What Are NFTS? Changing the Value of Sights and Sounds
Sep 21, 2021
Last updated on Sep 21, 2021
NFTs, or non-fungible tokens, are the digital version of something that has been around forever - non-fungible things.
Non-fungible things are unique pieces of our lives that we buy, collect, stumble upon, receive as rewards, and ultimately, attach to our identities. They are varsity jackets, wedding rings, paintings, rare sneakers, signed baseball cards, Xbox achievements, framed diplomas, and yes, even JPEGS.
The key characteristic of non-fungible things is that they are non-transferable. They cannot be directly exchanged for something else as the social and sentimental value they hold is entirely unique, unable to be copied or replicated. While any five dollar bill can be traded for any other five dollar bill, you wouldn’t trade your wedding ring for someone else’s. The value of the ring is not derived just from its price tag, but from its significance in your life.
It represents a piece of who you are.
Whether we like to admit it or not, the things we own are a big part of our lives. The clothes we wear, the items we fill our homes with, the images we use as our profile pictures, they all say something about us.
Our things tell tiny parts of stories. They help us form our identities.
As our lives continue to merge with the digital world, it only makes sense that we would start to assign more value to our digital things. For the first few decades of the internet, though, digital things could not truly be owned, so they were not part of our identities in the same sense that our physical things were.
But now, thanks to blockchain and non-fungible tokens, digital things can be owned. And because they can be owned, they can be part of our identities.
This is going to change everything.
How Do NFTs Work?
Yeah, “going to change everything” is a pretty bold claim. So to start, let’s get the technical stuff out of the way and see how NFTs actually work.
NFTs, or non-fungible tokens, are certificates of ownership recorded onto a blockchain. Blockchains are public, decentralized databases that record transactions and proofs of ownership. In stark contrast to the centralized databases used by most companies today, where the company has the sole authority to add and modify information, blockchains are maintained and updated by an entire community of individuals. Because anyone can participate, the blockchain leverages complex encryption methods to approve and authenticate the data added by its users.
For the sake of NFTs, let’s think of the blockchain as a huge tackboard in the middle of town. Every time you purchase an item, you receive a certificate of ownership and tack it up for everyone to see. This certificate contains information about the item, including a brief description, its original creator, its current owner, and a list of any previous owners.
If you sell that item, the new owner adds their name to the certificate, and everyone sees that the item has changed hands. Because this is all done publicly, stealing something or trying to add your name to an item that you do not actually own is extremely difficult. With the whole town watching the board, everyone knows who owns what and can see every transaction that takes place.
To put this back into crypto terms, these publicly verifiable certificates of ownership are non-fungible tokens. They can be attached to anything, physical or digital, and used to assign ownership over that thing.
Making Digital Things Ownable
This big tackboard might seem redundant for physical items, as simply possessing them is often a sufficient proof of ownership. Even if a physical item is rented, leased, or stolen, we naturally assume that if someone has something then they probably own that thing.
However, this is not the case in the digital world. While I can’t walk into your house and instantly create a physical copy of a painting you own, I can instantly replicate any digital image that you post online. Without being able to prove which is the original, and with no way to keep others from creating even more copies, there is no way to prove that the original image was yours.
This is where NFTs come into play.
Through tokenization, you can now create a certificate of ownership for that digital image, sign it with your digital signature, and post it to the tackboard. No matter how many copies are made, everyone can verify the original version and see that you are the owner.
For the first time, we can prove who owns something that exists entirely on the web.
This might still seem fluffy or frivolous on the surface, but the effects are undeniable. From real estate to gaming, NFTs are beginning to touch a wide swath of industries. But there is one realm where they are already proving to be particularly transformative - the creative world.
NFTs and the Creative World
How do we value a song? Or a digital article? How about an image that lives entirely online? These aren’t rhetorical questions. The unfortunate truth is that we commonly value these things based on the attention they attract.
