Ever since Christie's auctioned off "The First 5000 Days" by Beeple for 70 million US dollars, NFTs have been on everyone's lips. But what do NFTs stand for? How does blockchain work in the art market? And who is buying crypto art? An overview.
It does seem wonderfully ironic. In the last month, crypto-art, that most modern of collectibles, has exploded into the mainstream with major sales at the traditional auction houses – first Christie's, then Sotheby's, with Phillips close behind. However, the buzzword that has mesmerised the uninitiated is a seventeenth-century adaptation from mediaeval Latin, until now used almost exclusively by financial specialists: non-fungible tokens, or simply NFTs.
Fungible – or in this case, non-fungible – sounds almost Dickensian: certainly nothing like a key component of the technology that enables art to be safely traded in the virtual world, moving it out of the realm of the crypto-community and into the wider art market. But a new art form clearly requires a new language, so we have explained some of the important phrases and concepts below.
So-called "minting" means creating new content, particularly an artwork, usually in the form of a digital file. 'Minting' is specifically the creation of a token on the Ethereum blockchain – making the digital object (say a GIF with many millions of copies) into a singular object by listing it on a blockchain.
As in most product fields today, from music to sneakers, a new release is known as a 'drop'. And as in the conventional art world, the number of editions is the creator's choice, stated at the point of sale, and in most cases there will be an 'AP' or 'Artist's Proof'. There may be other stipulations connected to the artwork: it may reproduce or delete itself, for example.
The blockchain was invented by two American scientists in 1991 at a time when domestic computer use was beginning to increase rapidly: in a world where information held in digital files could be easily altered, they wondered, how did you hold onto truth? How could you trust the record without having to trust a central record-keeper?
They evolved a system in which each piece of information was electronically linked to the next, so that any manipulation would be reflected all the way along the chain. The system was deliberately decentralised, so that the blocks of information were not held at a central location or by a central authority, but on a massive, interconnected network of computers, each known as a 'node'.
Any new transaction added to the block appeared simultaneously on every node, making every transaction transparent, like an electronic ledger. A real-world equivalent might be geological strata, with physical evidence of the past laid down at a point in time, to be safely covered by subsequent layers. On the blockchain, each transaction needed to be accepted by consensus, achieved thanks to the computing power of the nodes.
In 2009 an anonymous persona called Satoshi Nakamoto, known as Satoshi (who could be more than one individual and has no assigned gender so is referred to as 'they'), came up with the idea for a cryptocurrency called Bitcoin, introducing an incentive element into the decentralised blockchain system.
Nodes could now compete to verify transactions and 'complete' a block – thus adding it to the chain – by solving an incredibly complex mathematical equation. The winner was paid in bitcoin.
Then in 2014, a Russian-Canadian programmer called Vitalik Buterin launched a more user-friendly interface called Ethereum, using a cryptocurrency called ether (ETH). This enabled the creation of tokens – crucially for the digital art and collectibles market – including the ERC721 now reaching world fame as the NFT (see below). There are now many cryptocurrencies - other examples include NEO and Hashgraph.
Also known as a 'Nifty', it stands for 'Non-Fungible Token' and is powering the new economy of digital collectibles and goods. The word 'fungible' means literally 'to serve in place of', so 'non-fungible' means irreplaceable or unique - the analogy frequently used is that of a dollar bill which can be replaced by any other dollar bill of the same value, while a theatre ticket, for example, cannot be replaced by another theatre ticket – even of the same value. When an NFT is linked to a digital file, such as an artwork, it makes that artwork unique and trackable – the digital equivalent of authenticated provenance. Confusingly, the term "NFT" or "Nifty" often refers to the artwork – or item for sale – itself, rather than just the token itself.
Sotheby's first NFT auction in April was conducted in partnership with Nifty Gateway, a major marketplace for Nifties founded by a pair of identical twins improbably called the Cock Fosters and later bought by a more famous pair of identical twins called the Winklevosses (yes, the ones who accused Mark Zuckerberg of swiping their idea for Facebook). It competes with many other platforms such as OpenSea – an open-access platform where anyone can mint Nifties – or SuperRare, for example, which takes a more curatorial stance and where only those invited can mint.
Someone who owns a computer or computers acting as a node and competes to verify transactions, thereby completing a block, adding it to the blockchain and receiving a cryptocurrency reward. There are two methods of maintaining blockchain records: 'proof of work' (solving a complex mathematical formula to complete the block, a process known as 'solving for the nonce') or the less common 'proof of stake' (putting down a financial deposit, which can be forfeited.)
This is intriguing because in Christie's recent triumphant sale of work by the Wisconsin-born artist Beeple aka Mike Winkelmann, which realised almost 70 million US dollars, the vast majority of buyers had never bid in one of their sales before. In other words, a totally new market was turning out for crypto-art. Some were keen to support digital art in general - and their favoured artist in particular, rather in the manner of an old-style patron. Most, of course, were keen to turn a tidy profit, or re-invest cryptocurrency gains into other crypto-assets. And it's not just buyers who have changed: auction houses themselves appear to have stepped from the secondary into the primary art market, creating digital art superstars along the way.
After a soaring start to 2021, the crypto-art market has entered choppier waters: this seems inevitable after such rapid expansion and will probably settle as the market matures. Artists are using the structure to claim resale royalties and to share risk with other artists by owning shares in each other’s art.
You could argue that an artist of real talent and integrity will hold their value in the long run. In the short term, however, remember Tulip Fever, the South Sea Bubble and the Gold Rush.
Co-reporting by Prof. Amy Whitaker, Assistant Professor in arts administration at the University of New York's Steinhardt School and advisor to Bitmark since 2014. Prof. Whitaker's book Economics of Visual Art is published by Cambridge in Autumn 2021.