NFT Explosion: Why Do People Buy Digital Art?

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Built on the same technology as Bitcoin, NFTs were a hot topic in 2021. They enable a true market for digital artwork while fueling unprecedented speculation.

2021 could become the year of the explosion of digital art. On March 11, a cryptocurrency investor paid $ 69 million for the digital painting “Everydays: The First 5000 Days” at an auction hosted by Christie’s. The Fomo flashing GIF is currently on sale for $ 2 million, 60 times what it sold for just nine months ago. And a series of 10,000 simple illustrations of monkeys, called the Bored Ape Yacht Club, are collectively worth over $ 1 billion.

This breathtaking bubble is powered by NFT technology, which allows cryptocurrencies such as bitcoins or ethers to be exchanged for digital items. An NFT or “non-fungible token” is a string of digital data that establishes proof of ownership of a specific item that typically exists in the virtual world. This could be, for example, a digital work of art, a financial asset or a patent.

NFTs live on the blockchain, a decentralized transaction-tracking ledger, which until recently was primarily known to be behind Bitcoin. It generated incredible hype while expanding its potential impact across many industries, from finance to art, music, intellectual property and luxury goods.

NFT and royalties

“NFT has really created a market for digital art,” says Robert Zumkeller, a graphic designer who started creating NFT illustrations while a student at the FHNW Academy of Art and Design in Basel. “I’m not sure I found a physical gallery ready to exhibit my digital work, or buyers who would have purchased a physical screen to own it. With NFTs, I could use an online gallery, Superrare.com, to showcase my work and sell it.

Like everything else recorded on a blockchain, art NFTs allow all transactions to be tracked after their initial sale. This tracking allows for a perpetual refund of royalties, Zumkeller explains. Under his nickname, Vicarivs, the young artist will receive 10% on any subsequent sale of his work, which rarely happens with physical items sold by galleries or collectors.

In physical art, there is usually only one original copy (or a few dozen, in the case of fine art prints). The original is distinguished from reproductions, which are sold legally or as counterfeits. With digital painting, the artwork is a data file, which can have an infinite number of perfect copies. This is why a TVN does not include the data file of the work of art itself; instead, it works as proof of original ownership.

Digital versions of luxury products

NFTs have also entered the luxury market, where recently digital twins (a photograph or 3D animation) of collectible watches were auctioned off in the spring of 2021. “More and more brands are looking at the NFTs ”, explains Serge Maillard, managing editor of the watch magazine Europa Star. “First as a useful tool to fight against counterfeiting by ensuring traceability and authenticity. Second, to develop and maintain a closer and more personal relationship with his client, without having to resort to intermediaries.

The Swiss IT security company Wisekey has also embarked on this activity. “Digital twins for luxury goods and art are the main markets so far, but other uses of NFTs are emerging, in particular for certifying intellectual property and identity,” says CEO Carlos Moreira. The company provides NFTs to protect luxury items and recently launched an art marketplace. He plans to introduce his own cryptocurrency and is working on digital rights management projects for music and movies.

In total, the NFT market has exploded over the past twelve months with an increase of 700% from the second to the third quarter of 2021, according to the analysis platform Dappradar. This bubble confirms the speculative nature of cryptocurrencies and blockchain applications; namely: the dollar value of bitcoin has multiplied by 100,000 in ten years.

Speculation and impact

“Until now, design choices over technology have helped fuel speculation,” says Claudio Tessone, professor of blockchain and distributed ledger technologies in the Department of Computer Science at the University of Zurich. “The most popular systems are based on what is called proof of work, where validation and tracking of all transactions by the network as well as the introduction of new tokens only work because users are executing calculations on their systems.

“As the resources spent accelerating at a constant rate of supply, the creation of assets becomes more and more expensive, which fuels an increase in their value, just like the price of oil which rises when it is more difficult to extract. . In turn, this creates incentives to invest resources in the blockchain, which feeds a self-reinforcing loop that spurs speculation and further inflates prices. “

The energy consumption of blockchain applications is a growing concern. As the company desperately tries to tackle climate change, it has simultaneously introduced economic services that consume as much electricity as a mid-sized country like Sweden. “There is some hope that a new architecture for blockchains, called proof of stake, will render negligible the electricity needed to run it,” Tessone said. “A new generation of platforms such as Cardano, Polkadot or Tezos are already running on such systems, but their impact, although increasing, has been limited so far. We’ll have to see.

However, this new architecture could generate new problematic incentives. Until now, cryptocurrencies have rewarded those who set up huge IT farms for economies of scale and more efficient use of energy. Rather, a proof-of-stake blockchain rewards users who invest heavily in it, which fuels speculation. “For now, it’s hard to imagine blockchain without speculation,” says Tessone. “It’s good to see that the community is taking this issue seriously, from crypto-economies for a future with more functional crypto-economies. “

Catherine Tucker, professor of management at MIT and specialized in blockchain, regrets this focus on speculation: “Most of the reports on NFTs have focused on speculative aspects. This is rather frustrating, as it can lead to less experimentation on ideal use cases. “

Not so private after all

One of the concerns is that the anonymity provided by blockchain technology could aid financial fraud. The most obvious are bogus auctions to drive up auction prices and insider trading. In September 2021, Opensea, the largest marketplace for NFTs, revealed that one of its employees had purchased items just before they went up for sale on its front page, an action that would amount to a crime. insider.

Many expert forums discuss the risk of deceptive auctions, when an artist or someone they conspire with buys their work for a large sum to drive up its price and keep the auction frenzy going today. This culminated with the suspicion that the owner of an NFT from the CryptoPunk art series borrowed $ 500 million as a flash loan – a funding mechanism only available on the blockchain – to buy the NFT on his own. before returning the money. While this was a nifty trick to inflate the price of their art, the move also raised suspicions that NFTs could be a perfect tool for money laundering.

Interestingly, specialists discovered these suspicious activities because all blockchain transactions are fully accessible to the public. “The famous cryptofinance privacy is just an illusion,” says Tessone. “It is based on the premise that users create a large number of wallets containing their assets for the purpose of obscuring their transactions.” But in fact, many people choose to avoid this option due to the cost of transactions. And then, of course, there’s traceability, adds Tessone: “Mathematical network analysis can reveal suspicious activity, allowing transactions to be traced back to one person even if they manage many portfolios. This is why bogus NFT auctions are not really safe for scammers, as many commentators say.

Catherine Tucker also cautions us against blaming NFTs entirely, saying that “issues such as insider trading with NFTs are a reflection of the underlying behavior of users in uncertain environments and conditions. persistent transaction costs. I’m not sure it’s correct to blame the technology. In the end, technology is just technology.

Source: University of Zurich


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