A look at Non-Fungible Tokens as digital art on the blockchain
How did you celebrate this year’s Valentine’s Day? What gift did you give to your partner to show your appreciation? One of the most popular answers would be flowers. One of the less popular answers — but no less creative — would be “crypto flowers” that live on the blockchain as non-fungible tokens (NFTs).
You may have lots of question marks in your head right now: what are NFTs? Why would anyone want a crypto flower vs. a real one? Why do you buy a “crypto flower” that feels like a digital art file when you can easily google the GIF of a flower for free?
Take a deep breath as we dive into the world of NFTs.
The example of Crypto Flowers (NFT as digital collectibles on the blockchain)
The CryptoFlowers website describes themselves as “an internet collectibles game”, allowing you to “breed two different flowers to receive [a] new and genetically unique third one (on the blockchain)”. (It is a spin on CryptoKitties, where users breed digital kitties. The game got so popular that it once congested the Ethereum blockchain because of spikes in transactions. Think too many cars on the road led to a traffic jam.)
To get flowers to begin with, users can purchase them with cryptocurrencies on the website. The price tag could be up to a few thousand USD equivalent each — I guess you can call that the Hermes of flowers.
Some readers may be baffled at why anyone would spend so much money on, essentially, digital art that lives on the blockchain. The CryptoFlowers website gives users this incentive: “Your unique flower brings real profit! Get money for crossing your flowers with the flowers of other players or sell flowers at Auction House of CryptoFlowers!” To sum it up, users monetize crypto flowers similar to how they could monetize rare art — by selling or auctioning it.
The basic economics of supply & demand work here: for the value of the crypto flower to rise, there must be a sufficient number of users interested in buying it. Hence, incubating and growing a sizeable user base is key to the (monetary) value of crypto flowers.
The value of NFTs (focusing on digital art)
Art is one of the predominant use cases of NFTs today, as we have seen in the case of CryptoFlowers AR (though NFTs could be extended to represent other things, e.g., admission tickets).
Some are skeptical about the high price tags that such NFTs command. A Financial Times article reported about CryptoFlowers in a somewhat sarcastic tone: “You can’t accuse the blockchainers of not appreciating aesthetics can you? That one will only set you back 4 ETH, so about $7,300. And if you really want to impress her, there’s the ‘first Ethereum flower’, which can be yours/hers for 50 ETH (a snip at $91,000).” The most popular comments underneath the article are also not short of skeptics, e.g., “By any chance, can you send someone a digital tulip?” “I would love to get my hands on the customer database because I have a bridge I could sell them. Many bridges in fact. All unique. And digital of course.” “For $90K, I’m sure Cartier could come up with something a bit more interesting (and rare) than a digital flower.”
All in all, what’s special about art in NFT form vs. other digital art (e.g., a picture online)?
Advocates of NFTs would point to the abilities to: (a) check & prove that the art is unique, (b) verify ownership and (c) make past records of ownership transparent, thanks to blockchain technology. Let’s go through them one by one.
Uniqueness of NFTs — the name “non-fungible” itself means that it is not divisible and not replaceable. Common examples of fungible items would be say a $10 USD bill. You can replace it with another dollar bill of the same face value. However, each flower on CryptoFlower is a unique version.
Ownership — the owner (or more like the wallet address that owns the NFT) is codified on the blockchain. Hence in case there is dispute on who the NFT belongs to, the owner can always prove he / she holds the key (literally as in keys to the wallet). Even if someone were to say download or screenshot your artwork and tokenize it as an NFT, you can always prove you are the rightful owner by showing that the creation timestamp of the NFT you hold is earlier. (Though one could argue in the non-blockchain world, we could use similar methods such as checking file creation or upload time.)
Transparent ownership records — each time the NFT is transferred to a new owner (address), the transaction record is recorded and public searchable. This feature is particularly handy for NFT marketplaces that give the original creator royalties for each secondhand sale with ownership (address) transfer that happens on their platform. (Though one could argue that an off-chain marketplace could easily achieve the same using a database.)
While NFTs certainly have their merits, the skeptic would say that these benefits — e.g., uniqueness, ownership records — are not necessarily unique to NFTs on the blockchain. Arguably, off-chain products can achieve the same traits, albeit it would require placing trust in centralized entities (e.g., database provider or a merchant platform).
One comment on Financial Times, credit to JohnB, game makers could be hesitant about NFTs because they would lose control over the sales (as anyone could buy or sell NFTs on the blockchain without requiring permission) — this could mean loss of sales commissions for the gamers, as well as loss of control over the pricing (inflation, deflation). It is yet to be seen how many gamers would care enough about “decentralization” or “permission-less” features of the blockchain such that they’d embrace NFT versions of in-game collectibles.
Due to the decentralized nature of NFTs, most marketplaces do not gather user information (i.e., no know-your-customer verification process). This could mean in times of dispute — e.g., over copyright infringement or plagiarism — it could be hard to get remedies if the alleged perpetrator’s identity could not be revealed. This is a generic argument to uses of blockchain, e.g., concerns over money laundering by (pseudo) anonymous users.
It is worth noting the NFT space as a whole is trending up these days, with increased transaction volume. Probably another reason behind CryptoFlowers making it to a The Financial Times article. As always, do your own research and form your own investment thesis (or reasons not to invest).
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Substack: Wang Street Journal