The value of a song is reliant on how many streams it receives. An article is worth how many clicks it gets. Digital art, like something made with Cinema 4D or Unreal Engine, is even trickier to monetize. Many artists just post their work to social media for free in hopes of building an audience and attracting clients.
The common thread here? None of this creative work is valued in and of itself. The inability to own these digital things strips them of the identity-building aspect that we humans value so much and happily exchange for our dollars.
At least, this was the case until NFTs entered the picture. Now that digital things can be singled out and owned, works of digital art are finally being appreciated and valued just like their physical counterparts. No story illustrates this paradigm shift better than Beeple’s.
Digital Art Is Art
Let’s travel all the way back to 2007, where we’ll find Mike Winkelmann sitting at his desk in Wisconsin. The computer science major who will become known as Beeple is just starting his Everydays, a challenge to create a complete piece of art every day. The very first image of the series, below, is a drawing of his uncle.
Fast forward thirteen years, and Mike is still creating a piece of art every single day. Holidays, the birth of his children, food poisoning, whatever. Regardless of what the day brings, Mike sits down and creates. By 2020, Mr. Winkelmann has graduated from (or abandoned) drawing by hand, has dabbled with photography, and has finally found a creative home in the 3D modeling software, Cinema 4D. Mike, who we can start calling Beeple now, has a strong command over his artistic abilities.
Using entirely digital mediums, Beeple brings bizarre and beautiful realities to life. Swinging from sociopolitical commentary to the purely phantastical, Beeple’s work ammasses him a huge following online and attracts a steady flow of collaborative work with brands like Louis Vuitton and musical artists like Run The Jewels.
And still, with no way to directly monetize his own creative work, Beeple simply posts it to Instagram for free.
In October of 2020, though, he tries something different. For the first time, Beeple drops three pieces of art as NFTs on the digital marketplace, Nifty Gateway.
The first piece is issued as a set of 100, all available for a single dollar.
The other two pieces, both one-of-ones, sell for $66,666. Each.
This is the tip of the Beeple iceberg, but before we continue with his story, let’s look at what’s really going on here.Now that digital art can be minted and owned, it has gained some important attributes that were formerly out of reach. These are scarcity and provenance.
Scarcity, or rarity, is a key contributor to any item’s value. If something is desirable, but has a low supply, then people will pay more to acquire it. One of a kind paintings and sculptures are inherently scarce, as only one version of them exists. Sure, you can make some prints of the Mona Lisa, or take some pictures of a Jeff Koons Balloon Dog, but you’re not actually replicating the original work in its true form. A digital image, on the other hand, is replicated perfectly with a quick right click and save.
However, the NFT of that digital image is not replicated. That ownership remains exactly where it is on the blockchain. This is what gives NFTs their scarcity - the true version can be singled out and distinguished from its copies.
NFTs allow for digital creations to be made into scarce, one-of-ones.
Now that a work of digital art can be made unique, we can track its movement through the world and the web. This information all contributes to a piece’s provenance. In the context of art, provenance is an item’s history of ownership. As we have already seen, NFTs have that part down. But provenance is more than just a series of owners - it's a piece’s story.
Who owned this piece? Where has it been shown? How did it arrive at the place it is today? All of this information affects the value of a work of art. The more interesting the piece’s provenance, the higher its price tag. Why do mundane objects owned by celebrities sell for thousands of dollars? Because of the stories they’re attached to.
To be clear, this is not financial advice, but it’s not uncommon. For example, the chair J.K. Rowling sat in while she wrote the first two Harry Potter books sold for $394,000 at auction. There’s no way that piece of wood is worth that much (the chair looks terribly uncomfortable), but that’s not what the new owner paid for. What they paid for was a piece of history - a piece of culture. They paid for the story, quite literally in this sense, that the chair played a role in.
Digital art, and digital assets in general, can finally share in this scarcity and provenance. And it’s all thanks to NFTs.
