Johannes Hoellerich and Fabian Danko on NFTs and PFPs and why the hype around non-fungible tokens has every chance of changing the art scene and other markets.
Non-fungible tokens (or NFTs for short) are the new buzzword. So-called profile picture (PFP) NFTs have become all the rage, especially since Christie's auctioned off Beeple's digital artwork "Everydays" for an incredible USD 69 million earlier this year. An increasing number of celebrities have boosted the hype further by using PFPs as their profile picture on Twitter. Just how large the NFT scene already is could recently be seen in New York during the largest NFT conference to date.
The First NFTs: CryptoPunks and Autoglyphs
The oldest and best-known PFPs are the “CryptoPunks”, launched in 2017 by the American studio Larva Labs. They consist of 10,000 unique characters with different features (e.g., hoodies), each consisting of only a few pixels. Depending on how rare the depicted features are, enormous sums are paid for these characters – currently, the record for just one (!) Punk is USD 7.6 million. "Bored Ape Yacht Club", another collection of NFTs, was released in April 2021 and also consists of 10,000 characters. The "Ape" with the lowest floor price (and therefore the cheapest), currently costs 70 Ethereum, which is equivalent to about USD 260,000.
But why do these NFTs sell at such large sums? In addition to speculation on further price gains, PFPs like CryptoPunks have become a status symbol. Anyone using a Punk or Ape as a profile picture on Twitter joins an illustrious line of celebrities, including Eminem, Jason Derulo, Snoop Dogg or Jordan Belfort. Reese Witherspoon recently also jumped on the bandwagon: An NFT from the "World of Women" series now adorns her Twitter profile. If you want to be taken seriously in the NFT scene, you must own a CryptoPunk or at least an Ape. Owners of NFTs not only have access to exclusive communities, they can also obtain further NFTs and merchandise.
In addition to PFPs, so-called generative art NFTs are gaining in importance. These are digital artworks generated by an algorithm. One of the first generative art projects created directly via the Ethereum blockchain is Autoglyphs, which, like CryptoPunks, was developed by Larva Labs. There are only 512 artworks in this series, and the cheapest motif currently available is worth over USD 700,000. CryptoArte is another early generative art project. It was launched in 2018 and depicts the history of Ethereum. NFT owners have the right to obtain a printed image of their NFT signed by the artist - linking the digital with the traditional art world. As was typical for these early projects, it has taken CryptoArte a long time to gain attention. In the first year, only a small number were sold at a price of a few dollars. Today, they are traded at between a few hundred and several thousand USD depending on their properties.
In addition to these automatically generated series, there are so-called one-of-one edition artworks, exclusive works by well-known and lesser-known artists, some of which can become incredibly expensive.
NFTs as the Holy Grail for Artists?
Anyone can sell their artwork directly via platforms such as OpenSea and Rarible; there is no selection process and buyers can purchase it directly from there. For a private art investor, this procedure guarantees a high degree of transparency. Traditionally, art buyers have faced two challenges: Is the piece genuine, and is the price justified? With NFTs, they can see at what price the artwork has traded and how much artwork in the same series is trading. Since ownership is easily transferable via the blockchain, digital art is also much more accessible than its physical counterparts. In particular, there are no transportation and storage costs. Feyyaz Alingan is the founder of Blue Alpine Research, which evaluates cryptocurrencies and other blockchain projects. He considers these platforms to be a way to democratize the art market. From the artists' perspective, NFT platforms offer a new sales channel. Viktoria Koestler, artist and owner of RedOutside in Zurich, Switzerland, sees this as an opportunity to make artists more independent of the galleries, which demand exclusive rights from their artists.
So, are NFTs the holy grail for lesser-known artists? Probably not, although crypto-art will likely create a lasting niche for itself. Artists compete with each other for attention, even in virtual space. However, just as there are vast amounts of little-heard music on Spotify, most NFT art on OpenSea and the like will remain completely obscure. And what about the galleries and auction houses? If you wanted to put it cynically, the NFT auctions held by well-known auction houses have only demonstrated just how replaceable they are. Galleries, too, will have to reinvent themselves. No doubt, they will soon be promoting their artists on Twitter, Discord, and Clubhouse - because this is where NFT collectors congregate.
What this can look like is demonstrated by Johann König, a well-known gallery owner. He has created MISA, an online platform that aims to close the gap between the traditional art world and the NFT universe. NFT artworks are regularly offered on that platform as well as traded in an associated secondary market. Interested parties can also exchange information about the projects with other art enthusiasts via Discord.
What Are NFTS?
NFTs are unique tokens and non-fungible. The blockchain adds a digital signature confirming their originality and uniqueness. Until now, it has been easy to copy digital art. NFTs have solved this problem. Allowing a collector to own original digital artwork makes it easy probe ownership and gibe royalties to the artists. Most NFTs rely on Ethereum. As opposed to NFTs, there are also interchangeable (fungible) tokens such as Bitcoin. A bitcoin is always a bitcoin - just like a Swiss franc is always a Swiss franc.
NFT Market Still in Its Infancy
This leaves the question as to the value of digital art. It is not easy to understand why such high sums are paid for digital artworks that anyone can easily copy. But according to Viktoria Koestler, the same is true for analog works of art. Anyone can photograph the Mona Lisa, but that does not mean they own the original. Digital art is in line with the spirit of the times, Koestler says, because digital goods are attributed an increasingly greater value. Even though the trading volume of Open Sea, the largest NFT platform, set a new record of USD 3.4 billion in September this year, the market for NFTs is still in its infancy. Questions around ownership, for example, have not been resolved. Do artists retain the copyright? Can they offer the artwork for sale again? It is also difficult to estimate the direction in which the prices for digital art will develop.
According to Feyyaz Alingan, this situation is somewhat similar to the gold rush during the ICO hype in 2017. But even if it is still just hype, NFTs will play a role in the future. Unlike back in 2017, digital artworks no longer appeal only to crypto enthusiasts but also to small investors. NFT technology has made it possible to create unique and scarce artwork, making it unattainable in the analog world but a commodity in a digital reality.
The general trend toward the digital has been fueled in no small part by the Corona pandemic. Therefore, it is evident that digital art will continue to gain importance, as indicated not least by the art scene's great interest in NFTs.
In addition to digital art, NFTs are already a reality in related areas such as digital trading cards, music, or real estate in digital worlds. Recently, Bored Ape Yacht Club community members and music producer Timbaland formed Ape-In Productions as a new kind of music label. Among other things, it releases NFTs that entitle holders to participate in virtual events and give them access to new content and merchandise.
Even established brands like Gucci, who is offering digital shoes, are jumping on the bandwagon. This development will presumably continue. It is conceivable for a consumer who buys a luxury handbag to receive an NFT as proof of authenticity. It is also conceivable that in the future, NFTs will prove ownership whenever music rights are secured and traded, or real estate or other commodities change hands – which is theoretically feasible but, for the time being, still a pipe dream.
Johannes Hoellerich is Head of Development and Services and Deputy Head of the MSc in Banking and Finance program at the Zurich University of Applied Sciences (ZHAW) Department of Banking, Finance, Insurance.
Before joining ZHAW, he worked in private banking at a German savings bank.
Fabian Danko is Project Manager and Deputy Head of the ZHAW Center for Corporate Finance & Corporate Banking. He is also a partner at Swiss Global Investment Group AG, Zug, and a member of the board of Digital Winterthur.
Before joining ZHAW, he worked as a financial controller for a listed industrial corporation.
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