NFTs: A New Economy?

Can you remind us what NFTs are, and what is actually sold in this form? NFTs, or non fungible tokens, are unique, digital ownership deeds registered on the blockchain, (1) associated with metadata that specifies the rights associated with these deeds. Indestructible and tamper-proof, they theoretically guarantee the authenticity of the certificate of ownership. Almost everything can be sold in this form: newspaper articles, music files, photographs, images generated by algorithms—once saved on the Ethereum blockchain, the 10,000 CryptoPunk characters created by Larva Labs generated $3 billion in transactions in 2021—or digital works, like those of Mike Winkelmann, aka Beeple. Twitter founder Jack Dorsey sold his first tweet for nearly $3 million. There are also digital reproductions of famous works: the British Museum (London) creates more or less rare digital lithographs of masterpieces from its collections, such as Turner’s watercolours; the Belvedere Museum (Vienna) sold The Kiss by Klimt in 10,000 different fragments, for 1,850 euros each, a bit like shares on the stock exchange. It is a new economy of derivative products for museums, a way of creating value on the basis of inalienable works—at the risk of seeing museums involved in an ethically questionable speculative game. In terms of contemporary art, Damien Hirst has produced 10,000 original “Spot Paintings“and put them up for sale as The Currency, leaving buyers the choice to opt for the physical work or the NFT. 95% of them chose the NFT version.

How and where do these transactions take place? The transactions mainly take place on specialised NFT platforms which connect sellers and buyers. The most important one in the field of photography and art is OpenSea. Often, sellers use intermediaries upstream who help them transform their digital files into NFTs. These decentralised autonomous organisations (DAO) value and publish works sold in this form on the market. The Magnum agency thus signed an agreement with Obscura DAO to offer photographs of its members in the form of NFTs.

On these platforms, sales are mainly made in cryptocurrency. This implies owning a cryptocurrency “wallet“. So there is a technical entry cost, which I think will be quite quickly waived because structures are also being created to help collectors enter this market. But for the moment, this market mainly attracts people from the digital field, which also partly renews the profile of collectors, since they are often younger. The flipside is that they do not necessarily know much about contemporary art, photography or art history. And some of them are only there for speculative reasons.

THE ART WORLD AND NFTS

In 2020-21, NFTs became popular by reaching record prices (Beeple and its 69.3 million dollars in December 2021 at Art Basel Miami). In 2022, on the contrary, there was a “cryptocurrency crash” that led to the collapse of their value. Is it mainly a speculative system? NFTs are technological tools that can be useful to the art market, but for the moment, they are mostly a pretext for speculation. The average time between the purchase and resale of an NFT is 33 days. It is as if the first market stage (the first purchase of the work) was only a necessary condition for being able to speculate on the second market. However, the actors who bring contemporary art, and therefore artists, to life, such as the galleries, are rather those of the first market. So it’s a kind of perverse game. Since no “fundamental value” exists yet to assess the value of an NFT, we are in a configuration of an almost purely speculative bubble, as in the case of tulip bulbs in the seventeenth century. Although criteria are beginning to emerge, they are not those of the art market, which traditionally reflect a consensus about the originality of an artist’s approach, supported by gallery owners, collectors and art centres which attest its value. It’s a game economy where value derives from the size of the community that is mobilised around an artist, the number of “likes“generated by a work. Moreover, very large resources are mobilised by NFT intermediaries to build and maintain these communities in the form of clubs that exchange, meet up and buy.

What about the porosity between the NFT market and the contemporary art market? The stakes are high. Is there going to be an evolution in the art market where value becomes increasingly linked to the number of

followers rather than to a critical analysis of the work, a shift towards more of a media reputation than an artistic one? Will we see the emergence of a world of digital art, with its own codes and communities, developed around NFTs, in parallel with an unchanged world of contemporary art? Right now, we are all in the dark, with this speculative bubble that means that works or artists can make millions of dollars simply through their ability to attract attention. Speaking of the “NFT market” is also quite revealing of the fact that this market has little interest in works. ”The NFT market” means nothing. An NFT is just a certificate of ownership linked to a digital file which gives access to a work. The purpose of the transaction is confused with the tool used for the same transaction.This reflects this market’s current lack of maturity.

Nevertheless, some galleries have leapt on the NFT bandwagon (Pace Gallery) as well as some fairs (Art Basel Miami) and collectors (Adam Lindemann). The major auction houses Sotheby’s and Christie’s are also very active in this market. So we are starting to see identified actors in the contemporary art market who are investing, and the more they invest, the more they have an interest in securing this market, in making it less speculative. Pure players (2) such as DAOs may become new intermediaries in the art market in the coming years. Finally, the notoriety acquired in the NFT market can open access to the world of art. Beeple’s work, Human One, sold as an NFT, was subsequently exhibited at the Castello di Rivoli (Turin). It is a kind of aquarium, a physical sculpture where a character walks around in a diving suit: a digital file makes up the contents of the aquarium.

