Ejo #151 – The Case For NFTs: Foundation

Welcome to my NFT Foundation Class. If you’re here it’s because you’re interested in acquiring a basic, but solid, understanding of NFTs as they pertain to art (either that or I made you promise me that you’d read it).  Some parts of this ejo are going to be necessarily dry and a wee bit technical, though I’ve tried my damndest to keep it simple and interesting.  I beseech you to stick it out and make it through to the end, and hopefully you’ll find it worth your while.

I love art.  And I love NFTs.  And I desperately want to talk to you about why those two things go hand in hand.  But the world of non-fungible tokens is murky and overrun with jargon and technical mumbo jumbo, making it difficult for the average person to understand.  I’ve spent almost 1000 hours studying crypto and NFTs so that I can smash through all the bullshit and explain to you, in as simple terms as possible, why they are such an important development in the art space.  Don’t worry, I’m going to start with the assumption that you know absolutely nothing.  This class is all about laying the groundwork so that in the next installment we can have a meaningful conversation about it on a relatively level playing field.  As always, if you have any questions at all, please feel free to drop me a message.  OK, let’s do this!

If you googled “what is an NFT” right now, you’d be rewarded with 272 million results and definitions ranging from the not-very-helpful (iT’s a noN-fUNgibLe tOKeN…. uh, duh) to the esoteric and super technical.  Investopedia defines NFTs as “cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other”.  Clear as mud. 

So let’s break it down.  What the fuck does fungible even mean?  The definition of fungible is something that is mutually interchangeable.  So think of a five dollar note in your wallet.  If I also had a five dollar note, in the same currency, we could swap them and we’d both feel OK about it.  Because for the purposes of being used as currency, they are the same.  They are mutually interchangeable.  Therefore they are fungible.  Another example.  If you “accidentally” drank the bottle of Whispering Angel rosé wine that I brought to the picnic, I’d be more than a little upset with you, but you could very easily make it up to me by heading out to the store and bringing me back another bottle of Whispering Angel rosé.  Because bottles of Whispering Angel rosé are all the same.  They are interchangeable.  Therefore they are fungible. 

Since they’re fungible, theoretically, we could use bottles of Whispering Angel rosé as currency. It’s about as arbitrary as using bits of paper with numbers written on it.

So now that we know what fungible means, let’s have a look at the definition of non-fungible.  If we take it to be the opposite of fungible, it must mean something that is not interchangeable with anything else.  Something that is unique.  Your house is non-fungible.  Your neighbour’s yappy dog is non-fungible.  A birthday card your mum gave you for your sixteenth birthday is non-fungible.  These items are all unique.  They are not interchangeable with anything else.  Therefore they are non-fungible.  Receipts are non-fungible, which is why stores won’t issue refunds without an original.  And legal contracts are also non-fungible because they contain specific clauses, relating to two or more specific entities.  Each signed contract is unique, and not interchangeable with other contracts.  We don’t normally think of things in terms of their fungibility because it’s an incredibly clunky way of describing something, but hopefully you’re getting the idea. 

So now we know what non-fungible means.  But what are tokens, in the context of cryptography?  First here are some simplified definitions of things that will help you to understand. 

A blockchain is a public digital ledger where transactions are correctly and permanently recorded and stored.  Bitcoin and Ethereum are examples of blockchains.  A smart contract is a computer coded digital contract, stored on a blockchain, which executes automatically when certain parameters are met. 

I really don’t want to get into the weeds on cryptocurrencies or blockchains here, but in super broad brushstrokes, a cryptocurrency like Bitcoin is a blockchain’s native digital currency, which is built into the blockchain itself.  It’s part of the blockchain’s DNA.  A token is different.  A token is a piece of code which is part of a smart contract that’s built and implemented on top of the blockchain (usually Ethereum).  And there are several different types of tokens.  For instance, utility tokens allow a user to access a service or a network.  Security tokens are like digital shares.  Governance tokens grant voting rights.  And (drum roll, please) non-fungible tokens are used to represent unique assets. 

So what are these unique assets?  Well, NFTs can represent anything.  Jpegs of course, but also songs, gifs, collectibles, avatars, movies and gaming wearables.  Art represents only a small fraction (14% in 2021) of all existing NFTs.  The technology is also being widely used in real estate, music and the verification of IDs, medical and academic credentials.  NFTs are tracking supply chain logistics, being used for ticketing (for everything from concerts, to parking your car to airline flights) and also helping to eliminate voter fraud in elections.  You can literally create an NFT for anything (yep, even your grandmother if that’s the kind of person you are).  The only kind of NFTs I’m interested in however, are the art kind, and when I refer to NFTs from now on, that’s what I’m talking about. 

