NFT Explosion: Why Do People Buy Digital Art?

Built on the same technology as Bitcoin, NFTs have been a hot topic in 2021. They enable a veritable market for digital artwork while fueling unprecedented speculation.

2021 could become the year digital art exploded. On March 11, a cryptocurrency investor paid $69 million for the digital painting “Everydays: The First 5000 Days” at an auction held by Christie’s. Flashing GIF Fomo is currently on sale for $2 million, which is 60 times what it sold just nine months ago. And a series of 10,000 simple monkey illustrations, called Bored Ape Yacht Club, are collectively worth more than $1 billion.

This bewildering bubble is powered by NFT technology, which allows cryptocurrencies such as bitcoins or ether to be exchanged for digital objects. An NFT or “non-fungible token” is a string of digital data that establishes proof of ownership of a specific item that commonly exists in the virtual world. It can be, for example, a digital work of art, a financial asset or a patent.

NFTs live on the blockchain, a decentralized transaction tracking ledger, which until recently was primarily known to be behind Bitcoin. It has generated incredible hype while spreading its potential impact across many industries, from finance to art, music, intellectual property and luxury goods.

NFT and royalties

“NFT has really opened up a market for digital art,” says Robert Zumkeller, a graphic designer who started creating NFT illustrations while a student at the FHNW Academy of Art and Design in Basel. “I’m not sure I would have found a physical gallery ready to exhibit my digital work, or buyers who would acquire a physical screen to own it. With NFTs, I could use an online gallery, Superrare.com, to showcase my work and sell it.

Like everything else recorded on a blockchain, art NFTs allow all transactions to be tracked after their initial sale. This tracking allows for perpetual royalty reimbursement, Zumkeller explains. Under his moniker, Vicarivs, the young artist will receive 10% off any subsequent sales of his work, which rarely happens with physical items sold by galleries or collectors.

In physical art, there is usually only one original copy (or a few dozen, in the case of fine art prints). The original is distinguished from reproductions, which are sold legally or as counterfeits. With digital painting, the artwork is a data file, which can have an infinite number of perfect copies. This is why an NFT does not include the artwork data file itself; instead, it functions as proof of original ownership.

Digital versions of luxury products

NFTs have also entered the luxury market, where recently digital twins (a photograph or 3D animation) of collectible watches were auctioned in the spring of 2021. “More and more brands are looking into NFTs”, explains Serge Maillard, editorial director of the watch magazine Europa Star. “Firstly, as a useful tool to fight against falsification by guaranteeing traceability and authenticity. Secondly, to develop and maintain a closer and more personal relationship with his client, without having to resort to intermediaries.

The Swiss IT security company Wisekey has also entered into this activity. “Digital twins for luxury goods and art have been the main markets so far, but other uses for NFTs are emerging, including to certify intellectual property and identity,” says CEO Carlos Moreira. The company provides NFTs to protect luxury items and recently launched an art marketplace. It plans to introduce its own cryptocurrency and is working on music and movie digital rights management projects.

In total, the NFT market has exploded in the last twelve months with a 700% increase from the second to the third quarter of 2021, according to the analysis platform Dappradar. This bubble confirms the speculative nature of cryptocurrencies and blockchain applications; namely: the dollar value of bitcoin has increased 100,000 times in ten years.

Speculation and impact

“So far, the design choices of the technology have helped fuel speculation,” says Claudio Tessone, professor of blockchain and distributed ledger technologies at the University of Zurich’s computer science department. “The most widespread systems are based on what is called proof of work, where the validation and monitoring of all transactions by the network as well as the introduction of new tokens only work because users perform calculations on their systems.

“As the resources devoted accelerate at a constant rate of supply, the creation of assets becomes more and more expensive, which fuels an increase in their value, just like the price of oil which rises when it is more difficult to extract. This, in turn, creates incentives to invest resources in the blockchain, which fuels a self-perpetuating loop that drives speculation and further inflates prices.

The power consumption of blockchain applications is a growing concern. As society desperately tries to tackle climate change, it has simultaneously introduced low-cost services that consume as much electricity as a mid-sized country like Sweden. “There is some hope that a new architecture for blockchains, called proof-of-stake, will make the electricity needed to run it negligible,” Tessone says. “A new generation of platforms such as Cardano, Polkadot or Tezos are already running on such systems, but their impact, although increasing, has been limited so far. We will have to see.

However, this new architecture could generate problematic new incentives. Until now, cryptocurrencies rewarded those who set up huge computer parks to take advantage of economies of scale and more efficient use of energy. A proof-of-stake blockchain instead rewards users who invest heavily in it, fueling speculation. “Right now, it’s hard to imagine a blockchain without speculation,” says Tessone. “It’s good to see that the community is taking this issue seriously, cryptoeconomics for a future with more functional cryptoeconomics.”

Catherine Tucker, a management professor at MIT specializing in blockchain, regrets this focus on speculation: “Most of the reporting on NFTs has focused on the speculative aspects. This is rather frustrating, as it can lead to less experimentation on ideal use cases.

Not so private after all

One of the concerns is that the anonymity provided by blockchain technology could aid in financial fraud. The most obvious are fraudulent bidding to drive up auction prices and insider trading. In September 2021, Opensea, the largest marketplace for NFTs, revealed that one of its employees had purchased items just before they went on sale on its front page, an action that would amount to a criminal offence. insider.

Many specialist forums talk about the risk of rigged auctions, where an artist or someone they conspire with buys their work for a large sum in order to drive up its price and keep the current auction frenzy alive. This culminated in the suspicion that the owner of a CryptoPunk art series NFT borrowed $500 million in a flash loan – a funding mechanism only available on the blockchain – to buy himself the NFT before returning the loan. ‘money. While this was a clever trick to inflate the price of their art, the move also raised suspicions that NFTs could be a perfect tool for money laundering.

Interestingly, specialists discovered these suspicious activities because all blockchain transactions are fully accessible to the public. “The famous secrecy of cryptofinance is just an illusion,” says Tessone. “It is based on the principle that users create a large number of wallets containing their assets in order to obfuscate their transactions.” But in fact, many people choose to avoid this option due to transaction costs. And then, of course, there is traceability, adds Tessone: “mathematical analysis of the network can uncover suspicious activity, allowing a person to be traced even if they manage many wallets. This is why scam auctions on NFTs are not actually safe for scammers, contrary to what many commentators say.

Catherine Tucker also cautions us against placing the blame entirely on NFTs, saying that “issues such as insider trading with NFTs are a reflection of underlying user behavior in uncertain environments and Persistent transaction costs I don’t know if it’s correct to put fault on technology At the end of the day, technology is just technology.

Source: University of Zurich

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