NFTs are both priceless and worthless

The cryptocurrency offshoot is a jumble of contradictions.

Artist-created image of Nyan Cat hung in place of the Mona Lisa. (Image Credit: kevinofsydney (Flickr, modified))

It is no longer possible to ignore NFTs, the crypto off-shoot that can tie intangible assets to specific, unalterable tokens. Interest in NFTs (non-fungible tokens) has spiked over the last year, and is now breaking into the mainstream with several headline-grabbing deals. On March 6th, Twitter co-founder Jack Dorsey announced that he would “sell” the first ever tweet on an NFT auction site. Right now, the current high bid for Dorsey’s initial missive stands at $2.5 million.

If Bitcoin has become the cryptocurrency world’s version of gold, a method of exchange that its boosters hope will always gain value, then NFTs are its asset class. Bitcoins are all equal, and can be broken down into chunks — much like turning a dollar into change — but NFTs are not, and cannot. They are intentionally unique and inviolable, allowing you to permanently tie them to a digital or real-world asset. It’s possible to produce a home ownership document as an NFT, but the world’s attention right now is on digital art, music and collectibles.

The point of tying a digital object to an NFT is to create a lasting record which can prove its identity and provenance. Because blockchain is a public ledger, it means that there’s an added layer of security and transparency which should make it harder to defraud people. Plus, in the digital world, where everything can be replicated without penalty, you can attempt to give a single copy the prominence and weight it would receive if it was a real-world asset. Yes, you can duplicate a file a thousand times and they’ll all turn out the same, but only the one tied to an NFT is the real deal.

Digitization means that you can easily and endlessly create a perfect copy of something, making it harder for creators to be compensated for their work. (Naturally, there are legal remedies for copyright infringement, but that’s a different story.) The band Kings of Leon, for instance, will sell its next album as an NFT for around $50, for which you’ll get both a physical and digital copy of the music. And, naturally, the added prestige of being able to tell your friends that you own the token that connects to the album.

To a certain extent, that is the lie agreed upon that underpins why NFTs are so in-vogue right now: Despite all digital copies being equal, the tokenized copy is more equal than others. That this one copy, out of all of those that exists, is the one that carries any value. And, if you tell enough people that this token is worth money, they’ll buy into the idea as well. Ownership of the token does not, however, convey additional rights to the buyer, you don’t own the copyright, and can’t loan the file out to others in the hope of earning an income.

IOTA co-founder Dominik Schiener explained how the process works: You create something, let’s say an image that you have painted. You upload that file to a website, and then include the URL of that file inside the smart token that you then “mint” onto the blockchain of whichever platform you’re using. From there, you can then sell the token yourself, or more likely, using a third-party retail platform that specializes in crypto art. “What makes NFTs so unique,” said Schiener, “is that you can verify their authenticity.”

Musician Claire Boucher, who records under the name Grimes, recently sold NFTs of digital artwork made in collaboration with their brother, Mac Boucher. The Guardian said that the series, WarNymph Collection Volume 1, made more than $6 million in sales, with up to 300 copies of one piece selling for a fixed price of $7,500. In February, Chris Torres, creator of Nyan Cat, sold an NFT version of the internet-famous animation for $650,000.

Crossroad 1/1 is a looping video, 10 seconds long, created by the digital artist Mike Winklemann, who works under the name Beeple. It was one of a pair of artworks prepared in anticipation of the outcome of the 2020 US elections, depending on the result. The clip features a nude, orange-haired, overweight figure, several meters tall, lying prone in a public park. The body has been covered in graffiti while indifferent pedestrians go about their day, oblivious to the spectacle beside them. On November 1st, 2020, the clip was published on the Ethereum blockchain and purchased by collector Pablo Rodriguez-Fraile for $66,666.60. On February 5th, 2020, an anonymous buyer bought the same artwork from Rodriguez-Fraile for $6.6 million.

But NFTs aren’t just the reserve of oblique art collections and musicians looking for ways to monetize their work. The NBA, in partnership with Dapper Labs, the Canadian company behind Cryptokitties (essentially digital Beanie Babies), launched Top Shot in October 2020. Top Shot is, essentially, a form of card collecting, but rather than static images, you’re buying “moments.” These are short video clips highlighting a specific basketball play that is worthy of commemoration.

On Top Shot, you can buy a 12-second clip of Orlando Magic forward Aaron Gordon’s dunk against the LA Lakers on January 15th, 2020. At the time of writing, there are five copies of that dunk, with various serial numbers, on sale from private collectors. Prices from the clip range from $74,000 for serial number 41, through to $129,000 for serial number 12. The company says that more than $200 million in sales has been made since the site launched.

