Non-Fungible Tokens (or NFTs) are revolutionising how we represent the ownership, validity and scarcity of digital assets – they’ve even prompted a worldwide philosophical debate on the very nature of ownership. But this isn’t what’s most interesting about them. Rather than being novelties, NFTs have the potential to permanently change the way business is done and income is distributed in the art world and beyond. Here’s how NFTs could shake up how individuals, investors (or even corporations) interact with the global art market.
The accusation often levelled at cryptocurrencies is that they are a solution looking for a problem. NFTs, however, solve a longstanding challenge – the difficulty of collateralising intangible assets like digital art, video and audiovisual material. We’re already seeing NFT-collateralised loans emerging. These use a peer-to-peer lending model, where borrowers offer up NFTs as collateral, to be released to lenders in the event of non-payment.
But how much is any NFT really worth? Currently, the honest answer is that we aren’t sure – anyone who says otherwise is purely speculating. The first consideration is, of course, that each digital art NFT is unique. As such, determining the value of one is very much like valuing a real-world piece of art. Two paintings by the same artist painted in the same year can fetch very different prices at auction – regardless of whether an expert valuer priced them similarly. Plus, since the NFT market, especially the secondary market, is still young and immature, there’s not yet enough data for accurate price discovery. This would require significantly more NFTs to be bought and sold.
Boosting liquidity in the NFT market requires solid, interoperable, infrastructure to support buying and selling – meaning auction platforms must integrate with the most commonly used blockchains and interchanges, like Ethereum and Polkadot. This would prevent the owners of digital art from being limited to transferring ownership of their NFT over a single blockchain – a significant barrier to liquidity. What’s more, paying for NFTs needs to become easy, regardless of whether you’re crypto literate. Only once this happens will it be possible to establish a “market price” for NFTs, and convince major financial players to seriously consider using them as collateral.
NFTs in the physical art world
Could NFTs make the jump from digital art to the physical art world? In theory, yes. Art collectors, museums and auction houses have long been plagued with an authentication problem. Undetected forgeries regularly change hands and it’s currently estimated that around 50% of art on the market is fake.
NFTs present a potential solution to this problem. Rather than being a piece of art in itself, a digital art NFT is essentially a crypto asset that includes a “smart contract” based on a specified blockchain which “points to” a specific artwork. There’s no reason that this same format couldn’t be used at scale to tokenise real-world artworks. For instance, paintings, sculptures or other collectables could be embedded with a code or chip that, when scanned, would enable buyers to register their ownership of the piece on the blockchain. Through the same process, they would be able to reveal its entire history – previous owners, sale prices, dates it changed hands etc. Rather than spending countless hours compiling easily forged provenance documentation, this would enable sellers to give buyers information they can be sure is unique, tamper-proof and non-interchangeable.
NFTs as a democratising force in art
A recent study found that, on average, the collections of major US art museums are 87% male and 85% white. It’s little surprise then, that the art world is notorious for unequal wealth distribution. By creating and selling NFTs of their digital artwork, professional artists – especially those from underrepresented groups – could bypass the art world’s traditional gatekeepers – galleries, auction houses, dealers and agents – and connect directly with all potential buyers. These NFTs would deliver initial value when sold, and would continue to provide ongoing revenue for the artist each time they were resold on the secondary market.
The worlds of art and professional sports are similar in that most of the wealth is held in the hands of a relatively small group of men. Deloitte predicts that global women’s sports revenues will remain well under a billion dollars in 2021 – despite rising significantly in recent years. According to Forbes, the world’s top 10 male sports stars earned $1.05 billion in the past year, meaning that their earnings alone eclipsed the entirety of women’s sport. Like artists, elite athletes who may not be high earners – despite being at the top of their fields – uniquely stand to benefit from harnessing NFTs as an independent revenue stream.
So far, NFTs sold by professional sportspeople have included video highlights, digital trading cards, and works of art created in collaboration with professional artists.
NFTs clearly have huge promise to change a multitude of sectors – including the art world – for the better. Following almost a year of strong sales, the world is no longer asking “Are NFTs worth anything?” but “What are they worth?”. However, to unleash their full potential, a strong, interoperable blockchain infrastructure is required to support their purchase and sale – especially on the secondary market. This is what it will take to truly bring art NFTs into the mainstream.
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