EminApe / Eminem's NFT

NFTs (Non Fungible Tokens)1 have been on everyone's lips, mainly as a result of the crypto-art market, which has broken several records in the last year. For example, the American artist Beeple sold, at an auction held at Christie's, the company specializing in art and collectibles, a work entitled Everydays: The First 5,000 Days for $69.3 million. The buyer, an investor from Singapore, paid for the work in Ether, the native cryptocurrency of the Ethereum protocol.

And yes: all this commotion was caused by a digital work, which any of us could save, view and use as wallpaper. Also reproduce it, print it and hang it.

This is speculation, isn't it?

The answer is complex. There is no doubt that the amount of liquidity and investment capital available, partly generated by the real and organic growth of the crypto ecosystem, and partly by the lax policies that flooded the world with dollars in the last eighteen months, play an important role in "inflating" the prices of these cryptoassets, as well as that of so many other items considered as "alternative investments" (for example, baseball collectible cards or even the traditional art market). In the face of this saturation, capital is looking for new ways to make a profit, and these types of markets are benefiting. However, it is worth asking ourselves, is crypto-art so different from traditional art?

The reader can "keep" the image that the collector bought for almost 70 million dollars. Similarly, I can also, when leaving a museum, buy a print of a painting I like and display it in my living room, and only a trained eye would be able to tell the difference. This opens a fundamental question: why do we pay when we buy art? It is certainly not for an objective quality of the painting, otherwise we would buy the print; what we are buying is the provenance, the story behind the painting and its artist, and, mainly, the social value that owning the original generates. The same can be said of crypto-art. We can keep the image, but if we buy it and show that we own the original (which, as we will see, is demonstrable on a much more powerful and objective level in the crypto-art world than in the traditional art world), we will impress our friends much more. Curious animal, us.

Cryptoart or NFT?

Source

You may have noticed that throughout the previous section I referred to cryptoart and not to NFT, and that serves as an excuse to clarify an important point: NFT does not mean cryptoart, cryptoart is a particular, though by far the best known, application of the former. Let's get down to the interesting stuff. What NFT technology achieves is to create, for the first time in history, digital scarcity and an objective ownership record. What the internet era generated was infinite reproducibility: I send you an image and you save it on your computer, transfer it to your cell phone, share it with a friend via WhatsApp and post it on Facebook.

This viral component, together with the speed at which information can be exchanged (whether it is a text, a photo or a document), is what made the Internet grow and become successful. However, in the cascade of cat pictures and chains to share with five contacts to get lucky next year, we forget one important element: ownership. Who owns that funny picture of a cat falling over that your aunt passed on to you? There is no method, either technological or social, to determine the origination of that file and eventually reward its creator. And, honestly, in that particular case the correct answer would be: who cares who created it?

It is not so easy to dismiss the issue when we are talking about, for example, art. Isn't it unfair that we find a beautiful painting in a forum and share it without the artist being rewarded for it? Or that we download a song we like and share it infinitely without the artist receiving anything? Sure, it's easy to hide behind the excuse that artists receive the always diffuse "diffusion", which then by magical mechanisms should (we don't know why or how) be able to monetize.

And although this has some truth to it, the reality is that Spotify pays fractions of cents per stream, which generates a dynamic that in economics is called "winner takes all": the most recognized artists collect a more than proportional fraction of sales. This generates a perverse incentive structure, in which not only the only way to live comfortably from online music is to achieve massivity and reach the top of the profession, but the platforms themselves have incentives to promote artists who are already successful instead of helping to promote new talent. And the picture in the visual arts is even grayer.

NFTs solve this problem.

I understood what they do, but what are NFTs?

Everydays: The First 5000 Days (2021), Beeple.

NFTs are items that are on a blockchain and can be transacted, generating a record (objective and decentralized) of their movement history. Well, I guess that didn't help. Let's go again. To summarize, it is a kind of digital ledger in which all participants can write (i.e., add new items or record transactions) and validate (i.e., verify that transactions made by others are correct). These ledgers are very secure because they do not have a central agent managing them, who may eventually have incentives to lie or be pressured by external agents to validate transactions that are valid or legitimate. Instead, it is managed in a decentralized manner by its users.