Image taken from NBA Top Shot

Jack Settleman is the founder of Snapback Sports, a multimedia company that includes one of the world’s most popular Snapchat channels. “I’d been buying Bitcoin since 2018,” he said, “built a business on social media, and loved the NBA,” which drew him toward Top Shot. In January, he and his friends paid $47,500 for a copy of a famous LeBron James dunk. In the clip, James mirrors a move made by Kobe Bryant back in 2001 in tribute to the late star.

Settleman and his friends bought serial number 23 of the card — James’ shirt number — which they felt was “the holy grail of the platform.” “The best player on Top Shot,” said Settleman, “with his jersey number, matched with the most meaningful play on the platform.”

“There was never an ‘oh shit’ moment,” he said, when asked if he was ever clutching his head wondering if spending $50k on a video clip was a smart idea. “When making decisions of that scale, you’ve already run the calculations on what can go wrong, so I wasn’t too worried.” But despite the skyrocketing value of the moment, Settleman isn’t going to sell it to anyone but James himself. “We’ll sell it to LeBron for $1 million,” he said. Representatives for the basketball star have yet to get in contact.

“When I jumped in, I was [only] focused on the investing aspect,” said Settleman, “but now I have moments that have appreciated 10,000 percent, and I would never let them go as I’m too attached to them.” The entrepreneur added that he has also become attached to Top Shot as part of his love of “building communities and connecting with new people.” He said that he has spent around $75,000 so far, and is currently working on a way to display the moments in his home.

The sudden rise of NFTs, as well as the renewed interest in crypto and share-dealing more generally is, financial types say, due the amount of cash sloshing around the financial system. Jason Welz is an investment analyst at Invictus Capital, who said that the movements we’ve seen in the last year reflect “extremely loose monetary policy from central banks globally.” “We’re seeing unprecedented demand and price performance for penny stocks,” he added, “I think we’re seeing a similar scenario play out in the NFT space.” He did note, however, that investors need to be on the lookout for “bubbly conditions” which could see speculators lose their money.

Adrian Krion, founder of Spielworks, says that the spike in interest is little more than a gold rush, with everyone speculating on high-worth assets. “The latest crypto bull market has people who hold a lot of money investing in objects that are provably scarce, like waterfront apartments in top locations or digital items like NFTs, which can be liquidated easier.” Krion himself said that he is spending “a few hundred dollars monthly on NFTs,” mostly in the form of online games like Splinterlands, NBA Top Shot and The Sandbox, as well as the “occasional piece of art” through online galleries, “because they look cool, not for investment purposes.”

“I believe the overwhelming driver of the hype is greed,” said Welz, “people believe that getting in early and owning some of the earliest NFT artworks or collectibles will, in the long term, become extremely valuable, in the same way that work from old masters continues to appreciate in value.” He said he didn’t know if we’d see a similar rise in the value of NFT artwork but that putting money into the space seemed like a “rational, albeit high risk, punt.” One that, given the profit Pablo Rodriguez-Fraile made in less than a year, is likely to encourage more speculation.

The art world is happy to embrace this speculation, as a potential rush of new collectors look to build their portfolios. Noah Davies, a specialist in contemporary art at Christie’s New York, told Art Market Monitor that the current movement could represent a “drastic shift” in art collecting. He said that “Christie’s, as an organization, is really excited about a moment in time where you see $3.5 million of sales just organically appear out of thin air. That’s something we want to capitalize on.” Davies also said that the potential buyer of an NFT skews “definitely male and more American than not.”

NFTs have the potential to be better for the artists themselves, as Joanie Lemercier explained. Lemercier is a French artist who specializes in computer art, light projections and mapping, and has exhibited across Europe, China, Japan and the US. He runs his own studio in Belgium and has also worked to raise global awareness around climate change. One of the best features of crypto art, he explained, was knowing where your work winds up.

“When an artwork is sold through my gallerist,” he said, “I know it’s been sold, but I have no way of knowing when it will be sold again.” If he wanted to know if a piece was being exhibited, or stored away in a vault somewhere, he’d need to track it down on his own. “What the [block] chain allows me to do is track who owns the work and when a sale is made again,” he said. He added that NFTs have the potential to help artists from being boxed out of the blockbuster fees you sometimes see on the secondary market. If a piece is re-sold through the same marketplace, the artist can receive a cut of the sale, which can be around 15 percent.

Image of two pieces of crypto art available on NiftyGateway
Some examples of CryptoArt from NiftyGateway (NiftyGateway (Respective artists))

As part of his climate change work, Lemercier began working to reduce his studio’s energy consumption by 10 percent every year. “I wanted to reduce consumption at the studio,” he said, “because I knew I was spending a lot of money on electricity and gas.” Spurred on by the pandemic, he was hoping that embracing NFTs would be a key plank in his plan to make his artistic career more sustainable. That “very hard work” saw the energy consumption fall from 4,618kWh in 2018, down to 3,800kWh in 2020. “Then, I was introduced to crypto art by my friend.”

