In March 2021, three letters were suddenly everywhere. NFT became the talking points of evening news segments, rabid Twitter threads, disparaging long-reads and of course, memes. Seemingly from nowhere, NFTs had captured the attention, imagination and discourse of the entire internet as millions scrambled to understand the impact the abbreviation would have on their industry.
The truth is NFTs have been around for a while – having first appeared in 2012, they rose to prominence alongside the first crypto boom when the duo behind CryptoPunks created 10,000 completely unique pixelated characters and gave them away for free in 2017. In May 2021, a CryptoPunk NFT sold for $16.9m at the auction house Christie’s. How did we get here? What actually are NFTs? How do they work? Why did they suddenly explode in 2021? Are they really the solution for artists to take back control of their work online? Let’s explore the answers.
NFT stands for non-fungible token, where a fungible item is replaceable like for like – all one Euro coins have the same value, for example – a non-fungible item doesn’t have the same value as another, like a trading card or a one-off painting. The word token is key to understanding the technology. While an NFT can be linked to any media file – an image, an animation, a movie file or an MP3 for example, it doesn’t store that file, nor are you buying the rights to that file when you buy an NFT. The token stores ownership information, as well as other metadata like previous owners or trade or purchase information. NFTs can also contain smart contracts, which can automatically assign a royalty split, meaning artists and musicians can be paid instantly, and automatically, when a clause is met, such as a sale or a stream.
The fact that it’s sorted on the blockchain is important, as it makes the token secure – it’s much harder to manipulate or change said metadata. The blockchain works by linking ‘blocks’ of information together like a ledger – every change is cross-referenced to ensure consistency so if a change isn’t authorised, it won’t happen. The blockchain is also decentralised, meaning there’s no one server that holds all the information, making it less susceptible to hacking. Fundamentally, NFTs are essentially ultra-secure tokens that can verify ownership information of a digital file. They allow everyone to view and experience a digital asset, but they also allow someone to truly own it.
Why does that matter?
The answer goes beyond the art auction hype of recent months and arrives at a more fundamental concept – the internet, in its current form, has failed artists. When you upload a photo to Instagram, not only does Instagram and its parent company Facebook own your image, if their servers go down or the platform is discontinued, your images are gone. Despite your followers following you because they enjoy your posts, you don’t own them either – you can’t migrate to another platform and take them with you. The same is true for Facebook, Twitter, YouTube, TikTok and the vast majority of tech companies that monetise free content provided by their users. While none of this benefits the user, it has huge benefits to the platforms that use your free content to train their AI, build data sets and track interactions between users to add value for their investors or IPOs. Where there is a royalty payment made from music streaming services like Spotify, Apple Music and TiDAL, the income made by artists from the dominant listening platforms is so low, a recent enquiry by the UK government concluded the economics of streaming required a “total reset”.
NFTs allow artists to recapture the value that has migrated to big tech over the past 20 years by both allowing everyone to experience digital media but also allowing someone to truly own that media. As NFT platform Foundation’s CEO Kayvon Tehranian said in a recent TED Talk: “With NFTs, owning something doesn't preclude others from enjoying it. In fact, it’s the opposite. The more an NFT is seen, appreciated and understood, the more possibility it has to increase in value.”
But with NFTs having been around for nearly a decade, and the dominance of big tech nearly two, why are NFTs finally having their mainstream moment now?
Hindsight is 2020
“I was working across management and major/indie record label systems, and also doing consulting and bookings.” Charles Damga is the Director of Creator Relations at Foundation. Having previously worked as A&R for Warp Records, and been responsible for bringing streaming platform Boiler Room to the US – as well as running his own label UNO NYC – he’s been deep in the trenches of the music industry for over a decade and is finely tuned to musicians’ needs and concerns. “All of that was leaning towards streaming and digital technologies. At that point we were all really struggling with ‘How do you make money in this brave new system?’”
The answer came from the blockchain.
“Around 2015, a manager and old friend of mine named Jesse Walden was trying to figure out this new revolution of blockchain linking with media. We were sitting in an office together, running a management company in one corner and Jesse [Walden] and Dennis [Nazarov, now head of content platform Mirror.xyz] were burning the midnight oil in another, trying to speak to Getty Images, and museums in New York City, to try and convince them that instead of using barcodes and other antiquated cataloguing systems, they could use this royalty system that would go all the way down to Google Images and could trace where all this stuff came from.”
