Are NFTs the future for the art world?

Mike Winkelmann, a digital artist who goes by the name Beeple made headlines across the globe when a “Non-Fungible Token” (NFT) of his artwork sold for a staggering $69 million at an auction.

The hoopla around this once little-known use of blockchain technology raises an important question — Can NFTs help emerging and struggling artists make a living?

At the turn of the century, it seemed like digital technology would be the great leveler of the creative playing field — one person with a computer could now do what previously took entire studios full of people and resources. Though this is true in some ways, reality has played out a bit differently.

Take the music industry: revenues from the sales of music have been drastically falling for the last two decades due to piracy. Streaming services were supposed to be the industry’s answer to piracy, turning millions of piracy-based music fans into paying customers.

But the nature of their business model means most musicians make next to nothing by featuring their music on such platforms. This leaves performing artists with only two sources of revenue: events and merchandise. But the pandemic has put an end to the former and the latter requires substantial investments in resources — until NFTs came into the picture.

What are NFTs?

NFTs are unique tokens that certify ownership of digital assets. This information is stored on a blockchain: a shared ledger that would be maintained by thousands of computers across the world and therefore, can’t be forged. In theory, there is no restriction as to what can be tokenised. Twitter CEO Jack Dorsey sold the first tweet ever sent out for an eye-watering $2.9 million. America’s National Basketball Association has made more than $320 million by selling Basketball highlights videos as tokens.

But why would someone want to buy something that they can get for free? Jack Dorsey’s tweet is available for everyone to see and all you need to watch those NBA highlights are a mobile phone and an internet connection. The value of an NFT lies in its uniqueness — when an artist or their representative ‘mints’ one, they are essentially giving the buyer a certificate of authenticity, creating a scarcity of the product and therefore, value.

Think of it as owning a vinyl record of your favourite band, signed by all the members. There may be many copies out there in the world, but yours is unique and special, and therefore, valuable.

Apart from its uniqueness, another thing that separates NFTs from their more common blockchain based crypto-currencies is the number of complex things you can do with it. For example, an artist could set terms within a bitcoin that would give them a commission each time their NFT is resold. This could mean that artists could continue making money from an NFT long after the initial sale.

But there’s a catch. The value of a NFT is based on the belief that it will hold its value (or increase it) in the future.

The reason someone is paying hundreds of thousands of dollars for a video of a basketball shot is because Lebron James is taking it. It is safe to say that they won’t do the same for the video of a high-school basketball player. This means that these tokens are a viable option only for those artists who already have a reasonably large fan-base who are willing to pay for their favourite artist’s digital products.

There is also a hidden cost to the widespread popularity of these tokens — an environmental one. Mining for Etherium, the cryptocurrency that most NFTs are based on, consumes 29.8 terrawatt-hours of electricity a year — about half as much electricity that the entire state of Karnataka will consume in the same period. A study published in the Nature Sustainability journal concluded that mining certain cryptocurrencies consumes more energy than mining the equivalent value of gold.

So, are NFTs a passing fad or are they here to stay?

Well, all signs point to the fact that the market for these tokens are in a bubble that could burst at any moment. Beeple, the artist mentioned at the beginning of his article, was quick to convert his earnings from Ethereum to US dollars.

In an interview with The New Yorker, he compared the current NFTs market to the dot-com bubble of the late 90s. When the bubble burst, a lot of companies were wiped out, but the internet stuck around because the underlying technology was strong enough.

The underlying technology may be strong, but entire fortunes in crypto-currency can be erased with a change in government policy. So if you do mint these tokens for your art-work, remember to convert it into cold hard cash as soon as you can get your hands on it.