“I knew about how proof-of-work is based on, basically, wasted energy” said Joanie Lemercier, “I did some basic calculations and said ‘I will be careful and use the profits to do the insulation’ [on the studio] to [further] lower my consumption.’” He released a series of six artworks on NiftyGateway which was successful enough that he had already begun work on a second collection, due to launch on February 17th, 2021. “I thought my impact would be pretty low, and I asked NiftyGateway to help me with my calculation, but they said nothing.” (NiftyGateway disputes this, saying that it had conversations about “the environmental impact of minting NFTs,” with artists “including Joanie Lemercier.”)

Lemercier said that he then further calculated the energy cost of the artworks he had sold as NFTs. “I realized that those pieces, which had sold out in less than ten minutes, used more than 8,000kWh, more than my studio’s power consumption for the last two years.” “With secondary sales, this figure has already jumped to 9,000kWh,” he added, “and will [continue to] grow over the years.” “I could do anything with the profits to lower my consumption, but it will have zero effect because of proof-of-work.”

The role of cryptocurrency energy consumption is a contentious one, with its critics saying that it’s needlessly wasteful. Its supporters, meanwhile, assert that the global banking system uses far more energy, and that the criticism is unfounded. What isn’t in doubt, however, is that Bitcoin and Ethereum — which underpins a number of NFT transactions — both use Proof of Work to validate transactions. Rather than a central banking authority ensuring that Person A has paid Person B, hundreds, thousands or even millions of computers race each other to calculate artificially-complicated equations that then approve each deal. The computer which successfully solves the problem gets a financial reward, while the others do not. As a consequence, the system is relatively secure, but countless numbers of computers are running equations and burning energy for no real reason.

The Cambridge University Centre for Alternative Finance believes that Bitcoin, on its own, burns around 130TWh of power a year. BBC News reported that, if Bitcoin were a country, it would consume more energy per year than Argentina. Digiconomist, meanwhile, estimates that Ethereum consumes around 26TWh of power per year. There have been moves to push Ethereum onto Proof of Stake, a system which is much more power-efficient than Proof of Work. IEEE Spectrum reported at the start of 2019 that the team behind the cryptocurrency would make the transition by the end of that year. Two years later, it’s still being worked on, although it’s believed that we may see some movement at the end of 2021. Until the working method changes, there are valid questions to be asked about how much CO2 the crypto world emits.

The majority of mainstream NFT sales are currently made on Ethereum, including Cryptokitties, NiftyGateway and OpenSea. Even if those transactions make up a small percentage of all ETH traffic, artists and activists are already working to determine cryptoart’s environmental impact. Everest Pipkin has produced a lengthy explainer on the issues here, while Memo Akten has released, a website that calculates the potential emissions of a single piece of art when it’s bought and sold.

NiftyGateway said that it was “open to [...] conversations and [is] committed to transparency.” It added that it had engaged in conversations with Lemercier and was willing to continue this dialog in future. The company spokesperson added that “Ethereum transactions interacting with NFT contracts comprise roughly one percent of all transactions on the ETH network.” They added that “Ethereum 2.0, which will roll out in phases this year, will focus on improved sustainability, among other benefits.”

On March 2nd, SuperRare, another portal selling crypto art, issued a similar statement to rebut the environmental criticism of the platform. It posted on Medium, saying that NFTs do not directly increase the energy consumption of Ethereum since the network is already in use.

Proof of Stake would, on paper, dramatically reduce the potential energy that is consumed by cryptocurrency mining. Put simply, it essentially uses a random number system to assign work to computers that hold a certain value of the currency already. One blockchain that already uses Proof of Stake consensus is Flow, the system underpinning NBA Top Shot.

Weilei Yu, product marketing director at Dapper Labs, said that while it was “really hard to get exact figures,” he estimates that Flow is far more energy efficient than Ethereum. His analysis suggests that each node consumes around 250W of energy per hour, meaning over a year, the roughly 330 currently active nodes consume “less than 1GWh of power in a year.” While consumption does increase with each node added, if those figures are accurate, Flow offers a significant advantage over Ethereum and Bitcoin in sustainability terms.

Flow has a number of other big names signed up to adopt its platform, as well as Cryptokitties, which will make the switch from Ethereum in the near future. MotoGP Ignition, a management and collectibles game tied in to the racing series, will launch on Flow on March 26th. And OpenSea, one of the biggest NFT marketplaces, has said that it has begun working on support for Flow.

Right now, we are on a tipping point that will see NFTs either become part of many peoples' investment strategy, or go through another cycle of boom and bust. The move to a more sustainable blockchain could remove one of the biggest objections to NFTs, and crypto, in general. But if you’re looking to invest, you should always remember that the value of your purchase can go down as well as up. Or hope that a basketball star returns your calls.