NFTs: But is it art?

One of the topics that has kept popping up throughout the last year has been non-fungible tokens (NFTs), these funny little bits of cryptology that, in the eyes of the evangelical, have the potential to replace money, change the nature of commerce, and revolutionise the very functioning of the financial markets. Many other people are scratching their heads wondering if they really as good as all that and even if they are, whether it would be a good thing to replace money, change the nature of commerce, and revolutionise the very functioning of the financial markets. Either way, at this point, the NFT sector at first glance seems to be in a bit of a difficult position: their utility, robustness and security needs to be tested, but they also need to avoid becoming so trivial that people stop paying them any attention. The reality could be a little more complex though, it’s possible that they are exactly where they need to be.

There are all kinds of labels that management consultants develop as they attempt to explain what is going on. To be fair to them, sometimes they work well enough to fit a situation, and as a result, they gradually become part of general parlance. One of the most effective has been the hype cycle.

The hype cycle describes the process that new technology often goes though: something new and whizzy is created, slowly people start to get excited, the excitement builds, pundits start writing articles about how good it could be, investors start to pile in, the excitement becomes palpable, they start talking about it on the evening news and every meeting, every project launch, proclaims that it is related to it, everything reaches fever pitch, everyone simply has to have the thing… and then there’s a set-back, people panic, investors flee, prices plummet and pundits write articles explaining why they always said that it was never going to work in the first place…

At this point, it all goes quiet for a few months, and then one of two things happen. Either, everyone quietly agrees that the whizzy thing should never be spoken of again, or there is a realistic assessment of the value of the new thing and people start to get on board slightly more calmly. The new, whizzy thing may not be quite as whizzy as we all first thought, but it has utility. It may not be revolutionary, but it could well be evolutionary.

Riding its own cycle

NFTs however are following a slightly strange path, diverging from the hype cycle in a way that may or may not be to the detriment of the technology. What we’ve had so far is a very exciting offshoot of cryptocurrency which has the potential to enhance the way that many activities are carried out. Thanks to NFTs, we face a potential future where, for example, works of art can be validated and sold on a global market with the paperwork, fees and appropriate taxes paid automatically by the buyer and recorded by authorities with virtually no manual intervention. This could massively reduce the cost of trading art, creating a transparent system and a far more direct relationship between buyer and seller.

But it doesn’t stop there. NFTs can also be used to ensure that the original artist or their estate benefits from future sales of their art, so that their, let’s be honest, fundamental role in creating a piece is recognised in perpetuity. Struggling artists in their 20s might be forced to sell their nascent masterpieces before their true value is appreciated, but the artist will still be getting a return every time the art piece is sold in the future. Even if the payment is only 2% on a US$200 piece when it is first sold when the artist is but a callow youth, if it sells for US$2,000,000 a decade later, the artist or their estate still receives US$40,000 for their work. And who deserves that payment more, a broker or the original artist?

And this potential does not simply extend to digital art. There is a possible future where physical art is linked to an NFT, doing away with a lot of the fees that surround art sales. Potentially the only thing that wouldn’t change would be the logistics around moving a work from the seller to the buyer.

The potential value of NFTs goes well beyond the art world. Vintage cars, antiques, wines or luxury clothing could all become accompanied by an NFT making them easier to trade and enhancing liquidity across their markets. There are projects in all of these markets that are in the process of working out how NFTs could work for them. Most of the projects will come to nothing, but some of them could revolutionise their worlds.

The problem is that at the moment much of the talk in the NFT sphere is dominated by Bored Apes, CryptoPunks and similar projects. These avatars are attracting massive prices because their creators have identified an opportunity to create a community that it’s fun to be part of, but it potentially distracts from the wider benefits of NFTs, because for many observers, it highlights the trivial nature of the NFT sector. It isn’t serious, you shouldn’t trust it with your proper business.

A bridge between hype and reality

There’s a decent chance that this actually isn’t really a problem. It could be that the current hype around the avatar aspect of the NFT market is saving the sector as a whole from the worst elements of the traditional hype cycle. It might be acting as a lightning rod for the over-excited phase of the hype cycle, letting projects devoted to the “more serious” markets quietly go about their business, developing, testing and checking that everything’s working the way that it should. If they do it right, it reduces the potential that there will be a set-back that leads to people panicking, investors fleeing and prices plummeting.

At the same time the market for NFT avatars is also proving to be a very valuable test bed for the technology. Whether you personally chose to be involved or not, significant sums are being traded and the underlying technology is proving itself to be generally robust so far. It’s not without problems of course, but most of these problems are, in reality, simply challenges that can be worked though as the technology is proven. It also creates an environment where the area that regulators will ned to step into is pre-defined, rather than running the risk of inviting regulators to define their role themselves which has the potential to constrain rather than encourage innovation.

In the end, it could be that by having NFTs be tested in a relatively safe section of the market that is populated by tech-savvy consenting adults, the flaws will be exposed before there technology is extended to traditional and mass markets. It’s probably better to test with avatars than Renoirs.