a profile pic (PFP) in many of their online engagements with others. This serves as a form of viral marketing for the project. If you see someone you respect on Twitter flashing a picture of a specific NFT project, you might want to join that project as well. And whilst this might sound strange, it’s not a new concept. Brands have been doing this for years: Tiger Woods wears Nike while playing resulting in golfers around the world who love him to do the same.
Now whilst the image is but one part of the NFT primarily used for marketing, many early creators understood that NFTs can function well as membership cards to digital communities. Bored Ape Yacht Club (BAYC) is a great example of this. The project generated 10 000 unique apes that give owners access to a community of bustling creatives, artists and builders. All working together to create more value for their owners. Owning one of these NFTs has become the online world equivalent of owning and wearing a Rolex.
Trying to replicate the success of BAYC, thousands of other projects popped up overnight, most of which launched at prices and eventually lost close to all of their value. This misunderstanding of what NFTs are and what it is one is buying has led to a lot of people losing substantial amounts of money. But as with any new industry, the dust will settle and then the real utility will come to the fore.
What about NFT art?
Another interesting use case for NFTs is NFT art. NFT art is simply a digital creation that can be owned. The most common question to this statement is “Can’t I just save the image to my device?”. Well, you can, and you can also make a print of the Mona Lisa in your house, it might look pretty, but it isn’t the real thing, and it doesn’t make you the owner. And that’s the point of digital NFT art. We are moving to a world that is becoming more and more online and digital art and collectables are going to play a role in it.
With Facebook’s pivot towards the Metaverse, even renaming their company to Meta in the process, it is foreseen that digital collectables will be one of the backbones on which the Metaverse will be built. Think about the clothes you wear, the paintings in your house, etc. In a digital world, these will all be digital collectables.
Now for artists, musicians, and digital creators alike, the utilisation of NFTs means that it eliminates the middleman that usually comes in the form of curators, record labels, galleries, and art dealers who decide what artists and their work are worth.
Technically, anyone can create an NFT. Artists, gamers, brands, and musicians all have an opportunity to create NFTs and offer them for sale ensuring that a larger part of the revenue share ends up with the creator. It is opening up an entirely new economy!
Moreover, due to the smart contracts on Ethereum being turing complete (meaning it can run complex computational logic on the contract itself), it opens up an array of creative revenue sharing and fund distribution mechanisms. One of which is royalties — a percentage of every sale of their art — the smart contract can have coded into it, a requirement to pay a fee every time an NFT is transferred from wallet to wallet. The smart contract automatically collects this fee and sends it off to the creator’s wallet.
Over and above these new mechanisms to trade enabled by blockchain technology, NFT art also offers artists the capability to create within a new medium of art, never before possible. Like South African artist, Portchie, who recently launched a collection of generative canvas art through NFTs called ‘Cycling by the Riverside.’ Portchie is well-known in the art community and has created a reputable name and has sold more than 18,000 original artworks. In his first NFT project, Portchie hand-painted several individual elements that were made available to an algorithm to choose from by means of weighted random selection, to create a unique scene for each person minting. This gives the collection the option to literally create trillions of unique NFTs each featuring different cyclists, chickens, trees and flowers or a unique combination of them. For his first NFT collection, Portchie created 1000 such NFTs, giving each owner a unique scene. What’s more, to add to utility, each “minter” (that is someone who participated in the launch) will receive a complimentary print of his/her purchased art.
A word of caution
As the popularity of NFTs soars, like anything else, it also brings opportunities for fraudsters and scammers alike. For the most part, victims fall prey when they are clueless or lack adequate knowledge.
To avoid this, it’s important to first get a thorough understanding of NFTs. Once you have sufficient knowledge of the ins and outs, it is then imperative for buyers to determine reputable marketplaces to buy from. Some of the more popular marketplaces include OpenSea, LooksRare, SuperRare and Rarible.
Among other factors, buyers should look at the number of transactions, community size, whether the publisher is authentic, the floor price, and aspirational value. It is also necessary to conduct due diligence on the creators, theme, or market potential, with a high return possibility in mind.
Creators who are open about their identity are known as “doxxed” and this is normally a positive sign, whereas identities that are concealed or use pseudonyms carry with them a certain level of risk.
Once you own a piece of NFT art, how do you enjoy it?
As this is a digital asset, you cannot touch it, but there are several ways to enjoy the art you have just purchased. If the image is of high resolution, such as Portchie’s, an old-school way of enjoying it would be to have it printed. More currently, you would find all major screen manufacturers are either working on or have released mechanisms to display NFT art and as such one can use a digital screen to display art. Instagram and Facebook have both launched features to post original NFT art with a special marker highlighting the authenticity of a piece of art.
And the most exciting way to enjoy it in the metaverse is by viewing it in virtual galleries in the many virtual lands like Decentraland and South Africa’s very own Africarare.
The world of crypto art is growing tenfold and whilst the current bear market conditions have seen trading activity decrease substantially, it does provide not only new opportunities for both artists and collectors but fresh ways to think about producing, purchasing, and auctioning art.
NFT art hit mainstream news over the last year, with several high-profile sales garnering millions of dollars. For example, in 2021, Everydays: The First 5000 Days was sold for $69.3 million.
According to research from Finder.com, 8.3% of South African internet users currently own an NFT and this is set to double sooner than expected by bringing the traditional art world to the NFT space.
This article was written by Renier Kriel who is currently a strategy consultant