Not another NFT explainer
We’ve been hearing a lot about NFTs lately and there have been articles daily trying to answer everyone’s basic questions, like What’s an NFT? and How are people making millions of dollars off this stuff? But I think a better question is What does this all tell us about the underlying technology?
Non-fungible tokens are easier to understand if you think about them as digital collectors’ items in which the ownership of a singular or rare item is the goal. Like a rare Honus Wagner baseball card, these items (often in the form of JPGs, MP3s, videos, GIFs, etc.) are not interchangeable, they’re one of a kind. For reference, cryptocurrency is a digital token that IS fungible – in other words, one Ether token or Bitcoin is worth just as much as any other.
One of the interesting things about NFTs is not just the opportunity they present for creators to potentially claim more ownership over their work, but the underlying technology that has enabled this “craze” – blockchains. Blockchain technology is the starting point for understanding what it’s all about, the reason that NFTs and digital commodities are important, and the technology giving us the potential to do everything from collaborate on projects to disrupt hobbies and industries alike.
To put it simply, a blockchain is a decentralized ledger. It can be thought of as a database, of sorts. This ledger records transactions in a way that makes the stored information extremely secure. While it’s not 100% unhackable, it is very hard to interfere with information stored on a blockchain, since the technology requires each transaction to be transmitted to a peer-to-peer network. Each peer in the network (aka a node) then validates it, combines it with other new transactions, and adds it to the existing ledger. A blockchain can’t be altered by a single individual because it’s not held in any one, central place – everything added to the blockchain must be approved by at least 51% of the network before it’s encrypted and distributed to the ledger, a copy of which exists on all associated computers. The ledgers on each must be identical, meaning you’d have to find a way to tamper with them all if you were going to try and alter the ledger. This kind of security makes a blockchain (whether it’s Ethereum, the most popular blockchain, Ripple, or one of the dozens of smaller models) an ideal place to store things that rely on proof of ownership for their value.
Blockchain tech has already shown us that it can change the way markets work. But regardless of what happens with cryptocurrency, there are other projects that show us it has even more potential to change the way we work. And NFTs are a clear example of that.
Disrupting the art world
Non-fungible tokens (NFTs) can take many forms, but digital artists have managed to harness this phenomenon better than most. And because this has the established art world concerned that some intermediaries may become obsolete in the process, it’s under a lot of scrutiny. It may seem absurd that a jpg or png file could be worth anything when it’s easily shareable and inherently duplicable, but it’s clearly worthy of attention since Christie’s recently sold Beeple’s 300k+ byte jpg collage for nearly $70 million. The NFT was housed on the Ethereum blockchain and was available for purchase in cryptocurrency (in this case, Ether, the main cryptocurrency of the Ethereum blockchain). Back in 2018, Christie’s sold a 42-lot collection of physical art for over $322 million, the value of which was recorded on the Artory blockchain, so the auction house has played a large role in pushing blockchain technology when it comes to recording ownership.
Philosophical questions about what gives art so much value have always existed, as have duplicate and counterfeit paintings and drawings. Digital art itself has existed since the 1960s and is even more easily replicable. But the Christie’s sales marked a milestone because of the technology behind the transfer of ownership. Blockchain made it singular, provable, and unduplicable (even if the artwork itself is posted across 1000 websites). In this case, the act of “signing” the art involved assigning it an identification number on the blockchain that was so secure it can’t be stolen or forged (at least not yet).
Perhaps more interesting is the ability of blockchain technology to allow artists to remove intermediaries (like Christie’s) from sales, and other influences on their creations. The disintermediation of art sales can empower artists of all kinds (including music makers) to take true ownership of their creative process. In addition, apps like Mintable and S!NG allow anyone to upload a file and sell it in an NFT marketplace like OpenSea. Whether this is a democratization of art or a flooding of the marketplace with amateurs remains to be seen. This not only has the potential to give artists all the funds from their sales but to cut out middlemen like galleries, which may turn out to benefit the art world as it exists now.
Proto-NFTs and the potential of the blockchain
Highbrow art is a more recent phenomenon in the NFT sphere. In fact, the inspiration for NFTs were the pixelated CryptoPunk character portraits built and traded as one of the very first projects on Ethereum’s blockchain in 2017 (though a bundle was also recently auctioned off at Christie’s for $14.5 million, before fees). They were originally given away for free and traded amongst collectors until they came to be so popular that they were considered valuable and often traded for Ether coin. More importantly, they were built using the ERC-20 standard, which is a list of rules a token must adhere to in order to be housed on the Ethereum blockchain. These tokens were a proof-of-concept for the earliest smart contracts on Ethereum.