One of the most well-known protocols, and the most widely used for NFT, is Ethereum. In Ethereum, as a user, I can create an item (in a process called "minting" of the NFT) which can be an image, a gif, a video, a file or even a contract, and then I can put this item for sale or transact with other users. Every time an NFT is created it is assigned an "address", which is a set of specific numbers, through which you can know exactly who generated it and all its movement history. All this information is public and everyone can see it. This solves a problem endemic to art: provenance. One of the most complex aspects to determine in ancient works of art is their provenance, that is, to determine through which hands they passed before reaching the current owner, which is a key aspect in determining the originality of the piece. This problem disappears in the NFT world.

What things can be NFT and what can I do with them?

Basically anything that needs to be unique and digitally recorded can be converted to NFT. Why unique? That's where the "non-fungible" part comes in. For example, coins are fungible. A 20 peso bill is just like any other 20 peso bill. However, a collectible card or an ID card is not the same as any other collectible card or ID card, so these are "non-fungible".

Domains

A domain, i.e. an address such as copelmayer.eth, can be an NFT (and in fact is). The ENS2 (Ethereum Name Service) service allows domains to be registered in the form of NFTs. They are non-fungible because copelmayer.eth is not the same as kopelmayer.eth, and the ownership of each of them is registered in Ethereum in my name, and anyone can, at any time, verify that my wallet (my "electronic wallet") is the owner of copelmayer.eth.

Art

As we saw, art can be NFT, and this is the most common application of the technology. There are many portals, such as OpenSea3 and Rarible4, that allow the buying and selling of crypto-art. Artists can even set a royalty when they mint NFT (of whatever percentage they decide) and receive more revenue automatically every time their work is sold, in perpetuity and without the need for lawyers or contracts. Rights can also be attached to the works, as is the case with the Bored Ape Yatch Club5 collection, which offers the commercial rights to each of the pieces to its buyers (and, in fact, T-shirts, accessories and even films are already being produced using these rights).

Music

Sound XYZ6 is a company that recently raised $5 million in investment in a round led by the prestigious Andressen Horowitz firm and allows musicians to release their songs as NFTs. In just 10 minutes it went on to pay out more than $100,000 to artists, the equivalent of more than 30 million plays on Spotify. In addition, it reverses incentives and pushes users to discover new music, because if they buy early NFTs from an unknown musician who then does well, those early copies they bought will be highly valued, aligning incentives between artists and their community of early fans.

Loans

Since the ownership of NFTs is verifiable on Ethereum (and the other blockchains that use this technology, such as Solana) and NFTs have a certain value, generally according to supply and demand and how attractive each one is, they can be used as collateral when taking loans. For example, I can go to NftFi7, list an NFT as collateral (such as my copelmayer.eth domain) and request a loan of $100. The reader can make me an offer to lend me that money at a rate of 10% with that domain as collateral, and I either accept it or negotiate. If I accept it, the transaction is recorded on the Ethereum network and I incur the obligation. If I fail in my obligation to pay, that clause of the transaction is automatically executed and my domain becomes the property of my lender, without the need for intermediation or the possibility of non-payment of any kind. In this way, through the so-called "smart contracts" and NFTs, loans are opened for the first time in history without intermediation or delays of any kind and, although the possibility of default remains, there is no longer the risk of not receiving or of delay in receiving the asset put up as collateral.

Where do we stand?

The answer to the question that triggers the column - whether NFTs are a vehicle for speculation or a new technology that enables digital ownership - has a blunt and unequivocal answer: yes. It is undeniable that much of the economic activity in the space is for speculative purposes, and indeed I consider it quite possible that there will be a market correction, in part due to the projected tightening in U.S. monetary policy. But what is undeniable - still - is that this is a real technology, providing value to real users and solving real problems.

It is useful to keep this apparent contradiction in mind to avoid falling into mania and risking money unwisely. On the other hand, neither can we be blind and ignore what is probably the most important technological revolution since the creation of the Internet.

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