[Deep Dive] Non-fungible Tokens (NFTs) 🎨📈

conceptual art that can be owned but not possessed

This is Something Interesting, an independent, ad-free roundup of interesting Bitcoin and economics news along with my commentary and perspective. If someone forwarded you this newsletter, you can get it for yourself by clicking here.

In this issue:

  • First, a banana for scale

  • What are non-fungible tokens (NFTs)?

  • Who is using NFTs? What are they using them for?

  • Is this the future of art?

First, a banana for scale

In December of 2019 conceptual artist Maurizio Cattelan duct taped a banana to a wall of an Art Basel exhibit and called it Comedian. He ultimately sold five copies of Comedian, two for $120k and three for $150k.

What those buyers actually received was a certificate of authenticity - the formal acknowledgement that when they duct taped a banana to a wall it was an official, legitimate edition of Comedian. You can of course duct tape a banana to your own walls if you see fit but it will not be Comedian. To be a true edition of Comedian, you need to own the certificate.

Here is a video from YouTube creator "The Art Assignment" that doesn’t necessarily explain spending $150k to make your bananas official bananas but it does do a good job of anchoring it in the broader context of art history:

I start here because strange as it is I think this is the most useful way to conceptualize non-fungible tokens: as official banana certificates.

What are Non-fungible Tokens (NFTs)?

Currencies (including cryptocurrencies) generally aspire to be fungible, which basically means interchangeable: you don’t need to care about which dollars you have, only how many. Reasonable people disagree about how fungible Bitcoin actually is in practice but that is certainly the intention. Non-fungible tokens are (as the name implies) the opposite: each token is unique and it represents something unique.

An NFT can represent ownership of a real world object like the title of a car or the deed to a house, or a purely digital object like a video game item. Most frequently (at least today) they are used to represent formal ownership of a particular work of art, like the official certificates for Maurizio Cattelan’s Comedian. This might sound pretty abstract but remember that Cattelan’s copies of Comedian sold for a combined $690k. Certificates are a serious business.

This kind of preference for the "official" version isn’t all that unusual in markets for collectibles. First editions are usually more valuable than later printings. Lower numbered copies in limited print runs are valued more than higher numbers. Brand name fashion sells for more than even high quality knock-offs. Rational or not there is a well established history of people wanting the original, official copy. NFTs are like abstract digital certificates of authenticity - a kind of digital provenance.

As a space NFTs are absolutely taking off right now. Consider for example the NFTs that represent ownership of these four "CryptoPunks" (part of a set of 10,000 unique 24x24 pixel avatars). The prices listed are from actual sales:

NFTs have a number of advantages: they are easy to verify and impossible to counterfeit. They are easy to send or receive even with someone you don’t know and are physically distant from. On the other hand they are (like any certificate of authenticity) separate from the art itself. As you can see, I included ~$1.14M work of art just now and was gracious enough not to charge for it. These are not the authentic copies, of course - they are like bananas duct taped to the wall without official blessing. They have no certificates.

Who is using NFTs? What are they used for?

There are lots of experimental collectibles being built on Ethereum in the vein of the CryptoPunks I mentioned above. Cryptokitties was the first major NFT success, or here is a leaderboard of the largest NFT projects today.

There are also platforms allowing more traditional artists to experiment with monetizing their art in new ways. Justin Roiland (one of the creators of Rick and Morty) just held an auction for the NFTs associated with several of his sketches, selling pieces for $92k, $100k and $210k. Two of his pieces sold for undisclosed amounts at silent auction, including The First Ever Edition Of Rick And Morty Cryptoart:

Sports fans are also generally open to experimentation with new forms for collectibles. The most interesting example of this right now is NBA Topshots - officially licensed, limited edition, numbered gifs. Those collectible gifs are now clearing more than $6M in trade volume/day and accelerating wildly. The NBA Topshots site has been crashing routinely from the incoming traffic with every new release. Jeremy Levine (founder of Draft.com) recently bought the #1/50 of a Zion Williamson Topshot for $100k.

High art instituitions have also been exploring the NFT space. Robert Alice sold a piece called Block21 (42.36433° N, -71.26189° E) that included an NFT that gave the holder the right to set a "time zone" parameter that affected the behavior of the piece. The piece was auctioned at Christies and ultimately sold for $130k. Back when I started writing this piece it was the most expensive NFT in history. It was a simpler time.

Artist Trevor Jones sold two linked pieces of art, a painting called Picasso’s Bull and an NFT representing ownership of an animation of the same painting. The painting sold for $55k, the NFT for $55555. He also sold 3 "Gold edition" NFTs (for $2500 each) 10 "Silver edition" NFTs for (for $750 each) and 25 "Bronze edition" NFTs (for $200 each). You can see the animation here.

So is this the future of art?

In some sense probably, yes. Whatever value you place on the notion of authentic ownership, there is obvious demand for it and NFTs offer clear improvements on past technologies used to achieve it. I think the practice of artists using NFTs to tap into their markets into new and more direct ways is almost certainly here to stay.

That said, I think a lot of people are conflating the value of NFTs as a technology with the value of the particular NFTs being minted today. Not every first edition is valuable for the same reason that not everything scarce is valuable. Are CryptoPunks really priceless heirlooms of the early crypto era? Or just an absurd fad-within-a-fad-within-a-fad? Are the people buying Topshot gifs sports fans who genuinely prize this new conceptual memorabilia? Or are they gamblers who only view them as investment positions they eventually want to unload? How much do we as a species value the concept of ownership in the absolute abstract?

I genuinely have no idea. But I am very excited we are all about to find out.