The ideas predated art auctions and were focussed more on problem-solving for the artists and industry they represented. “We didn’t really have the word ‘NFT’ on the tip of our tongue, but I always knew it was going to be fantastic, it was just a question of when the world would catch up.”
Colborn Bell, founder of the Museum of Crypto Art – a digital gallery that’s a ”testament to those who dared to believe in a better future that prioritized sovereignty, market access, and freedom of expression in the arts” – has been experimenting with NFTs since an early blockchain game called MoonCatRescue in 2017. “I didn’t particularly know what I was doing, it was probably just a project I came across on some Reddit board, but that turned out to be my first NFT. It wasn’t until February 2020 until I started to really focus on the art.”
A few months later, the world would shut down.
“When the money started flying it was the peak of the pandemic,” says Bell. “People were indoors, people were online. It was also the introduction of [social audio app] Clubhouse. It was the perfect storm of people talking, sharing, onboarding, looking for ways to be social.” Among the many industries that suffered during the pandemic, creatives were among the hardest hit. “Musicians weren’t touring, artists weren’t doing their shows, so they were looking for a new medium to express themselves online.”
As the lack of physical events shone a light on the raw deal many artists face in the current internet economy, NFTs emerged as a potential solution to generating revenue while still allowing their art to be experienced by all. But the shift didn’t come from big tech. “[Industries] don’t lead by innovation or completely adopt tech unless they have to, because change costs money,” explains Damga.
“The artists really had to pull this through, because they were the ones hurting. Of course, museums weren’t having foot traffic or weren’t able to open because of limitations, but it was the artists who said: ‘Let’s push ahead on this’. And once money is being made, the industry has no choice but to follow.”
Web3, NFT and me
For people like Bell and Damga, deeply entrenched in the NFT space, much of the potential and excitement has been years in the making. But for the casual internet user who encountered NFTs for the first time via an absurdly priced jpeg, the experience could be slightly less enlightening. To understand the potential impact of NFTs, it’s important to look beyond the current art auction hype and at the bigger picture that the protocol aims to embrace: Web3.
In theory, there are three iterations of the internet. Web1, roughly 1991 to 2004, saw users visit websites and consume largely text and image content, but rarely generate their own. Web2, from 2004 until now, largely focuses on user-generated content, be it the emergence of social media, YouTube, Tumblr, etc. The internet became more participatory as internet speeds increased and smartphones, cameras and mics became more capable and more affordable. But, as discussed, platforms controlled the narrative, and most of the revenues. Web3 focuses on decentralisation, stripping power from a core group of big tech companies and automating secure transactions, contracts and ownership on a peer-to-peer (P2P) network. The theory is that artists won’t be tied to any one platform, and can control their art at the source, dictating everything from royalty splits to secondary sale percentages, which we’ll come on to later. For creators, Web3 means truly owning both their audience and their content. Web3 has community at its heart – while P2P is literally behind the tech, it’s also a metaphor for the values surrounding the movement.
For Damga, Web3 and NFTs go hand in hand.
“I think in terms of community, [Web3 and NFTs] can be synonymous. We really like shedding ‘blockchain’ and ‘crypto’ and these terms that feel very reminiscent of financial structures and have really head-y energies. Creative communities and art can align with [Web3 principles] way more [than financial ones].” Dagma also believes that not understanding the technical complexities of Web3 shouldn’t be a barrier to entry. “You might be able to understand how this really precise tech enables certain things, but we can probably all agree that dependence on the structures of previous industries are broken and are not working for everyone. So alignment on Web3 is a very unifying force and NFTs are a great part of that.”
Artist First
With the widespread adoption of Web3 concepts still a few years away, what are some of the ways NFTs benefit artists now? One of the most exciting is secondary royalties. Secondary royalties allow the original artist to apply a percentage rate of return from every sale. For example, if an NFT with a rate of 10% was later sold for €5,000, the artist would get €500 – they’d receive 10% every single time the NFT is sold no matter what the amount, no matter how many times it is sold. Artists can set their own percentage rate when the NFT is minted. It’s a radical solution that could solve everything from royalty splits for musicians, to ensuring an artist can still benefit from an early work that sold before their profile grew. Due to the nature of the blockchain and smart contracts, payment is instant, and doesn’t rely on antiquated royalty systems that pay out once a quarter or twice a year.