Stolen works have been known to have been sold in the form of NFTs. Is there any regulation of this globalised market? A market can only work sustainably with regulation. The NFT market has been developed by a number of rather anti-institutional actors. There is therefore a contradiction between the idea of being free, of dispensing with intermediation, especially with the actors of the contemporary art market, of not being accountable to the State, and the idea of regulating the market. Since nothing is regulated and there is no assignation of value based on consensual criteria, the market presents considerable oscillations. However, it is necessary to control who, for example, can put an NFT up for sale: does this person have the rights to the digital file being diffused? And there is no guarantee that a work exchanged in the form of an NFT was authentic to begin with. To say nothing of the fact that many NFTs have been sold without any details on the general conditions of sale, which are supposed to accompany any contract. These transactions can therefore be cancelled. It’s a sword of Damocles hanging over the market. As long as the prices were going up, nobody asked questions. But if you bought a $1 million CryptoPunk, and it’s only worth $50,000 on resale, and you have the ability to cancel the sale, you might be tempted.

This is why many people are now working on a standard ”smart contract” (computer protocol), to systematically accompany NFTs, which would precisely define the property rights associated with the purchased file, making it possible to secure the market, and to perpetuate it. A whole series of elements may be specified, including the conditions to be met at the time of resale, such as the resale right—an amount that must be paid back to the artist or to the rights holders at each resale—, or the set of property rights associated with the purchase, such as the possible uses of the digital object, for example the right to print the photograph to display it in your home or to use it on your website.

POTENTIAL

Might NFTs be promising in terms of royalties? That is one of the positive aspects of this technology. Few people are aware that, when you buy a work, you do not buy all the rights related to it: you cannot destroy it, you cannot modify it, you cannot exhibit it in any which way. Because of the contract associated with the digital file, NFTs can make it possible to better specify these rights, including those related to remuneration. If artists—and companies such as the ADAGP— take advantage of this, they could back up their sales with more advantageous conditions for the value of their works. In addition to an obligatory resale right applicable to each resale, the contract may provide for a share of the amount paid to the artists as part of each transaction, making the second market more remunerative for them. All this could appear in a contract that would be inseparable from the work.

Do NFTs have any other potential? From an economic point of view, the great and main point of NFTs is to offer a technological solution to the issue of the scarcity and authenticity of digital works, whose diffusion is difficult to control.To go back to the criteria of value on the art market, the three main elements are the originality of the artist’s approach, scarcity and authenticity. This technology can make it possible to reconcile a very wide distribution of a work in a digital format (image, sound)—and therefore the democratisation of culture—with a guarantee of a value linked to the scarcity and authenticity of the NFT.

More generally, NFTs could be useful for the development of a market of multiples of the twenty-first century, as a relevant tool guaranteeing the scarcity and authenticity of these works thanks to the traceability of exchanges, which is not currently the case for multiples.The great stories of forgeries often concern multiples, whose successive editions are complicated to follow, unlike that of unique works. In the same way that we can have multiple gelatine silver prints, etchings, and sculptures, we can also have multiple works in digital formats with NFTs. This prefigures an economy based on the value of scarcity which, in my view, will be one of the characteristics of the post-industrial economy in the twenty-first century.The industrial revolution transformed a craft economy of expensive copies into one in which they have become less and less expensive. A factory produces copies of an original prototype. Its profits are made on manufacturing. With digital technology, creating copies has zero cost: digital files can be copied ad infinitum with no cost to anyone. In this situation, as we have seen with music and photography, prices are plummeting and it is very difficult to compensate for the initial cost of creation. NFTs have created a collectors’ market for digital works where the prices are liable to offset the costs of creation and production. Can we expect a change in the definition of contemporary art? Perhaps we will see conflicts of aesthetic conventions and therefore the development of two parallel worlds, with a world of digital art sold in the form of NFTs, evolving in a relatively autonomous way compared to the world of contemporary art, without preventing the traditional art world from using NFTs in its own way. There is also a hope that the opportunity to market digital creations in the form of NFTs will encourage more artists to embrace these new formats. If communities of computer scientists, engineers and artists become connected within this world of digital art, this could give rise to radically original works.

1 Developed in 2008, the blockchain is a technology for storing and transmitting information that offers high standards of transparency and security (computer protocol secured by using cryptography) because it operates without a central control body. To describe the blockchain, the mathematician Jean-Paul Delahaye uses the image of “a very large notebook, which anyone can read freely and for free, on which anyone can write, but which is impossible to erase and indestructible.” 2 A pure player is a company operating in a single, non-diversified business sector. In France, the term has become popular for companies operating exclusively on the internet.

Note NFT révolution, naissance du mouvement Crypto-Art by John Karp and Rémy Peretz (The Book Edition, 2021), the first book to be sold as an NFT.