Insights

What connects The British Museum, Paris Hilton and Damien Hirst?
Answer: they have all created NFTs.

Although NFTs have been around for just under a decade, they only entered the mainstream artworld consciousness recently. 2021 was a landmark year for NFTs, with over $24.9 billion in total sales in comparison with $94.9 million worth of NFTs sold in the year prior. It is not a coincidence that cryptocurrencies, such as Bitcoin (Btc) and Ethereum (Eth), the two main cryptocurrencies, also surged in the last year, reaching new all-time highs. The result: a heady mix of crypto investors and readily accessible NFTs, which can be bought at the push of a button. But behind the big numbers there is much price fluctuation as well as concerns surrounding security, creating an unpredictable and often risky environment for new collectors.

Damien Hirst (b. 1965) with artworks from The Currency series

So what are NFTs? NFTs, or ‘non-fungible tokens’, are unique digital assets that represent a wide range of unique tangible and intangible items. NFTs are ‘minted’ on the blockchain, a distributed database which stores data in blocks that are then linked together via cryptography. NFTs can be stored in a ‘wallet’, such as Metamask, which can be used to interact with the blockchain to buy and sell NFTs. NFTs can represent a digital asset such as a jpeg, but they can also represent a rare pair of trainers, a physical painting or really anything ‘collectible’.

Metamask, one of the main crypto wallet providers

The Cryptopunks are often touted as the NFT project which sparked the 2021 boom. Created in 2017, the Cryptopunks consist of 10,000 digital characters algorithmically generated through computer code, and they were originally free to owners of an Ethereum wallet. Fast forward 6 years and the floor price – a term used to describe the lowest price at which an NFT in a series can be acquired – is now 67.2 Eth for the Cryptopunks (the equivalent of $200,000 at time of writing). The rarest of the Cryptopunks, no. 5822, sold for $23.7 million in February 2022 to Deepak Thapliyal CEO of Chain Protocol (a cloud blockchain infrastructure provider) and collectors of these characters include Snoop Dogg, Jay-Z and Jason Derulo.

Cryptopunk no. 5822, sold for $23.7 million at OpenSea in 2022

The highest price for an NFT thus far was set in March 2021 when Mike Winkelmann – the digital artist known as Beeple – became the third most expensive living artist, after Jeff Koons and David Hockney, with his digital collage The First 5000 Days selling for $69 million at Christie’s. The buyer, Vignesh Sundaresan, aka ‘MetaKovan’, revealed himself soon after the sale and is the founder of MetaPurse, a crypto-exclusive fund which invests in early-stage projects.

Beeple (b. 1981), The First 5000 Days, sold for $69 million at Christie’s

A similarly high-profile collector, Justin Sun, founder of TRON blockchain and now diplomat for Grenada, was the underbidder on The First 5000 Days and has since been on a buying spree of traditional artworks at auction: Picasso’s Femme nue couchée au collier (Marie-Thérèse), 1932, purchased for $20,113,793 million at Christie’s in 2021, and, most recently, Giacometti’s Le Nez, purchased in the Macklowe sale at Sotheby’s, New York for $78.4 million. Often these collectors reveal their identity to promote their own projects in the crypto space, it can be argued, and create upside for their own market and currency, but there is also an evident desire to have a seat at the table in the closed-off art world.

TRON founder Justin Sun with Pablo Picasso’s Femme nue couchée au collier (Marie-Thérèse), 1932, which he purchased for $20,113,793 million at Christie’s in March 2021

How an NFT is priced is dependent on the kind of asset it represents. For new NFT projects featuring algorithmically-generated artwork, the value is based on the rarity of each artwork determined by particular features. If a hat only appears in a select few of the artworks, for example, then their value will be increased. On the other hand, if the NFT is backed by a physical asset, such as an original artwork, the value is more likely to reflect the real-world price of that artwork. There are a number of prominent marketplaces that list NFTs such as Opensea, Superrare and Nifty Gateway. New NFT projects are often discussed by crypto collectors on specialised channels such as Discord and Telegram as well as Twitter. With many prominent artists including Damien Hirst and Tom Sachs now embracing the technology, the barrier between the blockchain and traditional galleries and auction houses is blurring.