Another is copyright.
No matter what price you sell your NFT for, you still retain 100% copyright on that image, gif, video or sound. As TechCrunch put it: “The NFT purchaser owns nothing more than a unique hash on the blockchain with a transactional record and a hyperlink to the file of the artwork.” The purchaser is buying into the concept that Web3 and NFTs will be a big part of the internet of the future. But they’re also investing in you as an artist and the NFT itself, as a potentially appreciating asset, either as your profile grows or as the price of Ethereum – or equivalent coin – continues to rise.
Thirdly, transparency.
Transparency is at the very core of blockchain technology. Every time a user bids on or purchases an NFT, their crypto wallet address is made public for all to see. Every address is unique and tied to an individual, and every transaction is publicly visible on the blockchain. It’s also possible to see any NFTs that are owned by that wallet. In a world of opaque art and financial institutions, it’s a welcome shift.
NFT Evolution
While NFTs promise a better future for artists, they’re not immune to criticism. Concerns lie around the energy usage of the blockchain and crypto in general, which uses ‘miners’ to verify transactions on the chain using high-powered computers. The Ethereum blockchain is in the process of moving to ETH 2.0, which includes a much more efficient system in an effort to address some of the energy issues. This move is currently scheduled for December 2021.
Another issue, as you might expect with the amount of money involved, is fraud. As it stands, there’s nothing stopping you from taking any image, whether you own it or not, and minting it as an NFT. There are many examples, including the work of a deceased artist Qing Han being minted, and a fake Banksy selling for £244,000. Other fraudulent stories include NFT collectors accidentally revealing the QR code that identifies their crypto wallet, resulting in the theft of hundreds of thousands of dollars worth of Ethereum. Finally, it’s important to point out that NFTs have no legal groundwork. You don’t legally own them outside of the blockchain. There are currently no legal protections in place and NFTs do not authenticate intellectual property rights in court, for reasons we mentioned above.
As we’ve explained, to really buy into NFTs – apart from also investing in Ethereum – you are buying into Web3. The lack of a legal framework IRL isn’t irrelevant, but when you find value in a decentralised digital future where NFTs have a fundamental role, it’s easier to make the mental leap required to appreciate them. For Damga, the vibrant debate around NFTs only serves to prove their impact.
“Generally speaking, when you see people have so much debate it’s usually around something that’s really powerful,” he proclaims. “There’s gonna be a rumour mill, there’s gonna be people forming opinions if they have to, and they should because those strong pursuits lead people to create things that are hopefully better.”
“I feel like that noise is really powerful and important,” he explains, “because it’s going to push us, especially at Foundation, where we’re so indebted to the community. Community is our entire basis. We have to listen all the time and try to uphold what they’re looking for.”
Are NFTs for me?
Ultimately, NFTs aren’t perfect. But in many ways, the plane is being built mid-air. To truly understand NFTs’ potential, it’s best to look at the long game. Web3 promises a better digital existence for artists, but many of its protocols are still in development – NFTs included. Focussing on what they can’t do now, is missing what they could do in the future. Regardless of your take on NFTs, it’s likely you agree current models of artist remuneration are broken. Web3’s potential offers artists a new paradigm that gives them control while still allowing their work to be distributed to the masses.
If you find yourself intrigued, Damga had this advice. “Don’t spend anything you don’t have to lose on a night out on a weekend, get a Twitter or get into some community like a Discord or Decentraland. Gig into some new universe that’s going to bury you. Communalise your experience, don’t expect one person to guide you or be your north star. It’s gonna be embraced across experiences.”
Bell added:
“Do your research. Mint something on an open platform, begin to figure out the technology, begin to build connections, begin to talk with other people; artists you know who are in the space. Come in with an open, positive, and inquisitive mind. People here are incredibly friendly and collaborative. Find your niche – be open minded.”