The First 5000 Days
Okay, let’s pivot back to Beeple and rejoin him at the beginning of 2021. After selling a collection of 20 artworks for $3.5 million in December of 2020, Beeple is gearing up for an even larger offering. For the first time ever, the art broker Sotheby’s is auctioning an NFT. But this is not just a single artwork, it is the entire collection of Beeple’s first 5000 Everydays. Beeple has taken every image from the first thirteen years of his Everydays artwork and compiled them into one massive collage, minted as a single NFT.
On March 11, 2021, Beeple’s The First 5000 Days sold for $69 million.
Some quick math will tell you that this makes each individual artwork in the collage worth $14,000, give or take. But this is much more than a collection of art. Beeple’s The First 5000 Days is a prime example of the value of provenance. Every step of the way is catalogued, every single day is accounted for. The collage is a complete visual representation of the artist’s journey.
On top of being a symbol of Beeple’s climb, the sale of this piece marks a momentous occasion for blockchain, NFTs, and the art world as a whole. The First 5000 Days is not just about the images, it is a turning point for artists and creators everywhere. Beeple echoes this sentiment in a statement released by Christie’s:
“Artists have been using hardware and software to create artwork and distribute it on the internet for the last 20+ years but there was never a real way to truly own and collect it. With NFTs that has now changed. I believe we are witnessing the beginning of the next chapter in art history, digital art.”
Buying and Selling Digital Art
Thanks in no small part to the success of Beeple and other big names in the NFT space, such as FVCKRENDER, XCOPY,and Fewocious, the way an entire generation views art is changing. Creators everywhere finally have viable options for monetizing their work. The series of hoops that artists formerly had to jump through in order to present their work to an audience is being dismantled. This should come as no surprise, as our methods of communicating and presenting information have radically transformed thanks to the internet.
The birth of NFTs, and their adoption by artists, is simply the creative world catching up to this new technology.
This isn’t just having a huge effect on how we create and distribute art, it’s affecting how we purchase it as well. People who have never stepped foot in a physical gallery or placed a bid in an auction can now view unique artwork from creators around the world, and purchase from them in a few clicks. The best part? This is often a very direct relationship. Open NFT marketplaces, such as OpenSea and Zora, allow anyone to mint and sell their art. Even the premiere curated NFT platform, SuperRare, is opening its doors to more artists through decentralizing its curation process.
Will this create even more competition for artists? In a sense, yes. But ultimately, this is all putting artists in closer connection with their audience than ever before. In order for an artist to survive off of their work they no longer need to be a global success. Instead, they can tap into niche, dedicated communities that truly appreciate what they create. They can see who purchases their art and foster meaningful relationships with them.
The art world is transforming from a walled garden to an open field.
How about music and the written word? Although these mediums are yet to receive the level of press as their JPEG cousins, they too are enjoying the benefits of blockchain and NFTs.
Music and Blockchain
The music industry is notorious for how it pays artists. Or rather, how it doesn’t pay artists.
To justify this imbalance, label executives will tell you that the label takes a huge gamble and financial risk on every artist they bring on. As such, it is only right that the label receives a large cut of the rewards. To an extent, this is true. But it is becoming less and less true every year. Record labels are responsible for funding the recording, distribution, and marketing of an artist’s work. Back when we were reliant on studio musicians, radio placements, and physical sales, like vinyls and CDs, this was expensive.
But now that tools for music production have become far more accessible, and digital distribution to Spotify and the like is far less expensive, does this balance still make sense? How about for artists who are almost entirely self reliant and publish music on their own? Why are they still getting paid fractions of pennies on the dollar?
We’re generalizing here, as the music industry is a large and complex machine, but the fact that artists receive around 12% of the music industry’s revenue seems….off. And artists agree. So they’re taking matters into their own hands.
A song is a work of art in and of itself. But as with much digital art, it is not valued as such. In the age of streaming, listening to music costs the average person around $10 a month via a platform like Spotify or Apple Music. This translates to around $0.004 per stream being paid out to the artist. And no, that isn’t an accidental extra zero - artists receive less than half a penny every time someone listens to their song. Because of this skewed payout, artists often hand over the master rights of their music to a record label in exchange for an advance. The label will then receive most of the income from a record, and the artist will rely on touring for the bulk of their income. All of this is to say that, once again, the songs themselves are not valued as works of art in and of themselves.
