NFT. A highly fascinating, yet equally obfuscating phenomenon that has seemingly sprung out of nowhere over the past couple of months and held the world in its grip ever since. Making headlines everywhere, these days everyone and their grandma seems to have taken a whiff of NFT, and everyone seems to want a piece of the pie.
I. Introduction: What's this NFT hype about?

A lot of prominent figures have jumped on the NFT bandwagon and made a lot of money in the process. Just a few examples: Canadian musician, Grimes, whose partner Elon Musk also happens to be an ardent crypto supporter, reportedly made $5.8 million in under twenty minutes selling her artwork as NFTs. Controversial Youtuber Logan Paul sold $5 million dollar worth of NFTs in similar fashion. The CEO of Twitter, Jack Dorsey sold his first tweet on the platform as an NFT, with bids reaching north of $2.9 million. Digital artist Beeple’s artwork was auctioned by the 225 year old auction house Christie’s for an eye popping $69 million. Even huge companies are joining the party. Nike recently patented its first blockchain based sneakers called Cryptokicks in order to ensure the authenticity of the pieces.

screenshot-2021-04-06-at-6-50-02-pmThe first tweet ever from CEO of twitter, Jack Dorsey

These high profile transactions and the potential for large scale industry disruption has meant that a lot of interest has been sparked within artist and cryptocurrency enthusiast circles all across the world. These large scale transactions and big media coverages make for an otherworldly image of this particular art scene, daunting perhaps, or inaccessible to many creatives that don’t identify with the glam of a bombastic art market. Which is a shame, as the potential in NFTs and cryptocurrency technologies at large lie precisely in its radically decentralizing qualities. We therefore created this Universe article in the hopes that people, makers, artists and creatives from any background, who are interested in the world of NFTs and looking to harness its potential have a place to start. We will first provide a brief history of NFTs, take a look at how and why people buy NFTs, and situate it in the wider context of how traditional art markets at large operate. Then we will dive deeper into various real world use cases of NFTs, and provide a roadmap for the different NFT marketplaces. In conclusion I will touch upon a topic that has had the art world in its grip for the recent past: the environmental impact of NFTs.

So just what exactly are NFTs? NFTs (Non Fungible Token) are cryptocurrency tokens that are provably unique. Each token on the blockchain has a unique identity and no two tokens on the blockchain would be the same. For example, the cryptocurrency Bitcoin, the OG cryptocurrency and to this day, still the most popular out of the bunch by far, will only ever have 21 million units created (mined). All 21 million are the same compared to each other and one bitcoin would be worth exactly the same as another bitcoin in every sense of the word. This makes Bitcoin, and most other cryptocurrencies currently in circulation fungible tokens. NFTs on the other hand, behave in a different way. Every single token on the blockchain is unique, which means unlike Bitcoin, in which all 21 million are the same, NFTs are all one of a kind. Practically like trading cards, except this uniqueness can be technologically and mathematically proven because of the nature of blockchain technology.

The creation and adoption of this technology opened up a world of new possibilities and use cases across a range of industries. This, coupled with the rise in popularity and adoption of DeFi (decentralised finance) made sure that people realised the potential for large scale disruption. The NFT market absolutely blew up this past year with trading volumes jumping multifold, new companies and developers rushing to create new platforms for enabling the trade of NFT artworks, also called crypto-art, games that created entire virtual universes based on blockchain (New age minecraft, anyone?), and a host of other applications of the brand new technology. According to Bloomberg, the NFT market is now worth over 1 billion dollars, compared to nearly nothing a couple of years back. Let’s first go back to where it all started.

II. A brief run through the history of NFTs

The first reference closest to current day NFTs are arguably ‘Coloured Bitcoin’, coined in a 2012 blog post referring to the subunits of the bitcoins that were sent in the Genesis transaction; the very first transaction ever made on the bitcoin network. A sub-unit could be as small as one Satoshi, the smallest unit of bitcoin, which is equal to 0.00000001 of a bitcoin. Since all transactions on the bitcoin network are stored on the blockchain for anyone to check, it ensured that the coloured bitcoins were verifiable.