Collectibles, including PFPs, make up the huge majority of NFTs.

So far we’ve shown that non-fungible means unique and one of a kind.  And we’ve established that tokens are lines of code on a blockchain which identify, certify and represent an asset.  But did you know that when we talk about non-fungible tokens, the non-fungibility (i.e. the uniqueness) isn’t actually referring to the asset at all.  It is the token’s code itself which is unique and non-fungible.  The combination of the token ID number and the smart contract address (i.e. where it sits on the blockchain) unite to create something unique.  No other token can ever have this combination of numbers.  And that, ladies and gentlemen, is what makes a token non-fungible.  To demonstrate how that relates to art, if a photographer were to print out 100 physical copies of a single image, those prints would all be fungible.  They are mutually interchangeable and there’s nothing to differentiate them.  But if that photographer were to mint 100 individual versions of that same image on the blockchain, each piece would have its own unique NFT representing it, resulting in 100 unique digital assets.  And despite them all looking the same, they would no longer be mutually interchangeable.  So, to reiterate, the NFT is not the artwork.  The NFT is the code that represents the artwork.  And it exists in order to certify the asset, as well as to facilitate its sale, purchase and transfer. 

Pop quiz time: which of the above is an NFT?

So what about copyright?  Well, that’s another weedy area I’ll be steering well clear of today.  But broadly speaking, NFTs rarely confer copyright ownership to the purchaser.  Which is no different to traditional art.  For instance, if I were to buy a unsigned print of Banksy’s Girl With Balloon (with the spare USD200,000 I have just lying around), there’s no dispute that I would own that artwork.  But I sure as hell wouldn’t own the image.  And I certainly wouldn’t be permitted to profit from the image, even though I paid very good money for the right to hang it up on my wall.  And it’s exactly the same with NFTs.  They are artworks that you can buy, and verifiably own.  But unless it’s specifically written into the smart contract (which it very rarely is), you do not own the image, the intellectual property or any of the copyright associated with the image.  The legal side of NFTs is still very much a messy area, one that I’m not very familiar with, and which goes well beyond the scope of this class.

Even though there are 600 unsigned Girls With Balloon (as well as 150 signed versions), only one person owns the copyright and their name is Banksy.

So let’s go deeper into an area that I am familiar with, starting with a quick history lesson about the internet.  Web1 (1990 – 2005) was the introduction of the world wide web, the internet being made available to the masses.  It is commonly referred to as the “read-only” web because it was mostly used to search for information and had very little interactivity built into it.  Web2 (2005 – 2012) encouraged interactivity, participation and online socialising, giving rise to centralised social media platforms, like Facebook, Instagram and YouTube.  It ushered in an era of collaboration, community and dialogue.  It saw the rise of user-generated content, though the vast majority of creators were not able to monetise their creations, the platforms themselves cashing in on a creator’s popularity.  Web3 (2012 – ) is not yet fully realised, though elements are already in place.  The user can actually monetise their own content, rather than conceding control to the tech giants.  It allows users to interact amongst ourselves (i.e. peer-to-peer) rather than the interaction being facilitated by a centralised platform such as Meta (aka Facebook).  With the help of blockchains, NFTs and other tokens, Web3 is where the metaverse is taking shape.  

So what is this metaverse?  Well, firstly, there will be more than one, and they almost certainly won’t be movie-like, 3D virtual worlds where we are plugged into a matrix.  It’ll simply be a more integrated and seamless version of the internet that we experience today.  It’ll be a more complete way of being online.  People already rack up an average of eight and a half hours of screentime a day.  That’s more than half our waking time, and in the future it’s likely that we’ll spend even more time online.  It makes sense that a digital evolution of humanity into the metaverse will occur, and plenty of brainpower and technology is already being used to facilitate that.  And NFTs are going to be a big part of it. 