But as you may have guessed, NFTs are changing that too. The simplest place to start? Just mint a song as its own NFT. On platforms like Catalog and Zora, artists can upload original music and sell directly to fans. Just like we saw with Beeple’s work, this cuts out the series of middlemen that usually take a cut of an artist’s profits. Granted, musicians have been able to publish music directly for a long time with services like SoundCloud. And fans have been able to purchase a song digitally, instead of streaming, with marketplaces like iTunes. But this is the first time that fans can purchase directly from the artist, with the artist receiving that payment in its entirety.
Artists can finally profit from their work while holding onto their master rights.
But why stop there? Musical artist and entrepreneur, 3LAU, certainly isn’t. With the flexibility of blockchain comes new ways of building communities and rewarding supporters. In the music world, this is key. 3LAU is currently launching a company, Royal, that will allow fans to buy NFTs that give them a piece of a song’s royalty rights. This will be similar to purchasing shares of a company - as the song gains in popularity, it brings in more royalties, and those royalties get split up amongst the NFT holders.
This not only incentivizes fans to support and promote an artist, but gives them the opportunity to invest in artists they believe in. This will certainly be a new realm for creators and fans alike to figure out together, but the potential is vast. We may just see a world where artists share their profits with fans instead of labels and middlemen.
Just like streaming revolutionized the way music is distributed and consumed, so too will NFTs. But this time, it will be in the artist’s favor.
Writing on Blockchain
Not to be left out of the fun, writers are beginning to see the benefits of NFTs as well. Although, their options are still a bit limited. Currently, most NFT marketplaces don’t support PDFs to be uploaded, so minting a novel isn’t quite possible. However, there is a workaround.
When you mint an NFT on OpenSea, you can add a piece of additional content to be made available to the purchaser. This is called unlockable content. If you wanted to sell an NFT of a book or story, you could first mint an image, like the book's cover art, and make the book’s PDF unlockable content. To the buyer, this wouldn’t be all that much different than purchasing from any other digital bookstore. But unlike selling an ebook through Amazon, who will take a 30% - 65% slice of the sales, authors keep the whole pie.
Just a fun fact, if you do manage to retain 70% of your book royalties, you’ll have to pay Amazon a delivery fee for each purchase. If this seems like a bit of a slap in the face for trying to retain ownership of your work, that’s because it is.
Currently, the largest dedicated platform for writers in the NFT space is Mirror. Although it was conceived as more of a crowdfunding platform than a place for publishing, Mirror has attracted creators of all types.
Mirror allows writers to publish articles, essays, and stories as NFTs, and sell them natively on the platform. Writers can even set the proceeds to be split automatically, say between themselves and an illustrator. Alternatively, they can set up the proceeds to be routed somewhere else, like a charity or start-up that they are looking to fund.
The simplicity of Mirror has already given way to some interesting use cases for authors. Back in April, author Emily Segal crowdfunded her next novel entirely on Mirror, rewarding her early adopters with a stake in the final product and some additional perks. In her own words, Emily explained the tight spot up and coming authors usually find themselves in:
“Usually, novelists go to great lengths to fund their own novel-writing process by working other gigs, selling commercial writing, or – in significantly fewer cases – getting an advance from a publishing company.”
By leveraging Mirror and NFTs, Emily was able to bypass this usual maze and create a community around her work in the process.
Other writers are using the platform to publish their own creative works in their entirety, such as Untitled Frontier’s Simon de la Rouviere. Simon collaborated with digital artist, Mad Maraca, who created the artwork for his short story Line to Anchor City. The NFT’s sale brought in a little over thirteen thousand dollars - not bad for a short story.
