A Bullish Case for NFTs
I have been an active art collector over the past 7 years as well as an active participant in the crypto space over the last few years. I believe I have a helpful perspective to share while also wanting to learn from others. This is by no means a comprehensive article on every point, but I would welcome comments and feedback.
For most of this article, I’ll be focusing on ‘art’ NFTs, but many of the arguments apply across the spectrum.
I have been thinking about NFTs ever since I first came across the idea last summer. I was lucky enough to speak to Duncan Cockfoster from NiftyGateway at the time, and his excitement around the idea caught my attention. Once I discovered what they were, the idea immediately resonated.
What is an NFT? To me, it is proof of ownership. In some senses, it is separate to the artwork itself, like a Certificate of Authenticity (COA), yet integral to it at the same time.
The idea of transferrable and provable digital ownership- outside the traditional barriers of a gaming platform- seemed natural to me. Many people seem to baulk at the idea, viewing it with derision or cynicism. They laugh at ‘ownership’ when they can screenshot your piece. I believe this, partially, misses the point.
I find NFTs, and the arguments against them, interesting for multiple reasons: transferrable & provable digital ownership, scarcity, opportunities for artists to experiment with new mediums, the new audiences it opens up to art & crypto and the protections it can give artists are all exciting.
I equally wanted to cover a few thoughts here on; ownership & ‘screenshot theft’, valuations vs traditional art and market maturation.
Ownership & authenticity
Historically art ownership is proven by provenance and possession. 9/10ths of the law and all that. With NFTs you can definitively prove who owns the piece. This is the part I think the ‘save image as’ fail to understand. Part of the lure of art, for many, is ownership. You can print off all the high-quality images you want of a Mondrian, or perhaps in the future a Beeple, but you do not own it. There are a million and one posters of a Monet or a Rothko, but again you do not own it. Even if we are talking editions, the same holds true. There is scarcity and pride attached to the label. I can buy a Damien Hirst edition of 50 and be proud to own that. You can hang your internet-copied printout and be proud and enjoy the image, but you cannot conflate the two. Some people will not understand this point. I think that is fine, but then this market is not aimed at them.
In a world that is increasingly digital, increasingly based online, I do not think it is farfetched to say that people want to own something that exists in that space. It’s already happened with skins in games such as Fornite, but you are at the mercy of a centralised organisation. Your character skin does not exist outside of that realm. NFTs are the next layer of digital ownership.
Looking at the exciting startups in the space already being built to help people share and curate I am further encouraged in this belief. Showtime created by Alex Masmej is a cool platform where you can share and display your favourite digital art. People like Metakovan have built galleries and museums in Decentraland, Somnium Space and CryptoVoxels. It may be niche, it doesn’t make it unimportant.
NonFungible.com release their fantastic yearly NFT report and one image that stuck with me is below. Look at the vibrant ecosystem being created:
Provenance is something else entirely. It is important in the art world. People want to know their piece is real and if possible they want to know who owned it before (sometimes a notable past owner can even add value! The history becomes part of the piece). Traditionally this is largely done via COA’s (Certificate of Authenticity). If you own a Banksy piece right now and, for whatever reason, you do not have your COA you basically have one option- you send it to Pest Control (essentially Banksy's office) for authentication. (There are appraisers who can advise & will give you a high degree of certainty, but a COA is not issued). This process, if it's even available, costs time and money & if you buy a piece without it, you may have bought a fake, or if you want to sell it on the piece can be valued at a lower price.
The same applied to Andy Warhol pieces, however, the Warhol Foundation was dissolved in 2011 due to the excessive legal costs they were exposed to over the years from overzealous collectors.¹ Similar events have happened with Basquiat & Picasso’s authenticators.
NFTs remove this issue, you can immediately look up provenance, past owners, current owners and sales information connected with the piece in question. I think that is really exciting, to be able to see an immutable history of the piece you are buying is a great option. Granted, this won’t be necessary for every piece, but it's nice to have the choice.
The opportunities for digital creators
I’m also excited at the prospect of a new livelihood that was not possible before. Yes previously digital artists could make a living, but not in this manner. They are able to accrue a value to their work that was simply not possible before. This creation of an economy is to be applauded. To give creative people the outlet and opportunity to make a living in a way they couldn’t previously is so exciting to me. Look at the $370,000 drop that FEWOCIOUS achieved on their 18th birthday² or the $1m they achieved in a collab with TwoFeet³ (I’m not sure how anyone could begrudge their success, they seem so likeable).
