NFTS

Nfts

WHAT ARE THEY AND SHOULD YOU INVEST IN THEM?

Ihad to look up the meaning of the word “fungible” when I first encountered the term “non-fungible tokens”, now referred to simply as NFTs.

Wikipedia gives the following definition: “In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable and each of whose parts is indistinguishable from another part.”

The Cambridge Dictionary defines something as fungible if it can easily be exchanged for others of the same value and type.

So the opposite, “non-fungible”, therefore means something that can’t be copied, something that is unique. Examples are hand-crafted objets d’art, sculptures and paintings.

In a world dominated by consumptiondriven mass production, fungible goods are the norm: cars, television sets, painkiller drugs, bottles of cooldrink.

However, to mass-produce a consumer item, assuming you had a factory with the appropriate equipment to do so, you would need the permission of the party that held the copyright on the design, formula or recipe – the patent.

So while the goods themselves are fungible, the intellectual property rights behind them are not, and these rights have a monetary value.

Digital era

When the internet came along, suddenly there was a whole class of goods that existed only digitally, and they were immensely replicable.

Large corporations maintain intellectual property rights on their digital property, such as computer software. To use Microsoft Office, for example, you need to pay

Microsoft a hefty sum to be able to operate the application on your computer. Hence Bill Gates’s permanent smile.

But ownership of something you create digitally has been largely out of reach for the individual. It’s not only too easy for people to make copies of your creation; more importantly it’s too easy for someone else to claim your creation as his or her own.

Enter blockchain

The blockchain concept emerged in tandem with the world’s first cryptocurrency, Bitcoin. Cryptocurrencies can only work if there is something that prevents the units of the currency from being replicated. A single Bitcoin would quickly lose its value if it was subject to the ubiquitous practice of “copy and paste”.

So the inventor of Bitcoin, the mysteryshrouded Satoshi Nakamoto, developed a technology that was more revolutionary than the digital currency itself: the blockchain.

This is essentially an encrypted ledger that is accessible to all users but that is immutable (entries cannot be altered). Each transaction involving the digital item (in this case each Bitcoin mined) is automatically entered in the ledger. This immutable record of transactions is what gives the item its authenticity, or to use a term from the art world (particularly appropriate when discussing NFTs), its “provenance”. An item that has a unique digital record cannot be replicated and allows for only one owner at a time: hence it has value, subject to the laws of supply and demand.

It is the blockchain that has made possible the emergence of NFTs: digital creations that exist only in the realm of the internet but that have a unique provenance in the form of a blockchain ledger, and which thus can be owned, bought, sold and traded like a unit of cryptocurrency. And while copies may continue to be made, like cheap replicas of famous artworks, the “original” is held by the owner of the NFT.

Most NFTs use the blockchain of cryptocurrency Ethereum, which is more adaptable to multiple uses than the Bitcoin blockchain. The digital creation can be in the form of any one of a number of file formats: from jpegs and gifs to mp4 sound files.

NFTs: the new art?

NFTs may be attached to any number of things existing in the ether, including musical compositions and computer programmes (the source code for the World Wide Web, written by Sir Tim Berners-Lee in 1991, was sold as an NFT by Sotheby's for $5.4 million in June).

But it is in the world of the digital visual arts that NFTs have exploded.

The art world has been turned upside down by the sudden NFT craze, and prices for art NFTs have reached irrational levels. In March, blockchain entrepreneur Vignesh Sundaresan, also known by his pseudonym MetaKovan, bought the NFT “Everydays: The First 5,000 Days” by artist Beeple for $69.3 million, the highest price paid so far for an art NFT.

In an article for Investec’s Focus newsletter, “New gold rush: the rise of NFTs in crypto art”, art journalist Mary Corigall writes: “The brave new world of NFTs is so unpredictable that when a digital work by the American digital artist Mike ‘Beeple’ Winkelmann fetched a staggering 42 329 Ethereum (ETH), or the equivalent of $69 million (about R1 billion), the doyens of the art world, and Winkelmann himself, were taken by complete surprise.

“Even Christie’s, the global art auction house that offered the work for sale, had no idea what value to place on this NFT when it went under the hammer in March. So there was no reserve price or estimate for the work and bidding began at $100. The auction was run entirely on the Ethereum blockchain.”

She gave further examples of NFTs on auction:

• You Tube meme sensation Nyan Cat, a pixelated flying feline, was turned into a gif by its creator Chris Torres that sold as an NFT for $531 000.

• In Hong Kong in March 2021, a digital artwork created by humanoid robot Sophia was sold on auction for $688 888 in the form of an NFT.

• In May 2021, a collection of nine of Larva Labs’ CryptoPunks NFTs was sold at Christie’s in New York for $16.9 million.

• Twitter founder Jack Dorsey sold his first tweet, "just setting up my twttr", as an NFT for $2.9 million.