Like with any novel approach, going the self-published NFT route means writers need to wear more hats. Everything from marketing to artwork rests on the shoulders of the writer and their collaborators. But with that responsibility comes freedom. There are no gatekeepers in this new creative world.
Still, are the masses flocking to purchase NFT novels? Not quite yet. But as the tools for writers continue to develop, those who adopt this new technology early stand to gain quite the advantage. We could soon see the world of literature open up much like those of digital art and music.
Building Identity with NFTs
As revolutionary as all of this truly is, we do still have an issue. NFTs are from being a normal part of life, even in the digital realm. Just because somebody owns an NFT, that doesn’t mean you can easily see it. The easiest way is to navigate to someone’s OpenSea account, but people aren’t necessarily hanging out on OpenSea like they are on social media. And if we can’t actually see these NFTs, don’t they lose that identity-building aspect we’ve been talking about this whole time?
In the short-term, the NFT community has found a workaround for this lack of display options in a novel place - Twitter profile pictures.
In a seemingly short amount of time, Twitter has been overtaken with profile pictures, or pfps, of apes, pixelated punks, penguins, and virtually every other animal you can think of. This may be seen as flexing, and that’s certainly an aspect of it, but there is more going on here than you might expect.
In short, the rising use of NFTs as pfps is a form of digital community building. It is social signaling with an investable layer. Think of these pfps as T-shirts or membership cards. When you see someone with a CryptoPunk as their Twitter pfp, it tells you that they are in the crypto space, and were either in Ethereum very early or are very wealthy. When you see a SMB Monkey, you can be confident that person plays a role in the Solana ecosystem.
Much like clothing brands, pfps help us represent facets of ourselves to others in an easy to understand way. Simply seeing someone with the same pfp as you can be reason enough to follow and engage with them. By choosing to align ourselves with something, even when that something is a digital penguin, we are telling others a bit ourselves.
Twitter pfps and OpenSea accounts might be the most prominent forms of showcasing NFTs, but they’re not the only ones. If you want to take a more ‘metaverse’ approach to experiencing NFTs, look no further than virtual galleries. These range from simple browser galleries, such as those made with Muse, to in-game experiences built inside of Somnium Space, Decentraland, and The Treeverse. You can even create a basic NFT gallery of your own with an Unstoppable Domain.
This might be niche now, but that’s largely due to the lack of accessibility. Once the digital places we already hang out in, like Twitter and Facebook, support showcasing NFTs, the role they play in our lives will increase considerably. In the same way we look at online profiles to see what our friends are up to, we will want to see the art, music, and stories our friends collect and cherish.
There is one last piece to this puzzle, and that’s around where we store these NFTs. When you take ownership of an NFT, it is stored in your blockchain wallet. Unfortunately, the address of a wallet is a long string of random letters and numbers. If these wallets are going to hold our identity-building assets, then giving them a complex name that nobody can read doesn’t make sense. This is what NFT domains are for.
NFT domains, like those from Unstoppable Domains, allow their owners to replace their wallet address with a name that they actually identify with. Not only does this make them easier to use, it adds a much needed layer of personalization. If our wallets are to become the portals to our digital identities, they should feel like it.
NFTs Are Here To Stay
Is the whole idea around our things being important to our identity, let alone digital identity, a little...superficial? Materialistic? Well, let’s consider this. Why are our things important to us in the first place?
We experience a lot. We’re constantly racing downhill, occasionally finding a brief opportunity to grab hold of a branch and smell some roses. But we can’t possibly savor these experiences enough. We can’t relive them. So we do the next best thing - we bring pieces of them with us. We uproot the flowers that we deem the prettiest and most important and stick them in vases in our living rooms. We appreciate them not just for what they are, but for the experiences they represent. We show them to others to prove where we’ve been and what we’ve done, to show what we stand for and who we align with.
Our things are remnants of our stories. They are life’s souvenirs.
Whether they exist in our closets, our living rooms, or our blockchain wallets, our things are important to us. And until we stop caring about our things, NFTs will continue to extend ownership to our increasingly important digital ones.