However, since the bitcoin network was never created to serve the purpose of NFTs, the idea never took off. A few other iterations of this idea were created but nothing really hit the mainstream. That was, until the creation of CryptoKitties. CryptoKitties was a game based on Ethereum’s blockchain. Ethereum is the second largest cryptocurrency by market capitalisation and is the most widely used blockchain for real world use cases. CryptoKitties allowed people to adopt, raise, and trade virtual cats. Yes, you heard it right, virtual pet cats on a blockchain. LOL.

Every other news outlet seemingly covered CryptoKitties amidst the height of the 2017 crypto boom. Some virtual cats sold for over $100,000. People were trading so many virtual cats that it jammed Ethereum’s network multiple times. This raised a lot of eyebrows and people’s interest in the use cases and adaptability of non fungible tokens grew a lot. The 2018 crash of the entire crypto market took some of that public interest down with it, but the enthusiasts kept an eye on NFTs.
Throughout 2018 and 2019, a lot of projects and protocols aiming to provide real world use cases for NFTs were launched. Like mushrooms shooting out of the ground, an entire ecosystem developed around NFTs with tons of marketplaces and games built on the digital infrastructure. Some of these projects garnered eyeballs again due to the recent rise in adoption and popularity of cryptocurrencies and DeFi projects.

screenshot-2021-03-30-at-1-26-39-pmCNN tweet on Cryptokitties.
III. Understanding NFTs in the context of the traditional art world market

And now we come to the burning question we have all been asking ourselves:
How can artists and creatives harness this emerging technology and the surrounding hype to their advantage? To understand this in detail, we need to delve deeper into how the traditional art market works, take a little detour into the economical side of art appraisal, and look into the differing motivations behind why people buy art.

First of all, it is important to note that there is a marked difference in the art buying behaviours of people belonging to different economic classes. Furthermore, there is a crucial difference between art buying for the sake of art, and art buying for economical reasons. These different art buying motivations and class backgrounds, often intersect. Have you ever wondered, for instance, why some rich people spend millions of dollars, sometimes hundreds of millions of dollars on fine art when they could invest that money in the stock market, real estate, or any of the thousands of other options that give them much better monetary returns on their investment? I can tell you right now that it’s not just because they appreciate the artwork that much and don’t care about how much money they spend, no matter how much they would like you to believe that. Of course, there are art collectors out there as well who really collect artworks, no matter how high the price, out of pure appreciation and love. But those who spend exorbitant amounts of money on art, into the tens and hundreds of millions, usually don’t spend large amounts of money on assets which depreciate in value, or, what would in economic terms coolly be reduced to liabilities with diminishing returns, they spend their money on assets which make them even more money, making sure that they stay rich.

Art doesn’t generate any income like real estate or dividend paying stocks though. You purchase it and it just sits there. The reason people buy fine art is in the hope that they would be able to sell it to someone else at a higher price later on. This is the epitome of the greater fool theory and it doesn’t just happen in the art world. This sort of behavior can be observed in markets like high end watches, old cars, bottles of high end alcohol, and so on. The reason this works, from a consumer psychology perspective, is that people value things that they own greater than things that they are willing to purchase. This is called the endowment effect. None of us are immune to the irresistible pull of irrational behaviour. How do we meet in the middle, for a price that would make the transaction happen, then?

Anyone who has ever attempted to contemplate all the intricacies that go behind the appraisal of an art work, knows that connecting monetary value to art is one of the hardest things to do. More than anything, the value of an art work is so in the eye of the beholder, or the eye of a certain zeitgeist, that it often eludes or transcends any common logic or reasoning. If we take an economic perspective however, we realize that everything in our capitalist society is subject to the forces of demand and supply, even art.

