Artists and NFTs: A Love Story!?
Visions of easy money resulted in exponential growth in the adoption of digital technologies and exchanges that support cryptos and NFTs. How have artists fared during the recent NFT mania?
Cryptos and NFTs have made their way into the mainstream, first slowly and then suddenly. For the art world 2021 was a pivotal year. Prices for individual NFTs like Crypto Punks have skyrocketed to unbelievable valuations, often surpassing that of physical art by famous dead artists. Jimmy Fallon recently bought one of the Bored Ape Yacht Club NFTs. But despite the hype, very little is actually known about the inner workings of NFTs. What are they, how do they work and why are people willing to pay such exorbitant amounts for something that often looks childish, cartoonish or like trash? Are NFTs a scam and just another way to monetize the remaining ‘free’ parts of the internet? Are NFTs an elaborate money laundering scheme? Are NFTs art? And if so, how are the artists doing collectively and as individuals?
It is absolutely apparent that something big is happening in the world of NFTs. The media is pumping the NFT sector with glorifying articles with titles like Wall Street Journal’s ‘Art is Among the Hottest Markets on Earth’ and The Guardian’s ‘I went from having to borrow money to making $4m in a day’: how NFTs are shaking up the art world.’ To understand the NFT mania we must also understand the ongoing mania in the stock market, cryptos, SPACs and IPOs, because they are inherently linked together through the pools of liquidity flowing between them. On the back of the financial market’s SPAC (Special Purpose Acquisition Company) craze earlier this year, that saw celebrities and sports stars like Serena Williams and Colin Kaepernick backing these speculative ventures, the NFT boom is now in the throes of a similar boom and bust cycle, with Paris Hilton and Damien Hirst getting into the NFT game. We should all be very cautious what comes next.
In early 2021 SPACs were all the rage with the rise of companies like Lucid, Virgin Galactic, DraftKings and Microvision. SPACs are like IPOs (Initial Public Offerings). But unlike IPOs whose prices on its first day of trading could vary significantly (Coinbase was set to open at $250 while Robinhood at $38), a SPAC price per share is always set at $10. This makes the SPAC a much more lucrative deal for the retail investor who may not have nearly as much money to invest as a hedge fund or a family office. This focus on retail makes SPACs a riskier investment than a traditional IPO because retail is also much more vulnerable to price manipulation from the side of so called institutional ‘smart money.’ It has been said innumerable times that the stock market exists to transfer wealth from the little guy to the big guy. And this is precisely what happened with SPACs.
SPACS are blank check companies that are set up to collect money from investors with the purpose to buy another company and merge with it. There is always the chance that the SPAC company will never find another business to merge with and therefore the money simply disappears along with the company. When an investor is buying into a SPAC they are essentially purchasing a promissory note that says that the acquisition company will at some point in the future become a real company. But that future could be indefinitely postponed or never come at all. Things happen. People get sick or die. Deals fall through. Businesses fold. But, as is often the case with many Kickstarter campaigns, once the money is in, running away with it is a more lucrative option than to actually produce something. SPACs have been subject to massive fraud of this sort. By summer 2021 SPACs have fallen out of favor as it became apparent that many were set up simply to collect money from early investors and to take that money and run away with it. While some SPACs worked the name quickly became synonymous with scams. It will be interesting to see how Donald Trump’s SPAC Truth Media will turn out, given the absolutely insane rally followed by an enormous sell-off it saw just a few weeks ago.
But what do SPACs have to do with NFTs? SPACs and NFTs are obviously not the same thing. They do not even operate in the same space. But NFTs are rallying as a result of the ebbing SPAC mania and the churning frenzy in cryptocurrency. Liquidity within markets travels from one sector to the next as money is trying to find profits and minimize losses. With the continuous draw down in the SPAC sector, liquidity suddenly reemerged in crypto. But this is only a portion of what happened. NFTs, like SPACs earlier in the year, rely on the mass participation of individuals. Masses of people suddenly flooding into a market creates a mania that can be hyped by the ‘institutions’ that are hoping to profit from it. Within the NFT space the ‘institutions’ are the auction houses that act like exchanges in the financial market. As these institutions continue to hype certain products and artists, more individuals ‘buy in’ because valuations continue to rise higher and higher. Since the summer, crypto had been on a bull run not seen in years. The most recent crypto bull run happened last year, beginning roughly around October 2020 and saw Bitcoin and Ethereum, the primary blockchain connected to NFTs, rise to all-time-highs. In May of 2021, with the Chinese ban on crypto mining, cryptos fell by about 50%, only to rise again a few months later to their new all-time-highs. If we were to trace the mania in NFTs, we would see that the attention and valuation given to them correlates with the rise and fall of the crypto mania, primarily because NFTs are bought and sold using Ethereum.
NFTs or Non-Fungible Tokens are digital ‘objects’ that exist on the Ethereum blockchain. NFTs exist on other blockchains, but Ethereum is by far the largest. They are tokens because they can be exchanged, swapped, sold and bought and non-fungible because they are unique. ‘If something's fungible, it's interchangeable with another item of the same type. For example, a $10 bill could be swapped for another $10 bill -- or two $5 bills. In contrast, an original piece of art or a signed first edition of a book is non-fungible.’ All NFTs are ‘minted,’ meaning that they are run through a minting process during which a line of code is assigned to them by a program that gives it something like an origination code or identification number, a piece of metadata that acts like an autograph and the finished token is then placed onto the blockchain. A blockchain is simply a ledger that tracks all the ‘objects’ that are placed into it through the minting process. Mining cryptocurrrency, for example, places a block of crypto onto the blockchain in the same way, because mining a piece of cryptocurrency is a process by which a computer that is solving complex mathematical computations is ‘awarded’ a block of crypto with a similar code that places it within the blockchain. This line of code allows the objects and cryptos to be tracked forever and each time an exchange occurs, this also gets registered on the blockchain. Another way of thinking about the blockchain is like a computer server on which everything that is created and stored can be traced according to its metadata. Thus a blockchain is effectively a massive surveillance project for all the activities happening on it.
