In basic terms, a non-fungible token (NFT) digital art is an artwork that is created, owned, exhibited, and traded on a blockchain. It could be a painting, drawing, picture, video, piece of music, or even a tweet. We can now confidently say that the future Pablo Picasso, Vincent Van Gogh, or Michelangelo will not need to have their artwork on a framed physical canvas. Instead, their pieces can entirely exist in the digital form but still have only one person or institution owning the original copy at a time. Until the arrival of the blockchain, best known today for Bitcoin and other cryptocurrencies, it had been near impossible to have artwork in the digital form have the same value as one that is done with oil paint on a canvas. In particular, that was so because of the double-spending problem.
What is the double-spend problem?
Double spending is primarily a digital environment problem. It occurs because when you send a digital file, you don’t lose it. For example, if you take a photo right now with your smartphone and send it to a friend or a family member, you still have an identical copy in your storage, and they end up having exactly the replica in theirs too.
The recipient can also send the photo to others in their networks, and they still have their copy. In short, it has been the nature of digital files that you couldn’t send them and no longer have a copy unless, of course, you deleted your copy. Digital files have been by default replicable to infinity. And that is the double-spend problem.
Meanwhile, what makes anyone willing to pay $100 million for Pablo Picasso’s Weeping Woman or $700 million for Leonardo Da Vinci’s Mona Lisa, for example, is the knowledge that they are going to be the only one in the entire world owning the genuine original copy.
It goes without mentioning that no one will spend, say, $100 million on a piece of art when they know that potentially 100 million other people around the world will have exactly the same copy. Before artwork in digital format could have the same characteristic as the physical artwork pieces, the double-spend problem needed to be solved.
The easier way to do it is to have a central authority manage the digital asset as well as transactions around it. Meaning, the central authority keeps possession of the file on behalf of the owners to prevent replication. The central authority could also oversee the owners’ accounts and automatically delete the files in the sender’s possession once they give up ownership.
This is what happens in centralized digital payment services like PayPal. Once you send money, the service provider updates a ledger to indicate that your balance has been reduced by the amount you sent. That means you no longer have the same amount to send to another person.
For art-like assets, a similar system is used in video games to manage in-game assets like rare skins, weapons, and other assets. The platform admin makes sure that once you sell an asset, it no longer appears in your inventory.
The challenge with this form of arrangement is that you don’t have true ownership of these assets. An admin can still take them away from you for one reason or another.
Also, the existence of the assets depends on the existence of the platform and, in particular, the company that runs it. You can’t move with them to another platform that is not related to the one where you owned them first.
A more helpful way of solving the double-spend problem is to make a digital asset exist as a single sovereign copy that can be sent, and a copy is not left behind. As a critical step to achieving digital cash that didn’t rely on a central authority, Satoshi Nakamoto found a solution to this problem.
A few years later, this solution proves helpful in the management of artwork in the digital form.
How was this achieved?
Satoshi Nakamoto solved the problem of double-spend by creating what we now know as a shared ledger (blockchain). This is a record of transactions that appears on each computer in a peer-to-peer network. They all maintain and synchronize it through collaboration based on a consensus mechanism – strict laid down rules about how transactions are verified. Assets or digital coins are stored on this ledger, and only their ownership changes.
In other words, when you send bitcoin, the coin itself does not move. What happens is that you relinquish your ownership and transfer it to the recipient. Basically, the asset remains at the same location. Meanwhile, the protocol is designed and set up such that the assets recorded on the shared ledger cannot be replicated.
We can think of blockchain as a shared public storage space where digital assets reside and are protected from replication. However, unlike the other storage spaces, the blockchain is not owned nor controlled by any private entity. The ownership is managed through a detailed public protocol and smart contract. These features offer users true ownership.
Now back to NFTs
The same shared ledger on a peer-to-peer network that has been used for cryptocurrencies like Bitcoin can also be used as a storage for unique digital assets known as non-fungible tokens (NFT).
But what exactly does the word fungible mean?
Each of the 21 million bitcoins that will ever be in circulation can be replaced by another. In other words, when you expect a payment, you don’t mind which one of them you receive. That is because you expect them all to be the same. That is the fungibility characteristic of a currency, and it applies to fiat currency as well.
However, when it comes to assets like artwork, each must be unique and different. This can be achieved by creating unique metadata for each digital file stored on the ledger. Therefore, each becomes a non-fungible token.
The Ethereum blockchain has been designed with the best capacity for this purpose. That is, in particular, because of its smart contracts capability through which digital files on the shared ledger are given unique characteristics.
We’ve already seen the successful launch and sale of art pieces on the Ethereum blockchain as NFTs. At the beginning of the year, we saw Jack Dorsey’s first-ever tweet sell for $2.9 million as an NFT. Christie’s facilitated a $69 million NFT auction of a digital collage by an artist known as Beeple. This is a trend that can only grow with time.
Several marketplaces have emerged where art pieces created on the blockchain as NFTs are sold. These marketplaces include OpenSea, Raible, and SuperRare.
Like with physical artworks, those who buy NFTs are mostly collectors and investors who hope that whatever they buy will grow in price over time. Of course, much of the value comes from market sentiment on the asset and not any utility function.
Indeed, the gaming industry is also turning out to be an early adopter of the NFT application of blockchain technology. Video games are full of digital assets that need to be unique and different such as skins and weapons. These are better managed as NFTs on the blockchain.
While traditional physical art pieces will continue being attractive and growing in value, in the future, however, we are likely to see a growing class of art that is created, owned, and traded in digital form as NFTs. Thanks to blockchain technology, this art will be rare and therefore as valuable as physical art pieces.