1024px-leonardo_da_vinci_salvator_mundi-_c-1500_oil_on_walnut_45-4_x_65-6_cmThe most expensive painting ever sold. Salvator Mundi by Leonardo da Vinci (circa 1500)

When people believe that the work of Leonardo da Vinci is in some way better than the €20 wall print from Ikea, the price of the artwork from Leonardo da Vinci is going to be much more. When you add to the fact that Leonardo da Vinci has long been dead, and that there are only about twenty original pieces of work left from him, we get the exorbitant figures of money that some of his work has sold for. The world’s most expensive painting sold was ‘Salvador Mundi’, dating back to the year 1500. It sold for over $450 million.

Demand and supply is not the only factor, though. There are more insidious factors at work sometimes, aswell, that, to gain a more complete big picture, have to be mentioned. A major reason why some strokes of paint on a canvas solicit such obscene amounts of money is, you guessed it – dodging tax.

Tax avoidance is a very common but very complex phenomenon. Lawyers and accountants all over the world try to find loopholes in the system to have their clients pay less money in tax, loopholes that are sometimes there on purpose. A number of countries in the European Economic Area are known the world over as friendly destinations for those looking to avoid paying tax in their own countries. One way they stash artworks is through freeports.

Freeports are an economic area, usually at a port, where companies are taxed very little or nothing. These freeports are famously used as private storage for fine art and other collectibles for their wealthy clients in order to hide their identity or avoid paying tax. Even European countries themselves are estimated to lose $1 trillion, or 20% of the corporate taxes they are entitled to in the form of tax evasion. Art, unfortunately, just so happens to be a great medium for tax evasion.

20151119-acacias-portsfrancs-a3The Geneva Free port, home to some of the most exclusive art collections in the world

It should be clear by now that this sort of buying behaviour is radically different compared to why regular people purchase works of art. The reasons for those purchases usually are somewhere along the lines of aesthetic value, emotional attachment, source of inspiration, for gifting, or just for enriching their personal environment. In other words, they purchase art to keep it and derive utility out of it. They purchase art, because they appreciate art.

Understanding these behaviours is crucial for using the burgeoning NFT hype and technology to your advantage, as an artist, and as an investor both. It’s important to remember, even though NFTs are an incredible advancement in technology, it’s still the same market with the same underlying pros and cons, uses and practices. NFTs are just solving the huge problems of verifying that the multi-million dollar paintings are originals, as you can imagine when this much money is involved, there are a lot of people willing to work extremely hard to fake the art. And even that verification is actually useless till the time there is a proper legal structure around this technology and market.

The million dollar, headline grabbing transactions that have contributed to this NFT hype make for interesting content to write about, but when you add crypto to the already speculative art market, it makes for a whole nother level of a risky investment. The people blowing millions of dollars on examples of digital artwork are doing just that, taking an incredible amount of risk, in the hopes of re-selling it to someone who’d be willing to pay even more money for it.

schermafbeelding-2021-04-06-om-21-20-29Everydays: The First 5000 Days, a collage by digital artist Beeple. Christie's Images via Reuters

On the other side of the coin, there are also a lot of transactions happening on a smaller scale, some by small time speculative investors, some by people who just appreciate digital art and want to support the artists, and some by people wanting to be a part of history by being one of the first few to purchase some crypto-art.

Point is, if you’re going to speculate on artwork without the backup use case of million dollar tax breaks, there’s a significant chance it’s all going to come crashing down very soon. But if you’re going to purchase works of crypto-art because you enjoy and appreciate the artist or the work behind it, then NFTs are definitely for you. This goes especially for fans of digital art. For many years there was no way to make an income out of it, but now there’s finally some light at the end of the tunnel.

Let’s be real: as an artist, unless you’re already very established or dead, there’s little chance your piece of digital artwork is going to sell for $5 million. However, if you would want to use the world’s newfound interest in NFTs to create an extra possible source of income and sell your work directly, then you won’t be disappointed. Smaller transactions on NFT networks are starting to gain momentum. We have created a guide here to help you get started, or if you have already started, to help you understand the NFT world better and hopefully, support you in some way.