CryptoPunks were almost non-fungible, but it took the introduction of the ERC-721 standard for smart contracts to allow for one-of-a-kind NFTs to be reliably created, the first being CryptoKitties (basically the cat version of CryptoPunks). These were assigned unique ID numbers that carried identification information and value.
The Ethereum blockchain is still the most popular when it comes to NFTs and other smart contracts, though others have emerged in the last few years. Still, most technology created to assist in smart contracts – such as protocols like Arweave, which promises permanent data storage, even for abandoned projects – are fitted for Ethereum.
This all makes a difference when artists collaborate to take the NFT movement mainstream. For example, the Machi X DAO artist collective has set out to recruit more artists into cryptoart so they can monetize their creations. They employ very tight smart contracts, the first of their kind using Arweave. They can store copyright and royalty information, IPFS and Arweave hashes (meaning they can be stored on two decentralized storage systems), creator and title information, descriptions, tags, edition numbers, total editions, creation dates, and file types. In other words, if the goal is to prove iron-clad ownership, you’d want this smart contract technology. It’s not much different than owning a piece of priceless Renaissance art and needing to prove it’s yours for both prestige AND insurance purposes.
As you might expect, the Ethereum blockchain has competition now that NFTs are growing in popularity. At the end of 2020, TRON’s TRC-721 token standard was introduced. This is its biggest competition so far, and Dapps (or decentralized apps, a type of smart contract) now have choices of which platform they want to be a part of.
The vast potential of blockchain technology
While NFTs are just one element of understanding the blockchain, knowing that there are projects beyond cryptocurrency is key for illuminating their full potential. It’s rare for people to have heard of a modular framework like Hyperledger Fabric, but they’ve likely heard of TopShot.
Most people understand the novelty of a baseball card, so it’s not a huge leap to think about a digital version of such a collectable. In this case, instead of a player, you get a “moment” from an NBA basketball game, with some of them being common and rather dull and others (like a LeBron dunk) being akin to a 1952 Mickey Mantle card. Some moments are overproduced and others rare. And lest anyone think it’s the sole purview of pre-teen boys, it’s important to remember that sports memorabilia is a multi-billion dollar industry and yet between 50% and 80% of sports memorabilia are thought to be fake. When you turn that memorabilia into an NFT, it can’t be forged.
So, yes, there are a lot of ways to commoditize things that may seem silly, such as Twitter founder Jack Dorsey turning his first tweet into an NFT despite the fact that we’ve all read it, or musical moments by Grimes selling for $5.8 million in 20 minutes despite the fact that they’re also posted on her Instagram page. But it’s the same system that allows people whose images we’ve all taken advantage of via memes to reclaim ownership of their images and monetize their use. The woman from the “Disaster girl” meme is a great example. She recently came forward, claimed the image, and turned it into an NFT worth half a million dollars. The family behind the most popular video of all time on YouTube (of a toddler whose brother Charlie bit his finger) had it taken off the platform to be turned into an NFT as well.
Maybe 3LAU didn’t need to make $11.6 million in 24 hours selling music NFTs, but the disintermediation that NFT technology brings to the table also means that emerging vocalists, instrumentalists, and songwriters can sell their work in a marketplace that doesn’t involve a record company or even being taken advantage of by a streaming service such as Spotify. When artists collaborate on creating music, there are services like PeerTracks and platforms like MUSE that allow them to take ownership of just their own contribution to a final product (such as the lyrics) and earn royalties by attaching smart contracts. This fractionalization can be employed for any collaborative project, using smart contracts like Niftex, which takes NFTs and turns them into “shards” on the Ethereum blockchain, allowing people to own (and transfer ownership) of pieces of larger digital goods.
The power of the contract
These contracts are key because they point to larger implications for collaboration in any type of business. Blockchain technology is so closely associated with decentralized finance that it’s easy to forget what else it’s capable of.
Collaborators on any project can take advantage of smart contracts to reduce the number of intermediaries while sending files, assign ownership to different parts of an assignment, and maintain privacy. They can even automate a workflow so that when one part of an assignment is done another can immediately begin, making communication between team members smoother and more efficient. The “if…when” statements that are written into the code can even help clarify expectations and help resolve disputes, which has obvious ramifications for supply chain management. Wasteful time delays, and even fees for transactions, can be eliminated when contracts are executed on the blockchain.
All of these benefits are designed to reduce friction during production or collaboration, and new tools are constantly being built to add new functionality. The aforementioned Hyperledger Fabric houses open-sourced blockchain tools for data sharing and interoperability between stakeholders in a project. The ultimate goal is to use technology to build trust and ensure expectations via code that prevents tampering or overriding commands.
Operational agility, risk mitigation, and digital privacy are all things that businesses are looking for. It just so happens that the same technology that allows for authenticating and monetizing digital goods such as NFTs allows us to do so much more.
Featured Image: Everydays, the First 5,000 Images by Beeple