Non-fungible tokens (NFTs) are hard to ignore. According to CBInsights, funding for NFT companies topped $1bn for the first time in the third quarter of 2021, up 6,427% year to date. Also in the third quarter, NFT sales volumes hit $10.7bn, reports research firm DappRadar, an eightfold increase from the previous quarter.
While the hype is perhaps difficult to comprehend, so is the definition of an NFT. According to Forrester research, 28% of US and 27% UK online adults that have heard of NFTs say they still don’t understand what they are. In a recent blog, Forrester vice-president and research director, Mike Proulx, explained: “An NFT represents a digital or physical asset (such as a photo, video, audio file, or painting) and is created and stored on a blockchain. NFTs are one of a kind and have an identifiable chain of ownership that allows them to maintain value and be traded as collectable items (similar to physical baseball cards or artwork).”
But in many ways NFTs defy definition, blurring the lines between digital and physical, fine art and collectibles, unique works and mass production, artistic creation and algorithmic invention.
Yet everyone seems to be jumping on the NFT train, from McDonald’s McRib NFT sweepstakes and Disney’s NFT digital collectibles, to Artentik, the NFT marketplace launched by Santa Casa da Misericordia de Lisboa, keeper of one of the most important religious collections in Catholic Europe. Recently, director Quentin Tarantino announced new NFTs from his film 'Pulp Fiction', while a Dutch firm auctioned off $7m worth of NFTs that will not be “minted” (the process of turning digital art into a part of the Ethereum blockchain) until December.
The NFT frenzy really started to accelerate in March, when auction house Christie’s sold an NFT digital collage by American artist Beeple for $69.3m.
Speaking at a recent Centre for Finance, Technology and Entrepreneurship event, Shelley Mannion, chief product officer at Verisart, an NFT certification platform which recently launched a minting service, provided interesting insight into the world of NFTs. She reported that interest peaked in March, with around 1.1 million active wallets on Ethereum. While not a huge number, these collectors’ influence is significant.
Some are collecting and trading opportunistically in large batches of a series of collectibles, while others are looking at it much more from a long-term perspective, building “phenomenal collections” of NFTs, mainly unique pieces by well-known artists, she said.
NFTs are changing the dynamics of the art marketplace by removing the need for long-established intermediaries, such as galleries and dealers
“There are some interesting studies about the way that collector networks function on a site like SuperRare, for example, which is one of the most popular NFT platforms selling unique artwork. Many collectors have made hundreds of millions in cryptocurrency – the ‘crypto riche’ – and they are defining their culture, and art is a part of that,” she said. “This is intense demand among these incredibly wealthy crypto millionaires and billionaires, which is driving the NFT market price up.”
The cost of minting or creating an NFT on Ethereum has also dramatically increased over the past few months. According to Ms Mannion, the transaction costs, or “gas fees”, vary from chain to chain. “On Ethereum, gas fees are very high and it creates a lot of friction,” she explained.
Some of the marketplaces are addressing this issue, responding quickly with innovative solutions. “For example, OpenSea, one of the largest NFT marketplaces not just for art but for many other things such as digital collectibles, have taken an approach called lazy minting, where the gas fees are paid by the collector at the point of purchase,” she said. “In addition, there is now a proliferation of EVM [Ethereum virtual machines] side chains, where gas fees are nominal.”
Beyond the hype, the big question is whether this is just a bubble or will it lead to lasting market change? Ms Mannion believes it is indicative of something transformative. She provided the example of the use of the smart contract functionality embedded in the Ethereum blockchain to automatically pay the artist royalties on a secondary sale. “This has been a Holy Grail in the art world for a long time,” she said. Today, this only works if the NFT is bought and sold on the same platform where it was originally minted.
While the existence of cross-platform royalties has not yet matured, NFTs are changing the dynamics of the art marketplace by removing the need for long-established intermediaries, such as galleries and dealers. “There’s a much more direct connection and relationship between the creator and the collector,” she said, adding, “but there will also be new intermediaries coming into the market, especially as the technology evolves.”
The NFT movement in this space should be watched closely by the financial services industry, which is made up of multiple layers of intermediaries. NFTs are also bound up closely with the digital future concept called the ‘metaverse’. As both Chris Skinner, in his latest Shaping Tomorrow monthly column, and Forrester’s Mr Proulx point out, the metaverse is the next generation of entertainment.
As Mr Proulx says, “NFTs will become far more interesting within the context of the metaverse – once it’s actualised. One-of-a-kind digital art can help decorate your virtual home. Limited edition sneaker drops can customise your avatar. And NFT tickets will give you exclusive access to VIP events happening within the metaverse.”
And a key part of the metaverse, argues Mr Skinner, is the metabank.
Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight
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