IV. Roadmap guide to NFT Marketplaces

By now, it is clear that NFTs are cryptocurrency tokens that are provably unique. This sounds simple enough, but it opens up the doors to a world of use cases, improving the current systems in place or creating new ones. Let us talk about some of them –

In the gaming industry – for years, there have been games that focus on creating a virtual universe with its own economies. These games like Fortnite and Call of Duty have in game purchases of various collectibles, currencies, and other items. Till now, the users have only been able to purchase these items from the in-game marketplace where they pay money to the gaming company and get their virtual item of choice. However, there is no possibility to sell or purchase the items anywhere else, and no option to return them to the game. This has made the game developing companies extremely wealthy and in-game purchases have become a major source of income for them. Blockchain based games with virtual universes and economies have now started to pop up though. These games let players trade in-game items on a marketplace as NFTs. NFTs offer a great solution for the virtual ownership of rare and unique gaming collectibles, allowing the generation of revenue by leveraging the user’s gaming skills. [1]

Other industries that NFTs can completely disrupt are sports [2], real estate [3], and last but not least, the art industry. Artists, particularly digital artists, increasingly struggle with copyrighting their artwork and proving the authenticity. The use of NFTs can enable one to buy a work of art and showcase it within a digital space, being fully aware of the history of the asset, such as artist name, date of creation, list of other owners, and value of the asset throughout its lifecycle. It will also allow the artists to get better payment for their work through the elimination of brokers by initiating P2P payments, even once the hype dies down and there aren’t a lot of multi-million dollar NFT transactions. Let’s go into further detail about how artists can benefit from this increasing adoption.

How to create an NFT out of your art and sell it on marketplaces 

Before you start the process of creating (or minting) your first NFT for your artwork, you would need to decide which blockchain to do it on. Two of the most popular ones right now are Ethereum and Binance Smart Chain. There are others, but for the sake of simplicity, we are going to keep to discussing these two.

male-hand-with-golden-ethereum-blue-background_155003-8466A coin with the Ethereum logo.

Both of these blockchains focus on solving different problems with their protocols and systems: Ethereum focuses on security, and high levels of decentralisation. It has also been one of the first and by far the most commonly used blockchain in the decentralised finance and NFT world. This focus on security and decentralisation however, means that it misses out on the scalability aspect. Transactions on any blockchain require a network fee (called ‘gas fees’ on Ethereum), but the fees on Ethereum’s network these days have been astronomical, sometimes reaching into the hundreds or thousands of dollars for a single transaction.

A few of the most popular and accessible Ethereum based NFT marketplaces are:

  1. OpenSeathe first and biggest peer-to-peer NFT marketplace for crypto goods. You can think of it as eBay on the blockchain. Items available for buying and selling include collectibles, artwork, game items, and other virtual goods secured by a blockchain.
  2. Rarible – another popular NFT marketplace, similar to sites like OpenSea. It’s also a platform for creating NFTs, which anyone can do. Users can go to Rarible with content they own such as a digital image or motion graphic and create an NFT out of it. Sellers can create multiple NFTs for one single image and sell it a multitude of times. Or, instead, distribute just a single item which is then deemed rarer. Furthermore, artists can set a percentage to receive on lifetime re-sales.
  3. Mintable – also one of the most popular NFT marketplaces based on the Ethereum blockchain right now. It has an auction system for the sale and purchase of NFTs and users can mint their own NFTs with the artwork they own. They can also browse the website and vote on the quality of particular works of art. [4]

Binance Smart Chain is a relatively new creation from the company behind the largest cryptocurrency exchange in the world. It was created primarily to solve Ethereum’s scalability problems. Transactions on the Binance Smart Chain network’s blockchain cost significantly less in network fees, making them much more accessible to a wider range of users. However, the native token used for transactions on this network is the Binance coin ($BNB), which is controlled by the company Binance. This does not fare very well in the decentralisation aspect that the cryptocurrency community so wholeheartedly supports, since that was the main focal point of the movement from the beginning.

6929088d-a2d2-444e-9122-710031d93d6dThe Binance logo.

