A PRIMER ON NFTS, BLOCKCHAIN AND ART
You’ve probably come across a news item or two mentioning NFTs, the blockchain and stratospheric prices. But the jargon can be dizzying, and understanding how these innovations function together isn't always easy. To make sense of the tech that’s causing waves in art and beyond, Platform spoke with NYU Stern professor of technology, operations and statistics, Dr. Hanna Halaburda. Halaburda revealed how NFTs are like baseball cards, why Bitcoin is different from Ethereum and what NFTs might represent for the future.
What is an NFT anyway?
NFT stands for non-fungible token. A token is a unit, and a non-fungible unit is not interchangeable with anything else. (Cash, on the other hand, is fungible because one bill is interchangeable with another of the same denomination.) And non-fungible tokens can be almost anything within those parameters–a unique physical artwork is also an NFT since it is not interchangeable with anything else.
But the NFTs that started grabbing media attention in 2021 are a digital variety that run on smart, code-based contracts on the open-source blockchain, Ethereum. A digital token's contract contains, as contracts do, the specific terms of sale, including who owns the token, how it can be transferred in the future and the owner's rights to use the file associated with the token. Also contained in the contract is the identifier, called a "pointer," which can be embedded into a digital work of art or other digital file (or asset, if you want to talk finance) associated with the NFT.
Wait, what is the blockchain? And while we're at it, what is Ethereum?
Surprising as it may sound, there is no standard definition for “blockchain.” The term was first used in a 2008 research paper that established the concept for the now famous cryptocurrency Bitcoin. Bitcoin relies on protocols that make it nearly impossible to change the ledger (a finance term for “record”) of transactions that take place using its currency. This makes the blockchain ledger a reliable source of data on transaction history. For efficiency, individual transactions are batched in chronological groups called blocks, hence the name “blockchain.” It's just like how tree rings create a permanent record marked at regular intervals.
Ethereum is one example of a blockchain (different from the one Bitcoin uses) and the primary place where NFT transactions currently take place.
OK, got it. But when did these digital NFTs first come about?
Tokens were originally used in digital games. The very first use of non-fungible tokens was in the game CryptoKitties.
In CryptoKitties, users can breed and sell digital kittens with a unique genome. Each unique kitten is its own NFT. They do not represent anything outside of the game–even if purchased with real-world money. In some cases, several thousand dollars.
But digital files can just be copied infinitely unlike physical works of art. Do NFTs allow you to really own an artwork?
Not necessarily. When people buy an NFT, they often think they are buying the digital file housed inside, and that isn’t always true. All they’re buying is the token. There is no perfect analogy for NFTs, but it’s helpful to think about the relation between the NFT and the asset that it represents outside of the blockchain like baseball cards. If you own a baseball card, that doesn’t give you any claim over the player featured on it, nor does it give you any property rights for the picture printed on the card. Also like baseball cards, there doesn't have to be a 1:1 relationship between NFT and asset. Just as there can be multiple baseball cards for one player, there can be multiple NFTs associated with one digital kitten or work of art.
You could also liken NFTs to purchasing the listening rights to a song on iTunes. The contract gives you the right to experience the song but not to reproduce or license it. One key difference is that you can't resell a song on iTunes, but you typically have the right to resell your NFT.
This made a lot of headlines when Christie’s auctioned Beeple’s NFT artwork for $69 million in March of 2021. But that buyer did not actually receive ownership of the artwork. Instead, they received viewing rights and resale rights.
So if you can’t claim ownership over an artwork (even after potentially paying millions of dollars for it), why buy it at all?
There’s no single or clear answer to this question, but the ability to resell NFTs at a profit (potentially) is one strong driver. Because NFTs have unchangeable, unique code, those who purchase them have verifiable proof (and bragging rights) that they supported an artist’s work and are able to resell it. That can be worth a lot to some people, and it’s even more noteworthy if someone purchases an NFT at the beginning of an artist’s career, allowing them to lay claim to discovering new talent at an early stage.
And, of course, if your NFT includes resale rights, there could be a potential financial upside (as is the case with Beeple).
Are NFTs here to stay? And what could they mean for the future of art?
NFTs are most definitely here to stay, but the prices attached to them are likely a bubble. NFTs are creating a new market, partially fueled by the hopes of how NFTs might provide remedies for the established art market and the ownership of digital files. In the end, this new market may be like the market for baseball cards that exists primarily for the satisfaction of the people participating in it.