FinS đ˛ for the Soul (29 Aug 2021): How do NFTs change digital art commerce?
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Latest headline:
Visa buys CryptoPunk non-fungible token
Background: Visa paid $150,000 (49.5 ethereum) to buy CryptoPunk 7610, an image of a woman with clown green eyes and âhot lipstickâ that is one of a 10,000 unique NFT-based digital character collection. Proof of ownership was stored on ethereum. This asset was added to Visaâs art collection comprised of other commerce-related artefacts.
What is so special about the CryptoPunk collection?
CryptoPunk started as a quirky art experiment by Matt Hall and John Watkinson, two software developers, in 2017. They created a software programme that could generate thousands of different-looking characters, each with their own personality and distinctive, randomly generated features.
They wanted to reflect the anti-establishment spirit of the early days of blockchain in the look of the Punks. The aesthetic was inspired by the anarchic and dystopian grit of the London punk movement in the 1970s, films like Bladerunner, and books like Neuromancer. These avatars were originally distributed to anyone with an ethereum wallet and eventually became a cultural icon for the crypto community.
The hype of NFT trading is growing.
NFT trading has surged eight times to over 60,000 sales per day, compared to the peak in March. Beepleâs âEverydays: The First 5000 Days,â sold for $69M at Christieâs. Jack Dorseyâs first tweet that was minted as an NFT sold for $2.9M. Grimes, Elon Muskâs other half, sold a series of digital art for $6M.
Within an hour of Visaâs CryptoPunk purchase, 90 other CryptoPunks were sold on the market, representing about $20M in combined sales. If some of you artists were on DeviantArt in your younger days, this would be like DeviantArt loaded with drugs and spewing out cash like a broken ATM.
A new model for digital art commerce.
NFTs serve as an accelerator for the creator economy and lower the barrier to entry for creatives to earn a living through selling their works online. The NFT-model for digital art commerce augments the ownership experience, sale process, and resale royalty collection while protecting the artistsâ copyrights and reducing intermediary costs.
Firstly, NFTs create an intangible ownership experience, similar to the assets they represent. Buyers of NFTs obtain a digital certificate of ownership representing the purchase of a digital asset on the blockchain. An NFT owner will not be able to display the asset in their homes, but only on a screen. Viewing of the NFT would not be limited to the buyer, and the public can continue to access the associated media online. Appreciation of the work is not limited to its physical location, nor its owner.
Secondly, the NFT model retains the artistsâ copyright protection. The NFT buyer does not own the copyright or other intellectual property rights in the digital artwork itself. Under copyright law, the buyer cannot distribute (i.e., make the asset available to the world at large) or commercialise the represented asset through adaptation or reproduction. Such rights to copy, share, and reproduce would need to be transferred from the artist to the buyer through the terms embedded in the NFT. In some cases, creators have restricted all commercial use of their work.
This would not be dissimilar to the world of physical artworks, in which artists are given the âmoral rightâ to protect their creations from alterations and destruction, and determine how it is displayed. In the case of NFTs, due to the digital nature of its storage, degradation of the artwork through improper handling and care by the owner can be avoided.
Thirdly, the NFT model enhances the collection of resale royalties by the creator. NFTs enable artists to attach stipulations that ensure that they get some of the proceeds every time the work gets resold, thereby allowing them to benefit from the resale should the work secure a higher value. Comparatively, resale royalties in the physical art world face complex regulations informed by case law.
In France, where droit de suite (or Artist's Resale Right) has been recognised since 1920, the percentage due to the artist or the artistâs heirs from any resale is calculated on a sliding scale based on the value of the artwork. The duration of the right is the life of an artist plus 70 years. In the US, a federal court struck down a California state law that required fine artists to be paid royalties when their work is resold by galleries or at auctions. The NFT model circumvents such legal complexities and places market power back in the hands of the creators of the artwork.
Fourthly, NFTs provide creators with more control of the sale process and direct access to a wide audience for their limited works and collections. Ethereum, known for its smart contracts, allows developers to write special code or instruction atop NFT distribution-ledger protocols. The process of handling the auction can be encoded on the Ethereum blockchain, including holding the money from bids, which is held in escrow until the winning bidder is determined. In the physical world, only a small percentage of artists are selected to be showcased in galleries that feature a particular genre or theme of artworks. Terms and conditions on who can sell the art (including the artist) and how and when payment is done are included in a written contract.
Lastly, letâs compare the costs involved. On most NFT trading platforms, users are responsible for paying for the computing energy required to process and validate transactions on the blockchain. The gas fee is charged when minting, buying, and selling an NFT, and fluctuates depending on the time of day and complexity of the computation. Allen Gannett, the author of The Creative Curve, a book about creativity, decided to find out what exactly is involved in turning a creative work into a commercial NFT. He found the process complex and also surprisingly expensive - costing 0.67 ETH or $997 to mint an NFT. Such costs are poised to go higher as more transactions are made on the ethereum network. Layer 2 sidechain solutions, an upgrade on ethereum, may help to reduce costs.
Most physical galleries serving as intermediaries also take a cut of the sales proceeds. This may range from 20-50%, depending on the setting in which the artwork is displayed and other marketing-related activities. Auction houses charge a sellerâs commission between 12-25%, as well as fees for storage, photography, promotion, insurance, and shipping. For high valued artworks, NFTs enable cost efficiencies to be reaped, as compared to selling through traditional art intermediaries.
Conclusion:
NFTs stand at the intersection of technology and art, and they challenge our perception of what it means to own a piece of art. The technology is in its infancy and is evolving. While the prevailing technology addresses the transactional process, whether NFTs can serve as an enduring store of value remains much to be seen. Its value can only be underpinned by growth in the digital art market, acceptance by a broader art community, and a burgeoning number of people vying for it. Meanwhile, at this junction it is caveat emptor, you have been forewarned.
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