NFTs: The economic membrane of digital art

Digital art is currently viewed as an illegitimate and unprofitable form of art due to technological and economic issues, stifling an industry potentially worth billions (Cryptoart.io 2021). Digital artists are failing to capture the money they deserve within the creative value chain because artworks are easily pirated and copied using screenshots meaning there is virtually no demand to buy them (Potts, Rennie 2019). Without profit incentives, a perpetual brain drain of talented artists has desiccated the digital art economy. It is no surprise that, consequently, the digital art industry is worth just 0.03% of the traditional art industry (Chen 2021). In addition to surveying the difficulties digital artists encounter with ownership and monetization, this white paper by the AAANZ reviews Non-Fungible Tokens as a solution currently gaining ground.

Unowned, unfair, untapped

As the world becomes increasingly digitized and creative works are going online, it is imperative that there is a way we can attribute value and ownership to these digital assets. Licensing, copyrighting, and proofs of ownership are “the linchpin of creative industries” (Chevet 2018, 23-28). Without a solution, digital art and artists will continue to be trampled. The internet would lose an invaluable asset - the value of human creativity.

The primary problem of proving ownership is rooted in the fact that it is hard to prove who owns what digital artwork on the internet. Producing indistinguishable counterfeits, and pirating art is as easy as screenshotting. This renders digital scarcity non-existent as the act of owning an identical version is so frictionless (Chevet 2018, 55-59). Consequently, digital art prices are driven down immensely.

The status quo of tracking ownership is archaic and convoluted (Suvajdzic 2019, 13 - 14). Existing fixes are terrible. For example, Digital Rights Management (DRM) is used to restrict the free distribution of e-books (similar in form to digital art). However, DRM concentrates power in the hand of the publisher. This danger was exemplified when Amazon deleted copies of 1984 from the library of Kindle users without them knowing (Cashmore 2009). The need for centralized control of DRM services hardly fits into the ethos of true independent ownership and creates high barriers to entry, locking out amateur artists. Oligopolistic publishers hoard the lion’s share of earnings as they control the means of distribution. Furthermore, there is massive competition amongst digital artists. Ultimately, the bargaining power of digital artists is heavily eroded. Another method of enforcing ownership is the laborious method of artists filing legal action against pirate sites themselves. Finding who to contact is a process in itself of tracking IP addresses, and emails. When digital artists finally reach out to sites which have stolen their artwork, there is no guarantee of success in getting them to take it down because the protection from the Digital Millennium Copyright Act is weak and ill-enforced (Congress 1998). A full-time digital artist claimed the whole process was “soul destroying and time consuming” (Glanz 2018).

Most artists receive little remuneration. Digital artists have relied on commissions, crowdfunding or Patreon.com donations from fans. Art historian Chevet states that the “market structure of creators is heavily polarized”, with a handful of artists “gaining significant recognition and capturing most of the value of the market.” (Chevet 2018, 31) Moreover, capturing royalties has been a pipe dream. According to the European Commission’s study, traditional artists get 50% of the initial art sale and 4% of the subsequent income stream from the following sales (European Commission 2017).

The silver bullet: Non-Fungible Tokens

Non-Fungible Tokens (NFTs) can be thought of as programmable ownership certificates  representing unique digital artworks (Zeilinger 2018, 13). Powered by blockchain (the technology behind Bitcoin), NFTs enable the identification of true originality by recording the unique bytes of individual media files. Essentially, anyone can verify that ‘John Doe’ owns the original ‘Digital Guernica’ issued by ‘Picasso’, and not just a counterfeit screenshot of it. Furthermore, tokens can be split into pieces, meaning ownership of single artworks can be fractionalized (Viau 2021). Digital artists will benefit by finally being able to capture the value they deserve and build reputation online.