But it’s not only well-known celebrities and mature artists who have hit the jackpot on NFT auctions. A recent article by Raisa Bruner for Time magazine tells of 15-yearold Jaiden Stipp of Tacoma, Washington, whose digital illustration of a waving, astronaut-like cartoon figure, sold for 20ETH (about $30 000 or R450 000) and which traded a month later for double that. Bruner reports that Stipp had been making and selling logo designs for customers on the gaming app Discord for $20 to $70. “On a whim, he made his astronaut cartoon into an NFT, put it up for auction, and became a blue-chip artist overnight. He’s since sold four more pieces, and cashed out enough to help his parents pay off their house and cars.”

NFT platforms

There are various platforms for uploading and trading NFTs – the biggest one currently is OpenSea. OpenSea lets you upload any original digital content that is less than 100MB in size, although it recommends the size of your creation be less than 40MB to facilitate faster uploads and downloads.

There is an array of categories, including art, music, domain names, virtual worlds, trading cards, collectibles, and sport memorabilia.

Your NFTs can be “fungible”, which sounds like a contradiction in terms, but which allows you to reproduce a fixed number of copies of your creation (just as an artist may make a fixed number of silk-screen reproductions), which can be sold individually or as a group.

There is a cost to “minting” an NFT, which is the process of creating a blockchain ledger to go with it. However, OpenSea has introduced “lazy minting”, which allows you to create an NFT free of charge, and which gets “minted” only on its first sale, whereupon the ledger is created and the cost for creating that ledger is deducted.

Once sold, a buye r may kee p it up o n the platform for it to b e resold . Th e originator may the n collect roy alties (typically 10%) on each sale.

OpenSea also serves as a collector’s site for storing and exhibiting NFTs.

On a blog on OpenSea, founder Alex Atallah gives some statistics on the boom in the NFT market (as at mid-October 2021):

• In jus t th e secon d hal f of 2020, the volum e of ar tistic NFTs and user- created co ntent sol d has grown fro m $1 million per month to over $20 millio n per month. That’s a 20-fold in creas e in just si x months.

• Th e number of art sellers has grow n over 500% , fro m 1 395 in Jun e to over 8 770.

• Ar t NFT sellers have averaged 9.7 ET H per user ove r th e pas t six mo nths . At the exchang e rate of $650/E TH , lowe r than today’s rate, that’s ove r $1 00 0 per wallet per mo nth.

• For jus t their own NFTs , creators have sold 5.4 ET H (over $3 500) on averag e over th e pas t si x months In just th e art cate go ry, 9.7 ET H ($6 300) w as sold per artis t o n average (Primar y art sellers averaged 7.4 E TH , an d secon dari es were 9.1 ETH.)

• have each excee de d 10 0 ETH in primary sales of the ir artwork . Thes e super-ar tists averaged 4 4 ET H of sales per month, or over $28 00 0 per month pe r ar tis t in primar y sales of the ir ow n work . Fo r this elite group, it’s like havin g a salary of $340k pe r year.

• There are now 12 NFT millionaires , or wallets which have sol d ove r $1 million in NFTs On e NFT tr ad e r claims to have grosse d $650 00 0 fro m just a $60 0 deposit.

Where’s thi s al l going?

Is th e interes t in NFTs jus t a p assin g fad? Corigall quotes Chris Becker, blockchain lea d at Investec : “In th e NFT space we see and prove owner ship of digital goo ds not manage d by a central intermediary Digital co ntent creator s now have a direc t route to marke t an d th e ab ilit y to mo ne tis e their creations Co ntent creators in th e digital era have drawn th e short en d of th e stick. Blockchain and NFTs are a gam e chang er as they e liminate larg e te ch interme diari es from all th e verticals of digital co ntent creatio n an d distribution . NFTs put the power back in th e hands of co ntent creators , an d th e most popular marketplaces are bein g built as public utilities , not for pr iv ate gain.”

A Bloomberg articl e by Olga Khari f, Vil dana Hajric an d Jus tina Lee, balances th e enthusiasm aroun d th e technol og y with a more cautious view about NFTs as an investment.

“Art and collectibles – and NFTs share propositions . Combin e the m with somethin g as volatil e as crypto asse ts , and there is reason to procee d cautiously. The tokens themselves are often rudimentary others let users unlock new services,” say th e Bloomberg writers . “An d success hasn't be en easy to com e by Fo r all th e hoopla aroun d Beepl e's $69 million wind fall in March, plenty of NFTs en d up lan guishing o r se llin g fo r a few dollar s apiece.”

Th e articl e quotes Stephan e Ouellet te, chie f executive an d co-found er of FRNT Financial, wh o says: "What is happening right now is th e e quiv alent of m e hearing that a major co ntemporar y painter has sold somethin g fo r millions of d ollars and I , someon e with n o ar t skill o r exp erie nce says , 'We ll I guess I better star t painting be caus e any paint on canv as is sellin g for millions.'"

N o doubt som e s anit y will prevail, although it has taken lon g en ou gh to do s o in th e over-hype d cryptocurren cy space But alth ou gh th e market may be

crypto, inherently democratic To quote

Atallah: “An entirely new in dustr y has just be en born, an d on to p of bein g fun, safe, an d pand emic-f rie ndly, it’s remarkably e quitable Yo u can now create a v iable creative business n o matter wh ere you are, which languag e yo u sp eak , o r which bankin g infrastructure you have access to. All yo u n ee d is creativity an d th e inte rne t.”