Equally, it is great to see artists be able to create on a new medium. I have no doubt we will continue to see more traditional artists be drawn to the space and to experiment in ways we haven’t seen yet. I look forward to some of the weird and wacky creations that come out of it. Art is about experimentation after all. The crossovers it allows are demonstrating important incremental steps into the mainstream. When Beeple is having a piece auctioned at Christies things have changed!⁴
Another perhaps more niche point I am excited about is Artists Resale Rights (ARR). While NFTs do not solve this problem completely they do improve the situation drastically. It is my understanding that on direct private sales they cannot be automated, but on platforms such as NiftyGateway they can be programmed in so the artist collects their dues. I am currently unsure how this works across platforms or on places like SuperRare or Opensea but expect it is similar, and if not would encourage them to explore this. For those unaware, art often has ARR attachments that entitle the artist to a % of the sale that artwork is sold on in the future, this applies to every future sale. This amount changes from piece to piece, and laws on enforcing it depends on jurisdictions.⁵ Often artists miss out on these payments or can be left trying to chase them for years to get what they are owed. If NFTs are able to automate a larger % of these payments to go through, I think that is a hugely positive development and a step forward for artists and creators. It is an area that I anticipate further innovation in. We are going to be able to protect and support creators in ways that were never possible before.
Valuations and market maturation
I think valuations are an interesting part of the market. In traditional art there are a huge number of things that affect valuations. Provenance is always important, depending on who has owned the work previously this can price the work at a premium or a discount. If it’s an original piece from an artist, canvas works may sell for different prices to their paper works, the size of the piece can make a difference, condition reports are important and so on. If it is an edition you look at the print house, the edition size, is it a giclee or a silkscreen print for example. The NFT space appears to be different. You can have ‘attributes’ such as in CryptoPunks or Hashmasks, but equally, there is a price on scarcity and desire. Art is by nature an illiquid market, and pricing can be notoriously difficult.
I believe valuations are the most difficult part, this market is so nascent, the valuation model needs time to evolve and find its feet. You can look to the traditional model for ideas, but it is not all transferrable. Attributes will be a large part of this, and maybe hidden ones in the case of Hashmasks!
To give us some idea as to how early we are, the traditional art market is worth an estimated $67 Billion (this is likely low with areas of the private market hard to price), the NFT market is estimated at only $250 million.⁶
When you look at the increasing volume of unique active wallets you can see the growth coming into the space at the end of 2020 which, anecdotally from social media, looks to have continued strongly into 2021. While it is still relatively niche, these are all encouraging trends to me.
It is my opinion that NFTs will become commoditised in the way art has, where the great majority of art is essentially $-value worthless but holds intrinsic joy and value to the owner. There will of course be top tier creators who command top dollar for a multitude of reasons. My hope is that a large part of this can be valued on the image, and how people feel about it. Perhaps a pipe-dream, but one worth having nonetheless.
Art has always been a form of investment, and now more than ever that is the case. In the ‘real’ world, fractionalised art ownership has been experimented with (and met with problems). Galleries such as Maddox in London offer their art investment services,⁷ typically focused on blue-chip artists. People are becoming increasingly open to new investment opportunities & want to own assets, not hold cash, a concept we are all familiar with in the crypto space. NFTs offer a new chance for investment in this respect. While some people may not like this, it is naive to think that speculation will not continue to occur in the space.
Art is historically uncorrelated with stocks & bonds. It remains to see if this the case within the crypto space, but I did note how $NFTX remained relatively unphased by the large pullbacks these past few days. NFTs can possibly offer further diversification options, while still presenting large upside potential.
In some senses, I am reminded of Nic Carter’s argument around BTC energy usage (apologies in advance for butchering this Nic). It is only a waste of energy if you do not buy into the principles or belief of Bitcoin. If you do believe in it, then it is essential and valuable. In many ways, this applies to NFTs, and art in general. If you think a piece is worth $1m and someone else agrees and is willing to pay it, then it is. Obviously, there is value in art past $ valuations, but it is helpful to communicate a point.
NFTs as a route to adoption
One quick point I wanted to touch on, I think NFTs are a great way to pull people in using crypto without even realising it. Look at the success of NBA TopShots, with over $106m in sales over the past month. These types of offerings will attract people who otherwise wouldn’t be bothered about the space. Do I think all of these will become DeFi degens and power-users? No, but having another funnel and another ecosystem created on top of these protocols can only be a good thing for adoption. Can you imagine the adoption if KAWS decided to release an NFT drop? The continuing development of games and collectables will be a great thing to watch. I am excited to see the launch of Illuvium from Aaron and Kieran Warwick, the brothers of Synthetix founder Kain. The best is yet to come.
In closing, I think NFTs are and will continue to be an exciting innovation in the space. They are not for everyone, the same way one person will pay $10m for a piece of art and others won’t even spend $10. As a ‘collector’ they make sense to me: provable ownership, scarcity, desirability (for myself and others) and an opportunity to support artists. I do believe they are here to stay. They will open up a new life for digital creators, and a new wave of collectors that had no interest in traditional art. They will draw people into the space and continue to create an ecosystem that wasn’t possible with the old paradigm. We are still early and there is innovation yet to come. Maybe the old masters are here already, or maybe they are yet to be discovered :)
This piece is not meant to be exhaustive. I do plan on doing some deep dives on the topics discussed above.