When an artist mints their work onto a blockchain, it becomes a tradable NFT tagged with verifiable information on who created or currently owns the artwork. This can be sold by artists and owned by collectors. Many skeptics rebut with the fact that anyone can just take a screenshot of the image so it’s not really scarce. However, the same argument could apply to physical items as well. Anyone can take a photo of the Mona Lisa or create a replica of it, but it isn’t the real item from the artist. People are willing to pay a premium for the original. As screenshots of the ‘unique original’ can now be identified as counterfeit, we are able to prove ownership, create scarcity, and provide legitimacy to digital art.

By bypassing the bottleneck of centralized DRM services with decentralized NFT exchanges like Nifty Gateway, artists are now able to interact directly with their fans and capture the monetary value they deserved all along. Recognizing the existential disruptive power of NFTs, Christie’s has become the first major auction house to sell NFT-based artworks. It auctioned off “Everydays: The First 5000 Days” by “Beeple” in March 2021.

The resulting scarcity drives value. There have been many artworks sold online already, fetching in the millions of dollars. Certain NFTs have attracted immense virality, such as the algorithmically designed pixel-art series “Cryptopunks” fetching $31 million (Nonfungible.com 2021). NFT sales have skyrocketed this year. The weekly volume of NFT projects reached $200M in March, and has seen 300% year-on-year growth. Australia has been late to the show, taking up a negligible share of this market.

NFTs also influence creator behavioural economics by enabling granular price tiering, as researched by venture capital firm a16z. Previously, digital artists made money off ad-based models, generating revenue uniformly regardless of the level of fanaticism of each supporter. NFTs allow artists to “milk” the most passionate fans by offering them premium pieces that are more expensive. For example, NBA Top Shot cards (think digital trading cards) range from $9 to over $230,000. This tiered targeting of consumers allows artists to capture much more value under the demand curve, as seen in the diagram below.

There are numerous opportunities to get involved with these thriving online communities, whether it be through Reddit forums, NFT marketplaces, or Twitter art discussion. Adoption by the Australian artist community is growing too. For example, Consensual Hallucinations by Serwah Attafuah, an artist from Sydney said “getting paid for JPEGs blows my mind”.

By making art programmable, NFTs have created a whole new genre of “autonomous” art with the capability to surpass traditional art. In “Masked”, the woman’s face mask increases or decreases in opacity each day depending on the newly confirmed cases of COVID-19 as released by the John Hopkins CSSE.

Beeple, a popular Instagram artist, sold. “Crossroads” by Beeple, a popular Instagram artist, was designed so that, depending on the 2020 presidential election outcome, a GIF of Trump - either victorious or humiliated - would play. Christie’s, the prestigious auction house which sold the most expensive artwork ever (the last-discovered Da Vinci painting), recently sold a digital collage of Beeple’s works for $69 million. This makes it the third most expensive artwork ever sold by any living artist.

The division of artworks into layers, where artists work on separate layers of the same piece, creates an entirely new dimension to the process of artistic collaboration.

Contracts encoded into NFTs allow artists to automatically receive royalties at each resale, unlocking a secondary revenue stream. Whereas artists have previously received an average of only 4% from their works changing hands (European Commission 2017, 19), sites such as OpenSea.io and Nifty Gateway have enabled artists such as Grimes (Elon Musk’s wife) to receive more than 50% in royalties (Consensys 2021). It is even possible to fractionalize digital art, making it more accessible and expanding the market scope.

There are some challenges to the integration of NFTs. High transaction fees of up to $60 during peak times on the underlying technology which enables the trading of NFTs restricts accessibility and scalability. Technical fixes will solve this by 2022. The financialization of artworks into NFTs that resemble stocks also presents an unprecedented case for regulation.

A paradigmatic shift in the creative value chain

NFTs empower digital artists by financializing digital and intellectual property. Billions of creative works on the Internet have been traditionally difficult to monetize, except through centralized and inefficient licensing models. As a metatextual stunt, I also minted my whitepaper as an NFT for $99,999 on the Mintable blockchain!

Artists can now “create, sell, and fractionalize ownership in their works, opening up a new chapter for creative endeavor” (Community DAO 2021).

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