If you stop people on the street and ask what they think non-fungible tokens (NFT) are all about, what will you hear? Something about outlandish prices for cartoons of apes and maybe about Twitter profile pictures. Confused mumbling about cryptocurrency. A few celebrity names. The word “bubble.”
In sum, a tale of frivolity, bling and irrational exuberance. Which isn’t too far off the mark.
But NFTs can and will mean much more. In fact, if you dig below the surface, they already do.
As the market value and popularity of NFTs have crashed, many are questioning their longevity as a technology and a cultural trend. Were they just a speculative asset doomed to disappear as the NFT-market bubble burst? After all, what utility do NFTs have?
Ari Juels is a faculty member at Cornell Tech in New York and co-director of the Initiative for CryptoCurrencies and Contracts (IC3). He is also chief scientist at Chainlink Labs. He has recently co-authored a paper on NFTs entitled “NFTs for Art and Collectables: Primer and Outlook” and is organizing an NFT gallery opening in New York City in October.
Utility, though, isn’t really the point of artistic or collectable NFTs today. After all, it’s not the yardstick by which we measure the significance of physical works of art by Rembrandt or Damien Hirst, or musical works by Mozart or The Beatles, or luxury goods like Fabergé eggs or Birkin bags. It’s true that most NFT artists aren’t quite Rembrandt, but at least one is Damien Hirst.
An important way to think about NFTs is as a new medium for producing art and collectables. Throughout the centuries, technological innovations – from oil paints to the electric guitar to photography – have irrevocably changed the way in which works of art are produced and exhibited. NFTs are part of this long arc of history. A vibrant community is experimenting with its expressive possibilities through machine learning-generated art, art that transforms itself as its environment changes, community-driven artistic production and much more.
Moreover, NFTs also can, and increasingly will, have utility. NFTs can, for example, help address key challenges in traditional art markets. Among those are provenance and royalty payments.
Thomas Hoving, a former director of the Metropolitan Museum in New York, estimated that about 40% of the objects he examined – including many in the museum itself – were fakes, forgeries or misattributions. While many question this figure – and even the definition of fakes – it’s clear that problems in traditional art markets abound.
Many of these problems relate to provenance, the history of production of an artwork and who later owned it. Provenance is helpful in establishing the authenticity and value of a piece of art. Where it’s lacking, nasty surprises can turn up, like Steven Spielberg learning that he owned a stolen Norman Rockwell painting or the Getty Museum paying $10 million for a dubious ancient Greek statue.
With NFTs, provenance is recorded immutably on a blockchain. Ownership – at least as identified by blockchain addresses – is publicly visible and resistant to forgery. By making bids and identities transparent, strong provenance can also help address a couple of other rampant problems in art markets, like money laundering.
There are countless stories of artists who died penniless before they became famous, like Vincent van Gogh. These stories are reminders of how often artists get the short end of the stick in art markets. It is striking that they generally don’t receive royalties for sales of their works in secondary markets in the U.S., despite the practice being common elsewhere. Famously, the artist Robert Rauschenberg was at the Sotheby’s sale where his painting “Thaw” was sold for $85,000 by a collector who bought it from the artist for $900. Rauschenberg yelled at the collector, “I’ve been working my ass off just for you to make that profit.”
Read more: What Are NFTs and How Do They Work?
NFTs enable royalty payments to be enforced automatically (although some poor technical choices have created loopholes). Perhaps more importantly, artists can in principle dictate a set of future terms of sale of their works. An artist can decide, for instance, that she does not want her NFT ever sold for more than, say, $1,000. Or she might decide she wants to exert a right like France’s droit d’auteur, which allows artists some degree of ongoing control over their works after they’re sold. In some cases, they can even destroy them.
While some buyers may object to this degree of control by NFT creators, the transparency of blockchain systems can ensure that all participants can make an informed choice.
Problems and potential solutions
NFT markets today are rife with problems. Unauthorized copying is rampant. So too is wash trading, artificially generated trading volume intended to stoke sales. Preventing the decay of physical works of arts – such as sharks in formaldehyde – is challenging. NFTs pose the same problem in digital form. The archival integrity of the NFT ecosystem could turn out to be a ticking time bomb, as many NFTs have content that is stored with paid cloud services and could disappear if payment lapses.
Another big problem is the incursion of bots. NFTs are often sold in drops, i.e., in the form of a collection of thousands of NFTs offered at once for sale. When a popular drop takes place, schemers will often deploy bots to snap up NFTs, later reselling them at a profit. Enforcing a fair cap on per-customer purchases has proven tricky.
Happily, blockchain systems are evolving in ways that will enable people to prove facts about themselves and present unique identities while protecting their privacy. My group at Cornell Tech, for instance, raffled off an NFT created by a digital artist. We staged the raffle in such a way that individual participants could obtain only one raffle ticket (for free) by proving possession of a Social Security number to us using privacy-preserving oracle technology.
Read more: Michael J. Casey – The Value of NFTs Is Belonging
The blockchain community is working toward a broad concept called decentralized identity. This is essentially a privacy-preserving system of user-controlled credentials. Imagine having a digital version of your driver’s license that you can present online in a selective way – e.g., proving that you’re a resident of California but hiding your birthdate. A system of decentralized identity will allow for NFT marketplaces to enforce purchase limits and much more. For example, one NFT artist has told my group he’d like to be able to offer discounts to fellow artists automatically. There’s no good way to do so today, but in a decentralized identity system that certifies artists such a thing will be possible.
A strong system of identities can also help ensure that people are buying NFTs from legitimate creators rather than impersonators.
Ultimately, NFT marketplaces can include a “policy engine” that empowers creators to shape the lifecycle of their works in a rich variety of ways. They can set sale and resale conditions. They can make their NFTs dynamic. They can offer discounts and rewards to fans. They can cultivate communities of aficionados in the world of NFTs like those that galleries aim to foster in traditional art markets. Perhaps a policy engine can also address problems like the fun-eroding “speculative pricing and investment mentality” that led the Microsoft (MSFT)-owned video game Minecraft to ban NFTs earlier this year.
Beyond digital art
The human race is migrating online, increasingly immersed in digital content and visual experiences often called the metaverse. Young adults are ditching physical possessions. A number of technologists believe that NFTs will come to represent goods in the metaverse – everything from parcels of land to magic swords. They will shape our experiences in the metaverse, in whatever form it ultimately assumes. It’s not a coincidence that Facebook, which recently rebranded itself Meta (META) in a nod to the emergence of the metaverse, just integrated NFTs into Instagram.
NFTs have many other applications as well, such as representation of real-world goods. In a possible harbinger of the future real-estate market, an apartment was sold as an NFT. Mainstream companies such as Nike (NKE), TIME Magazine, and Tiffany & Co. (TIF) are using or issuing them and they also offer a vehicle for a much more richly experiential system of ticketing for events.
Make no mistake. For all of their potential, NFTs are not an unalloyed force for good. No one should be an apologist for the excesses they’ve fueled – scam sales like those seen in some cryptocurrency markets, plus new crimes, like artist identity theft. For these reasons, technical tools like those described here as well as community-based means of consumer protection will be important.
NFTs will in any case continue to evolve in powerful and exciting ways. Like it or not, they – or something like them – are a cultural force here to stay.