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24 December 2021

What are NFTs and what is their relation with the art industry?

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Whether you're new to bictoin or a seasoned investing professional with digital currency, you may not yet know too much about NTFs beyond the big headlines that scream about multi-million-pound sales!

So what exactly are these digital assets and what is their link with the art industry exactly? Let's take a closer look.

What is an NFT?

Bictoin, Ethereium, and other digital technologies have been touted as a modern alternative to old-fashioned physical currencies, and now NFTs have taken the spotlight as the digital equivalent for collectables.

Despite usually being a beautiful piece of digital creativity, NFT stands for the rather-less inspiring term, 'Non-Fungible-Token'. In economics, fungible assets are unit-based assets that can be easily exchanged - such as cold, hard cash. For example, swap £20 for two £10s and you end up with the same total value.

When an asset is non-fungible, this simple and equal exchange can't happen - the asset has some kind of unique property which makes it impossible to be interchanged with another, similar thing. Non-fungible assets are unique - a one of a kind, such as a house, a sculpture or a piece of design. You can buy copies, but there will only be one original.

In the digital world, these one of a kind non-fungible assets are like bitcoin in that they can be traded like anything else, but they have no physical form. Instead, you buy the ownership certificate for a physical or virtual asset. And when it comes to art, you buy the digital original which you can then reproduce at will - because you have the original ownership rights.

How do they work?

A traditional painting, sculpture or craft can be extremely valuable for investing purposes because it is unique and only exists in its original form. This contrasts to digital files which can be endlessly and easily duplicated. With non-fungible tokens, pieces of work can be tokenised to create digital ownership certificates. These certificates can then be traded to transfer ownership in sales transactions. Interestingly, this form of digital token can also be created with an accompanying smart contract - perhaps to give the creator a future cut from any token sales down the line in a commission arrangement.

The blockchain link

As with bictoin, the ownership record of digital art investing is held on the blockchain; the shared, public and permanent ledger of transactions that records every crypto-currency transaction. Because the blockchain is maintained across a vast network of thousands of global computers, it is extremely secure and records cannot be hacked into and forged.

How much are NFTs worth?

There has been a great deal of interest in this form of digital creativity, especially as some very high profile pieces of work have sold for hundreds of thousands of pounds. Even some memes have sold for vast amounts, such as the flying Nyan cat meme of 2011 which sold for over £365,000 this year!

And Grimes, the musician and girlfriend of billionaire Elon Musk, sold her own digital painting pieces for over $6 million. It's not just design that is being tokenised and traded either - Jack Dorsey, the founder of Twitter, has received bids of over $2.5 million for the platform's first-ever tweet! Even football cards are being sold for multi-million-pound sums.

The issues

As with all internet-based activity, there is a concern that this form of token simply adds an environmental burden to the blockchain - as carbon is released every time someone carries out an action online - a click, view, transfer or update to the blockchain for example.

There is also nothing to stop people from copying, sharing and reproducing digital designs, even though it will be owned by someone. For example, Beeple recently sold a piece of digital art for $69 million, and the image itself has been replicated and shared numerous times.

In many instances, the copyright ownership is still retained by the creator, so they can continue to produce copies and sell them. But the NTF owner is the token holder and this gives them proof of ownership to the original - whatever that means in practice! A good analogy could be the purchase of an autographed print; a collector piece which special attributes that are seen to be valuable by the purchaser.

Will this form of digital currency last?

Some people think that we may currently be seeing a flurry or bubble of excitement that will eventually burst. Mike Winkelmann, better known as Beeple, has said that there will be a bubble and that it may currently be peaking.

Others simply see NFTs as being official collectables and the modern digital equivalent of trading cards. Traditional auctioneers, such as Charles Allsopp from Christie's has said that the concept is senseless and unlikely to last. But whether or not this is the case, the fact is that some artists are already making money from this type of sale, and with the metaverse now a 'thing', perhaps token owners will soon be decorating their own digital real estate with authentic 'owned' art as the ultimate status symbol!

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