NFTs & The Art Use Case - Newsletter #221
NFTs enable provenance and royalties that the traditional art world lacked.
This week, we’re going to talk about the most commonly known NFT use case as we begin to break down NFTs, Smart Contracts, and IPFS. Our view is that this will be the most accessible way for a newcomer to understand NFTs and how this new technology will work before we dive a little deeper.
NFTs & The Art Use Case
By Elliot Koss, Founder @ Future Mints
Technical Level: 🛠️
My first real awareness of NFTs occurred when I heard about Beeple’s historic sale of artwork for $69M. It was a watershed moment for many people, partly for the eye-opening price paid for what seemed to be an otherwise unknown artist.
As it became known to everyone, the digital artwork Beeple sold was an NFT which stands for a Non-Fungible Token. Today, we won’t bother with the details of what an NFT actually is. It’s immaterial for talking about the art use case other than to know that an NFT is a unique, digital thing. I don’t want to call it an asset since it implies that an NFT is always something of value, but as we’ll learn over the next few weeks, that isn’t what an NFT is. So unique, digital thing should work for now.
As you can imagine, an NFT is something that can only be created with blockchain technology, ensuring that the item is unique and can be tracked.
When you think of artwork, there are a couple important elements to keep in mind. First, you want to make sure that the art is authentic. In the art world, there is an entire profession dedicated to verifying authenticity of artwork. One way this is established is via provenance, the history of the ownership of a given piece of art. Provenance requires some series of records, and when it relates to physical artwork, the provenance may establish the sales record, but a savvy thief could potentially create a duplicate of the original and swap a duplicate for the original at some point during the history of purchases. Entire movies and TV series are dedicated to this sort of thing (if you are interested in this genre and haven’t watched White Collar, give it a try).
The second critical concept to keep in mind is that an artist may spend their entire life perfecting their craft, establishing their unique art, and yet never see the benefits of their hard work. Even their heirs may receive nothing, because when an artist sells a piece of art, they receive the price of that initial sale. But over time, if that art becomes more valuable, the artist doesn’t receive any compensation from future sales. If their fame grows and they’re still alive, then the artist can eventually charge more for new art, but after the initial sale, artists receive nothing else.
NFTs are a technology solution that can help solve provenance and royalties, which excited a lot of people, myself included. But as we’re going to outline, these solutions are not perfect, and in my opinion, art is the most boring NFT use case, even though it’s the only one that the majority of people know about. There’s a reason why many people who know what NFTs are joke that they’re just JPEGs, because most people don’t realize this is the most simplistic use case.
The very nature of an NFT is that it’s a digital representation of something, and all transactions are stored on the blockchain. So if you buy an NFT, you can easily look up the history of who owned it before. And since an NFT is a piece of digital art, then the provenance can be easily established by looking at the blockchain. An NFT is unique by design, which means you can’t swap in a forgery. NFTs solve the provenance problem, but this is only for digital art. How do NFTs solve the provenance problem for physical art?
It’s a legit question, and there are a few startups that are tackling this problem. One potential solution is to create a physical item that is directly connected to an NFT. The physical item could then be attached to a piece of art’s frame, establishing a direct connection with the art and the NFT. This doesn’t prevent someone from tampering with the physical item to create a forgery, but a smart entrepreneur could likely find a solution that increases the confidence of authenticity. In any event, there is likely some way to merge physical art with digital tracking of provenance.
Let’s assume that NFTs will eventually solve the provenance issue for physical art while acknowledging that they solve it for digital art already.
Next up is the royalty question. Physical and digital art today does nothing for royalties. Even if an artist had a contract that required royalties, there isn’t a clear way to enforce this with every sale over the lifetime of the artwork. Imagine Leonardo Di Vinci’s heirs still owning (or perhaps previously selling) the royalty rights to the Mona Lisa. Or Picasso. This would result in a lifetime of earnings for each transaction that would benefit the artist and their family.
NFTs present a potential solution where the artist can create a royalty that is paid to the artist (or whomever they designate) each time the NFT is sold. This creates a new potential revenue stream for artists who are notoriously underpaid for their work. It’s a noble ambition, and one problem that NFTs present some form a potential solution.
But NFTs do not fully solve royalties. The digital token that an NFT creates does not natively include a way to govern royalties. Instead, royalties have essentially been enabled at the equivalent of the art dealer level - basically the place where the NFTs are bought and sold. As a result, enterprising entrepreneurs have built new marketplaces that eliminate artist royalties (or make them optional) where NFTs can be bought and sold.
With that said, NFTs are a technology built on the blockchain, so over time, the technology could iterate to include a way to ensure royalties are inherently a part of the technology instead of having to rely on the marketplace.
In other words, NFTs are imperfect today, but there’s a path for them to work as envisioned over time. It’s sort of like the concept of streaming video in the mid 1990s. It was more or less a fantasy until internet speeds and website technology caught up, and nowadays, the majority of people watch the majority of their video content via streaming technology. So just give this some time.
Now, think back to the beginning of this article. I described NFTs as a unique, digital thing. I didn’t call them art.
That was intentional.
NFTs as art is simply one, exceptionally basic use case. This is because the unique, digital thing can have an image or a video as its primary representation on the blockchain.
As a result of the headlines surrounding Beeple, Bored Ape Yacht Club (BAYC), Crypto Punks, and more, coupled with the remarkable visual artwork, most people have simply dismissed NFTs are being purely artwork, with no understanding of the underlying technology.
To put it mildly, they’ve missed the forest for the trees.
Over the next few weeks, we’re going to pull back the curtain and highlight what this forest looks like.
Until then, enjoy looking at the pretty JPEGs that, until about a year ago, were worth millions of dollars. And remember, this is only scratching the surface of what NFTs are.
News of the Week
The U.S. Department of Justice informed a federal judge that it did "not intend to proceed" with a campaign finance charge against FTX founder Sam Bankman-Fried. The DOJ originally indicted Bankman-Fried on eight different counts near the end of 2022, but according to a court filing late Wednesday, The Bahamas did not include the eighth charge in its extradition treaty.
The Securities and Exchange Commission ordered listed companies, including crypto firms, to publish annual reports on their "cybersecurity risk management, strategy, and governance.” The new rule requires companies to disclose any "material" cybersecurity incidents, such as a hack or exploit, within four business days in a bid to deepen trust between investors and public companies.
UNIBOT has been on a tear, rising massively in price as Telegram-based bots continue to gain popularity. The Unibot platform connects user wallets to the decentralized exchange Uniswap using Telegram-based tools, and pays out spot ether to its token holders based on the revenue generated on the platform.