Since the Binance Smart Chain network is relatively new, there are a lot less NFT marketplaces and projects built on top of it, compared to Ethereum. Some of the most popular projects currently built on the Binance Smart Chain, at the time of writing are – 

  1. JuggerWORLDone of the first NFT dedicated marketplaces on Binance Smart Chain. It only launched this January so it’s extremely new. The platform has been made as a direct answer to the BSC community’s requests to begin trading NFTs outside of Ethereum.
  2. PancakeSwap – originally a DeFi liquidity pool platform built on Binance Smart Chain, after the massive spike in popularity recently, they have also started to dip their toes into the NFT market. It’s not a proper marketplace yet, but users can earn some NFTs as rewards by entering into competitions. Users could swap the NFTs for their native token $CAKE, or keep them just for fun.

To mint your own NFT, you have to go on to any of these marketplaces and follow their process. Each market has its own way of letting artists publish their work for sale. Some require people to create their own store before they can add anything for sale, others let you post your pre-minted NFTs directly. What stays consistent is that you first have to mint your NFT, which means adding the artwork’s metadata on to the blockchain, and then you can post your work for sale. 

A lot of people don’t realise that NFTs themselves are not the asset people buy or sell, NFTs, in their current form are just some of the metadata from the digital product stored on the blockchain which would let anyone verify the authenticity and ownership of the image. It is theoretically possible to store an entire image on the blockchain, but that would take up a lot of storage and cost an incredible amount of money in fees. Some estimates, according to the current range of gas fees on Ethereum’s blockchain, say that storing an entire 1mb image on the blockchain would cost over $10,000. Most digital artwork takes up more storage than 1mb. 

This is an important aspect of the current state of the NFT market to keep in mind, because until the verification process is legally recognised, the verifiability and authenticity does not mean much in the real world. This fact once again points towards the extremely speculative nature of the current NFT market. It is very much possible that in the future, when governments and legal systems around the world realise the power of blockchain technology, these systems would be legally recognised and enforceable, but right now, it’s just not on the cards anywhere in the near future. It’s also possible that governments would be forced to reconsider and redefine what “ownership” really is.

V. Conclusion: a look into the environmental impact of NFT’s, and what does the future have in store?

A lot has been said about the environmental impact of cryptocurrencies. It’s certainly a conversation we need to have. According to a recent report from Bank of America, Bitcoin mining consumes as much energy as the entire country of The Netherlands. More recently, a lot of debates in artist communities have been sparked about the wasteful impacts of NFTs in particular. Climate change is an undeniable problem caused by mindless growth objectives of humanity in recent centuries, and it’s always a good thing to be conscious about the impact new technologies and developments have on the environment. In a blog post by Memo Akten, his research concluded that an average ecological footprint of one single-edition NFT, including minting, bidding on, cancelling, sale, and transfer of ownership, can reach into hundreds of kWh and hundreds of KGs of carbon emissions. In his words: A single NFT can involve many transactions. These include minting, bidding, cancelling, sales and transfer of ownership. If we were to break down the footprint by transaction type, we get: Minting: 142 kWh, 83 KgCO. Bids: 41 kWh, 24 KgCO. Cancel Bid: 12 kWh, 7 KgCO. Sale: 87 kWh, 51 KgCO2. Transfer of ownership: 52 kWh, 30 KgCO. In fact, of the ~18000 CryptoArt NFTs that I analyzed, the average NFT has a footprint of around 340 kWh, 211 KgCO2.” Comparing it to the average EU resident’s energy consumption, he concluded it’s the equivalent of one month’s usage of electricity.

These are head turning numbers. One single piece of artwork impacting the environment to this extent is certainly unsustainable. Let’s have a look at what’s causing the incredible levels of energy consumption:

gm-enigma-3-360-1-previewA bitcoin mining farm in Iceland.

The inherent mechanism behind most early blockchains, including Bitcoin and Ethereum, that is used to verify transactions is called proof-of-work, or PoW. The system requires miners to solve increasingly difficult mathematical problems in order to win the responsibility to approve a block and add it to the chain. They get rewarded with the network fees to solve these problems. Proof-of-work was never designed to be environmentally friendly. It was designed to require more and more energy with time, which is an important part of what makes it so secure. However, it also makes it much harder to scale and be adopted by the masses.