Whenever I talk about NFTs though, what I often hear back are the words “scam”, “Ponzi scheme”, “tulips”, “bubble” and “burst”.  NFTs are none of those things. They are, quite literally, a goddamn revolution.  But I do understand how people might get that impression.  So before we can have any kind of discussion about NFTs and art, we absolutely first need to address the ape in the room.  I’m referring to PFP (or profile pic) NFTs.  Whether you know anything about NFTs or not, you may still have heard of CryptoPunks and Bored Ape Yacht Club (BAYC).  After all Jay-Z, Heidi Klum, Jimmy Fallon, Madonna, Tom Brady and Justin Bieber are all proud owners of at least one of them.  But what exactly are they, and what’s all the fuss about?  PFPs are essentially a collection of (usually 10,000) digital images, each one unique in some way, designed to be used as profile pictures or avatars on social media, such as Discord or Twitter.  That’s the basic definition.  But PFPs are so much more than that.  They are about belonging to an exclusive community.  And they make perfect sense in a metaverse environment, allowing for the expression of digital identity and personality. 

“In-the-know” celebrities have adopted BAYC as their NFT poster child, and they do carry some cachet in certain circles. Personally, I don’t see the appeal. (I said what I said.)

When I first got into NFTs, I have to admit that I, too, was swept up in the PFP craze.  I bought into it, and picked up a couple of profile pics for myself.  But, as I spent more time in the space, as I delved deeper, reading, listening, watching, learning and evolving, I pretty quickly figured out where the true value of NFTs lies.  And I don’t believe it’s in new PFP projects.  Which is not to say that I don’t rate CryptoPunks.  On the contrary, I completely get it.  And I want you to get it too. 

CryptoPunks was the first algorithmically designed, random-generated PFP project released on the Ethereum blockchain, way back in the olden days of 2017.  The CryptoPunks series was actually released as an experiment, and they were virtually given away for free.  To everyone’s astonishment and delight, the project was a runaway success.  Owning a CryptoPunk now is a badge, declaring you an OG, or… perhaps just declaring that you have a shit tonne of money and want to be part of the cool kid club (hello Serena Williams, how you doing?).  Either way, it’s a huge flex, for people in the know.  Part of the appeal is that they are representative of something subversive, counter-cultural, avant-garde and underground.  And of course, they were the first.  Bored Ape Yacht Club, released in April 2021, capitalised on the fortune of CryptoPunks, becoming successful in its own right.  And as of March 2022 the combined value of both projects was estimated to be around $3.6 billion.

Yes, each of these 24×24 pixel images is probably worth more than your house.

But for those who still don’t understand the allure of these types of NFTs, perhaps the best way to explain their exorbitant prices is to compare them to baseball cards, which are also extremely sought after and valuable.  The most expensive baseball card in the world is a 1909 Honus Wagner which recently sold for a record breaking $6.6 million.  I mean, what the fuck, right?  It’s literally just a piece of cardboard.  But, as long as baseball fans agree on that value, then that is what it’s worth.  And as long as NFT fans agree that CryptoPunks are valuable, then they’ll continue selling for hundreds of thousands, and sometimes millions of dollars.  At the end of the day, asking why CryptoPunks are so expensive is exactly like asking why diamonds are.  Number one, scarcity.  Number two, strength (cryptographic immutability for the NFT, and physical toughness for the diamond).  And number three, demand.  Personally, if I were ever given the option to choose between a diamond and a CryptoPunk, I would take the punk every single time. 

So now that you know what PFPs are, let’s talk about their downside.  The problem with the stratospheric success of 10K projects like CryptoPunks and Bored Apes, is that they have spawned a shitload of copycat projects trying to cash in on the hype.  Is there value in profile pics?  Well, there are more than 700 PFP projects out there, shilling over 80 million NFTs to kids hungry for the same cult status and financial success of CryptoPunks and Bored Apes.  You do the maths.  Most of the hype is baseless and rooted in sheer FOMO.  Fear of missing out has driven extreme risk-taking and speculation in the PFP market, leading to a culture of flipping, scamming and a lot of innocent folk getting the rug pulled out from under them.  If there’s a Ponzi scheme anywhere to be found, PFPs is where it’ll be lurking.  And if you’re looking for a bubble, you need look no further.  I don’t think it will always be like this, and I do think that the space will mature.  After all, PFPs’ greatest utility, the metaverse, is just around the corner. 

So, I think we’re finally ready to move on and start discussing art in my upcoming NFT Masterclass, but before the bell rings today I’d like to stress that yes, PFPs might be the public face of NFTs, but they are not representative of the entire NFT ecosystem.  They are simply a subset of NFTs (albeit a big, loud, and sometimes obnoxious one).  As I said earlier, the true value of NFTs is not in cute cartoons.  The true value of NFTs lies in art.  

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