Behind the headlines of multi-million-dollar sales, there is an ecosystem of daily NFT sales at a lower ‘retail’ value level which range broadly from virtual land in the Metaverse, a network of 3D virtual worlds, through to physical memorabilia. A number of the most innovative projects at present seek to bring together the traditional art world and the technology of the blockchain, among them Particle, which sold a physical Banksy through fragmented NFTs, and the project at 0xArt, which will offer physical blue-chip art through individual NFT deeds of ownership.

Banksy (b. 1974), Love is in the Air, acquired by Particle Collection from Sotheby’s in May 2021 for $12,903,000 / Eth 3,408.19, and sold through fragmented ownership NFTs

In addition, there are projects involving a number of museums, including the British Museum (partnering with La Collection), which have engaged in the NFT sphere, offering tokenised versions of their collections, and last year saw the first donation of an NFT, Cryptopunk 5293, to the ICA Miami. What connects all of these projects? They provide new crypto collectors, who often form in investor groups called DAOs (Decentralised Autonomous Organisations), with the opportunity to participate in the art world, although it is questionable whether there is real-world, longer term commercial value in hi-res images of museum collections.

The British Museum Hokusai project with La Collection

The emergence of NFTs has found resistance, not least from the traditional art world, whose members question the artistic strengths of high-profile projects such as the Cryptopunks and Bored Ape Yacht Club. There is also extreme price volatility for collectors of NFTs, meaning that losses can be as substantial – people in the industry often talk of ‘rug pulls’, when NFT projects are launched and then the price drops immediately after release.

M. Kruppa, C. Criddle and T. Bradshaw, ‘The great NFT sell-off: has the digital collectibles craze hit is peak?’, The Financial Times, 11 March 2022

In addition, environmental campaigners have identified the large amounts of energy used to mint NFTs. Ethereum – one of the main currencies used to acquire NFTs – is currently transitioning to a more eco-efficient transaction model, and sellers of NFTs are seeking out more eco-friendly networks, but the impact on the climate remains a big issue. Concern is also raised about preserving the integrity of physical artworks, most recently when Damien Hirst’s ‘The Currency’ project offered buyers the option to keep the NFT provided that the physical was destroyed.

J. Jones, ‘The Bored Ape NFT craze is all about ego and money, not art’, The Financial Times,
4 January 2022

Another consequence of the decentralised, borderless structure of the blockchain is that regulation is harder to enforce, and laws relating to Intellectual Property and Anti-Money Laundering are likely to play catch up with the technology in the next few years. Indeed, sources of funds are often difficult to trace in the main NFT marketplaces. At the same time, NFT collectors have fallen victim to theft of their digital assets, as well as being conned by counterfeit versions of high-profile NFT projects such as the Bored Ape Yacht Club, meaning that collectors must be vigilant in the current marketplace. There is also the simple risk of human error, with the loss of a wallet ‘seed phrase’ (a 12-to-24 word phrase unique to its owner) meaning that NFTs can be lost. One solution is to take the collection offline in what is termed a ‘cold wallet’, but it is clear that there is much to be done to protect property on the blockchain.

A ‘seed phrase’ on the Metamask network which must be written down and kept securely

The future of the NFT market is difficult to predict, even within the next year, as the technology and community develop at such a rapid rate. Some point to NFTs as a useful tool in tracking ownership of ‘real-world’ assets, such as blue-chip physical artwork, jewellery or even houses. Imagine linking your Metamask wallet at an art fair and immediately acquiring an artwork, for example. As Snoop Dogg writes: ‘It’s a big moment and a big technology that is changing the way artists do business and connect with our fans. I am excited about it’. There is much to look out for in the future and it is still early days when it comes to what might happen with NFTs and the blockchain. What is certain is that it will be interesting!

 

John Swarbrooke, Senior Specialist, 0xArt and Advisor, Modern, Contemporary and NFT Art