There is currently another alternative to PoW gaining huge momentum however: PoS. For use cases where security isn’t the biggest concern, a number of blockchains are being built on proof-of-stake, or PoS consensus. In case of PoS, a set of nodes decide to stake their own cryptocurrencies for the transaction validation. They are called ‘stakers’. The larger the amount of stake and the longer the duration of the stake, the better are the chances of the staker to get transaction validation responsibility. Here, the stakers are providing the function that miners do for the more traditional PoW consensus. The difference is, you don’t need warehouses full of processing units and countries full of energy to do it.

Ethereum is also set to move to the PoS consensus with the roll-out of Eth 2.0, which is expected to arrive sometime within the next two years. Other blockchains that are gaining momentum like Binance Smart Chain already work with proof-of-stake. This shift of the consensus would solve a lot of the environmental issues. Not to mention that a considerable amount of PoW mining is done using leftover, renewable energy in places like the Sichuan region in China, and the country of Iceland, both of which produce large amounts of excess renewable energy which would otherwise go to waste.

The concept of “waste” is also arbitrary in nature. To someone sitting in a place like India, the average electricity consumption of the aforementioned EU citizen would also seem wasteful. Cars (even the electric ones) consume much more energy than a horse, but we still found a place for them in our systems. From an economic standpoint, any development that creates value is worth exploring. However, from a philosophical point of view, the key points to consider are definitions, not the technology. Value is defined imperfectly by our current market economics, and without a commonly agreed on definition, even a system that runs entirely on renewable energy or one that consumes as much energy as a lightbulb could seem wasteful. Here, it would be useful to keep in mind that NFTs and the overall world of blockchain and cryptocurrencies at large is still in its adolescent stage, these technologies only being about a decade old, it can go either way. We, the people, the actual users, need to decide what direction we want to take it in.

The question we have to ask ourselves is, are the (perhaps temporary) environmental costs worth the radical disruption and decentralisation of the traditionally top-down markets and systems that we all have gotten so used to? 

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[1] Users are also allowed to participate in the governance to make decisions on future developments in a game. It provides users with an opportunity to create their very own virtual world, operating the same within verifiable gaming marketplaces.

[2] Sports – the sports industry has been one of the fastest growing adopters of NFT technology to solve its problems of counterfeit tickets and merchandise, along with giving fans ownership to collectible digital items like NBA Top Shot, which is a website that allows users to buy and sell highlight clips of iconic moments in NBA games. Some of the clips have sold for as much as $200,000. Billionaire investor and owner of the Basketball team Dallas Mavericks, Mark Cuban recently announced his plans to use NFT technology for ticket sales at his team’s home stadium. 

[3] Real estate – tokenised real estate is one of the biggest use cases for NFT which has the potential to disrupt the entire industry. If real estate investments are tokenised, it enables the possibility of secure, verifiable, fractional investments. Which means that people would be able to buy even a small part of a particular property, which lowers the barrier for entry in an investment market which has traditionally been reserved for the more well-off parts of society.

[4] Some other marketplaces focus on having a curated selection of digital art for people to buy, so they are invite-only and artists have to get approved before they can list something for sale. We have chosen to focus on the marketplaces that are accessible to everyone.

This story was written by Parv Prabhakar. Parv is a blockchain and cryptocurrency researcher, trader, and consultant. Growing up in Delhi, India, he was one of the first few people to get involved with the world of cryptocurrencies in his country. He has been passionate about and involved in the photography and the wider art scene in Delhi for years as well. Now he helps other people understand the technology and hopes to contribute to the world adopting the crypto standard.

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This story was edited by MAMA’s Editor-in-Chief, Xiang Yu Yeung.

The header image was kindly provided to us by Ytje Veenstra. It is an excerpt of an NFT artwork titled The Jackpot, and is a collaboration between Ytje Veenstra and Rutger van der Tas. The work is mined on Async Art, an NFT platform. View here.


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