Non-fungible tokens (NFTs) have surged in popularity in 2021, opening up exciting possibilities for the art world.
The COVID-19 pandemic has accelerated the transition to digital sales on the art market, creating opportunities for galleries and museums, auction houses and art fairs to continue to interact with collectors and donors even while physical sales have been disrupted.
NFTs have become part of that transition, offering a new avenue for art collectors to invest in pieces with confidence that they are authentic. They also provide artists with a new means to market and sell their work.
What is an NFT?
An NFT is a unique digital token that can be used to represent assets. It is “non-fungible” in that it cannot be replicated or replaced, so it provides a way to authenticate ownership.
Although NFTs are wrapped up in talk of cryptocurrencies, they are not synonymous. Cryptocurrencies, like physical notes and coins, are fungible, as they are not unique and can be exchanged for other currencies with the same value. Cryptocurrencies are the money used to buy NFT assets.
NFTs have so far tended to contain digital artwork, but they can also be used to represent ownership of physical pieces of art, much like a certificate of authenticity.
What makes NFT art special?
NFTs bring exciting new prospects to the art world. NFTs give artists control over their work and a direct connection to collectors. Independent artists can gain more exposure to their work on an international market.
One of the valuable features of NFTs is that transferring the ownership of the token gives the buyer basic usage rights but does not transfer the copyright from the creator. The use of smart contracts allows artists to include a royalty structure in an NFT so they are paid each time there are secondary sales of their work. Artists have typically not earned royalties on resales in the past.
And this new way of buying and selling art digitally is bringing new consumers into the art market, creating a wave of visibility and attention.
As NFTs run on blockchain databases, the intersection of digital assets with cryptocurrencies means they can be used to put up art as collateral for loans, insurance or other financial products. Decentralised finance (DeFi) is emerging as a new class of financial services, creating unique opportunities for investors.
How do NFTs work?
NFTs run on smart digital contracts on blockchains. You can think of a blockchain as a highly secure distributed ledger, or database, that records all the details of the contract.
As each transaction is recorded on the blockchain, NFTs allow sellers to confirm they are the sole owner of a unique piece of digital art and that they have the right to transfer ownership to a buyer.
NFTs are created in a process called “minting”, which refers to the way physical coins are made by a mint, or manufacturer, on behalf of the issuer. To mint an NFT, an artist or other creator uploads a digital file to an NFT marketplace. They can assign characteristics to the NFT, including how many copies exist and whether it is part of a collection. This allows artists to not only sell one-off art pieces, but multiple versions of a piece, each with a unique NFT.
Where and how can I buy NFTs?
NFTs are sold in auctions on digital marketplaces like SuperRare, OpenSea, Rarible, and Known Origin. Some NFTs are available to buy straight away for a set price, or you can make an offer to the seller.
NFTs are usually priced in cryptocurrencies, so to place bids in auctions and make purchases you need to hold a cryptocurrency, typically Ethereum, in a digital wallet. Popular digital wallets include MetaMask, Coinbase, WalletConnect and Trust Wallet. You connect your cryptocurrency wallet to the marketplace to participate.
If you place the winning bid in an auction or make a purchase and pay with the cryptocurrency, the seller transfers ownership of the NFT to you. If you want to sell the NFT in the future, you can set up a new auction.
How much does NFT art sell for?
Digital artworks are commanding sky-high prices in NFT auctions. The artist Mike Winkelmann, known as Beeple, has broken records with a series of NFT sales.
Beeple sold an NFT of an animation called Crossroads in November 2020 for $66,666.60 on the Nifty Gateway marketplace. The work was resold for $6.9 million in February 2021, surpassing the previous record of $1.55 million for an NFT sale. In December 2020, he sold a series of works for a total of $3.5 million. An NFT of his collage Everydays: The First 5000 Days sold for $69 million at Christie’s in March 2021.
Monthly crypto art sales have soared from $1.3 million in December 2020 to more than $200 million in March, data from Cryptoart.io shows. The total value of crypto art sales reached $638 million by the start of May 2021, with more than 204,000 artworks sold.
How are NFTs stored?
Most NFTs are run and stored on the Ethereum blockchain, which launched in 2015 and has widespread adoption, but there are other compatible blockchains emerging. Flow Blockchain, for example, hosts the NBA’s basketball memorabilia NFTs. Flow is more centralised than some other blockchains and is integrated with mainstream payment systems.
Storing NFTs on well-established blockchains is important because they are less vulnerable to attack by hackers exploiting a security flaw.
As with cryptocurrencies, NFTs are stored in compatible digital wallets. A digital wallet stores a private key, or piece of code. The private key is needed to unlock the wallet and access the contents that are sent to the public key, or code. Transactions can only be completed with both the public and private keys, making them highly secure.
However, just as cryptocurrencies can potentially be stolen if they are not stored with the maximum security, NFTs must also be stored safely to avoid theft. Keep in mind that if the wallet keys are lost, the cryptocurrencies or NFTs can no longer be accessed.
Are NFTs a substitute for art collecting?
Yes, NFTs are providing new ways for collectors to invest without buying physical art pieces. Some collectors are acquiring NFTs in the same way physical collectors have been curating paintings and sculptures for centuries.
Do NFTs mean the end of physical art?
No. NFTs create new ways of selling art and open up new markets. They can also be used to administer physical art sales, acting as a secure digital form of authentication. Codex Protocol, for example, is a decentralised NFT registry that allows a creator to attach a record to their NFT that prospective buyers can then reference to verify its authenticity.
What can we do as Smith & Partner?
At Smith & Partner we can help you to transform your work into an NFT for sale.
You will receive exclusive representation from our recognised London art gallery. We can improve your visibility on trusted NFT marketplaces. And we will market your NFT through our online platforms, ensuring you get the best possible exposure.