Counterpoint on valuing NFTs

I have written about non-fungible tokens (NFTs) before. I stated that all you get when you buy an art (or collectible) NFT is a pointer to a digital upload of the artwork represented by the NFT. I argued that it didn’t really mean anything. My friend F. has written an excellent article explaining why he believes art NFTs have value and why people are paying millions of dollars in cryptocurrency for them. I wish to provide a counterpoint to this article, and together these articles may give you a perspective on the value of NFTs.

Caveats & disclosure

This article does not cover metaverse or gaming NFTs. I believe that they are of a different character, even though the underlying technology is comparable.
This article also does not attempt to explain how art in general is valued.
This article is not financial advice. Do not make investment decisions based on a single person’s views in a new and risky field such as cryptocurrency.
This article is not endorsed by my employer or by any parties mentioned in the article. The views expressed within are my own.
I own cryptocurrency and NFTs.

Physical and digital art

Let us first briefly look at a fundamental difference between physical and digital art. The physical artwork has to be made (drawn, painted, chiselled, written, etc.) by the artist. Reproducing each copy requires additional effort. A digital artwork takes no effort to replicate; a file can be replicated with ease. Intellectual property (IP) rights have been a serious thing since the printing of books became relatively easy. It is IP rights that are typically applied to protect digital artworks and to enable makers of artworks to get compensated for their art. Quite often, digital rights management (DRM) software are used to prevent users from downloading streaming movies into files for their later enjoyment or for distributing to other parties. The same is used on video games, songs, etc. Those who are of a mind to enjoy an artwork for free can often find “cracked” versions of video games or DRM-broken movies on the internet. Artists tend to have IP rights to their artwork even if a copy of the artwork is no longer with them. For digital artworks, the buyers of the artworks rarely have reason to get the IP rights when they make purchases.

NFTs of digital art

F. makes a great analogy between NFTs and traditional collectibles, in particular with rare editions of valuable comic books. Most art NFTs are now transacted on public blockchains such as Ethereum, Solana, etc. where the NFT contains i) a reference to access the artwork on the internet, ii) the cryptographic hash of the artwork and iii) the artist’s digital signature.

i) The artwork is essentially given away for free on the internet to anybody who should want to access it. So one’s enjoyment of the artwork itself has nothing to do with owning the NFT.

ii) The cryptographic hash is a number that uniquely identifies the artwork. Even the slightest change (e.g. one pixel, one character, etc.) will result in a totally different cryptographic hash, so this is a good way to prove that the artwork you are accessing is authentic. However, given that the file of the artwork is publicly available on the internet and anybody can create and check its cryptographic hash, the NFT-buyer cannot claim to possess a uniquely authentic copy of artwork.

iii) F. explains that an NFT provides proof that it was minted by its original artist. This would be similar to the way in which the painter’s signature on a painting is proof that it is indeed by that painter. The cryptographic (digital) signature in the NFT minting transaction gives the NFT (and the associated digital artwork) the authority that an artist’s signature gives their physical artwork. When a person pays for an NFT, they are paying for the equivalent of the artist’s signature to be associated with that artwork. This much is uncontroversial.

Furthermore, there is no transfer of IP rights with most NFTs. In some cases, the right to monetise the artwork to a limited extent may exist. This right is usually not described in the NFT itself; it would more likely be part of a “traditional” legal contract elsewhere.

F. addresses this criticism directly: “Perhaps it isn’t the art that people are investing, but the digital trail of transaction that serves as evidence that one owns something minted by the artist/celebrity regardless of how the art looks like.” This is an interesting and valid point, but it does not tie up well with how NFT prices change based on the “exclusivity of the NFT”.

Example: Eminem’s NFT drop

Let’s look at the example of Eminem’s NFTs, referenced in F.’s article. Eminem, working with an artist named D.O.M., created a series of artworks attached to NFTs. These artworks have visual (D.O.M.’s work) and audio (Eminem’s work) components. One NFT, Stans’ Revenge was “exclusive”, i.e. one NFT was released, which auctioned for $100,000. Most others (e.g. Tools of the trade) were non-exclusive, i.e. 50 NFTs of each of these artworks were created, and sold for the fixed price of $5,000 each. Eminem’s signature associated with each of these artworks should be worth the same, but it is the NFTs that have exclusivity associated with them, not the artworks. Somehow, the digital signature on Stans’ Revenge is worth more than the digital signatures on each copy of Tools of the trade. All these signatures would be equally unique and therefore should have comparable values, if if were the signature itself that gave it value.

It is also noteworthy that neither of these are “pure” NFTs. In both cases, Eminem provided physical goods (see images below) in addition to the digital artwork because clearly the creators themselves found it too abstract to just transfer a token in exchange for $5,000 (or $100,000).

*Stans’ Revenge, the NFT that was auctioned and sold for $100,000*

If Eminem had to hand-number and autograph (see image of Tools of the trade below) a physical print of the artwork, does this not invalidate the NFT aspect of the sale? From the resale perspective, does the NFT without Eminem’s personally numbered and signed physical print have the same value? The fact that there is a separate physical print now means that the blockchain and real worlds are no longer aligned, i.e. one person could own the token while another the paper with the autograph. I suspect that the ramifications of these actions will become clearer in the next few years, if the artwork NFT market does continue. All said, I find this a good way for Eminem to interact with his fans while trying to stay current with technology.

*Tools of the Trade, 50 NFTs of an artwork that was sold for $5,000 each.*

How many readers think that Eminem bothered to gain an adequate knowledge of Ethereum or Nifty Gateway (where he sold his NFTs) to actually mint the NFT himself? I am not saying that he did not, but in all likelihood, a technically competent person nominated by Eminem went through the process of minting the NFTs attached to the artworks that bear his name. If this were the case, would such an NFT indeed serve as the digital equivalent of a physical signature of Eminem’s to a collector?

My opinion is that most NFT collectors simply do not really understand what they are getting when they spend money on art NFTs.

An alternative theory

Keir Finlow-Bates has also written an article on why he thinks NFTs have value. He builds his argument based on the communities that surround NFTs and the fact that emotions drive NFT value (a generally accepted idea regarding the cryptocurrency markets, but articulated exceptionally well by Keir). Keir comes to the same conclusion as F.: when people like NFTs, NFTs gain value.

Key takeaways

You do not exclusively own an artwork just because you own an NFT linked to that artwork.
An NFT owner has access to a token that was created by / on behalf of the artist.
The value of NFTs is highly subjective and primarily in the eyes of the beholder.

References