In theory, what the blockchain does for digital art is that it authenticates it as a traceable object and assigning to it a form of provenance, thus diminishing the chances of loss, theft or fraud. In practice however, fraud is commonplace and part of the game. There is nothing stopping someone minting an NFT out of someone else’s work. Endless copies can still be made of NFTs and issues of copyright and terms of use are dependent on the contract written into the code. Anything that can be digitized can be turned into an NFT, like the first ever tweet or an audio file of a fart by New York director Alex Ramirez-Mallis. Art is only a portion of what constitutes the NFT space.
The elephant in the room is the obvious question, how are artists doing during the NFT mania? Reading through articles extolling the virtues and high prices of NFTs by Beeple, Damien Hirst or Paris Hilton, we don’t really get a sense of what happens to the thousands of artists in the NFT space or why are NFTs the subject of so much hype. To sell an NFT, it first has to be minted, which costs money, and then listed on an exchange site like Open Sea, where they sit in wait for the supposed millions of eager NFT collectors. But, looking at Open Sea, we quickly get the picture that the majority of NFTs not only do not get sold, the majority do not even get views. There are thousands of NFTs being minted each day. These thousands get listed on Open Sea, Nifty Gateway, Rarible, SuperRare and other NFT exchange sites. But unless it’s a Beeple or a Bored Yacht Ape, the chances of someone noticing and buying are slim. It looks like we are back to the same conversation we’ve been having over the effect of social media on artists, like in this interview I did with William Deresiewicz, the author of ‘The Death of the Artist’ or this secret plot article by Elizabeth Herring. Just like Instagram influencers, the big names suck up all the attention and money in the NFT space, like a big black hole around which the institutions and money circulate. Wild rags-to-riches success stories are used to drive attention to the NFT platforms that are then focused by celebrity culture and gossip news, from Elon Musk reposting a meme of an unknown 28-year-old designer that immediately sold for $20,000 to Lindsay Lohan’s fail at wooing the furry community with her ‘fursona’ NFT. These stories are written with the express purpose to stir up FOMO (Fear of Missing Out) in the buying public and the artists who are interpellated with visions of easy money. That NFTs are currently being hawked by celebrities is a clear sign of a market bubble.
Though the ‘real’ economy of NFTs is primarily driven by the thousands and thousands of mostly anonymous artists churning out millions of NFTs, the data on who makes how much is very murky and collecting it challenging. The artist Kimberly Parker did just that. Working with a data expert, Parker targeted Open Sea for scraping data and found out that the majority (more than 50%) of NFTs sold for less than $200, a price that does not include the ‘gas fee’ as the price for minting NFTs is called. Here the terrain for artists is even trickier Parker notes - ‘If your artwork is among the more than 1 in 3 NFTs that sold for $100 or less you can expect to have 72.5 percent to 157.5 percent of your sale deducted by fees [depending on the platform]. That’s an average(!) of 100.5 percent, leaving you with a $0.50 deficit or more.’ This means that many artists actually lose money trying to mint and sell NFTs. So much for the ‘creative’ economy.
Another major obstacle to artists in the NFT space is competition from non-art related ventures. As I mentioned above, NFTs can be literally anything that can be digitized and because NFTs are essentially tradable tokens, anybody can create and trade them, just like anybody is now able to create and trade cryptos. From the artists’ perspective this could be a losing battle. They have to compete against algorithms that create art (Crypto Punks), famous celebrities, memes (‘disaster girl’ NFT), and now the emerging NFT adult industry. Â
The problem lies in the generally abstract world in which NFTs exist and in the obfuscation of data. If platforms like Open Sea provided artists with numbers regarding sales, we might see a little bit of change in the industry. For now the NFT art world is a bit of a wild west and we should be highly suspicious of the notion that NFTs and the platforms where they exist somehow ‘democratize ownership.’ Much like the idea that the internet twenty years ago and social media ten years ago, were going to ‘democratize’ the way we interact with content and information, and by extension art, that reality was a mirage concocted by Facebook and Instagram to drive millions of users to their platforms in order to monetize their accounts and collect data that could be sold off to advertisers.
Other platforms followed suit, many like Etsy, Patreon, SaatchiArt and Art Storefronts targeting artists specifically. These platforms count on the small number of success stories to continue their business model because they conveniently leave out crucial information about the amount of work it takes to become succesful. And even if an artist does everything by the book, there is no guarantee they will indeed be successful. Platforms like SaatchiArt make money like a traditional brick and mortar gallery by charging a commission fee. This fee is slightly lower than a brick and mortar, which gives the artist reason to list on the platform. But unlike a traditional brick and mortar, Saatchi Art does not represent the artist. This means that much of what a gallery does that goes into selling an artwork, like promotion, packing and shipping, is all mostly passed on to the artist. If the platform does nothing to promote the artist, their artwork ends up largely ignored, because Saatchi Art uses algorithms similar to Instagram to drive traffic from image to image. Saatchi Art, like Instagram, once opined it was going to ‘democratize access’ by creating a link between sellers and buyers, changing the dynamics of art buying and giving small-time artists the chance to grow and succeed without gallery representation. In reality it had done the opposite.
As NFT platforms undergo major changes like mergers and acquisitions, even this space will one day become totalized and centralized. Out of a totally unregulated environment what tends to emerge are monopolies, not democratic spaces. But this is not to say that artists ought not create art or NFTs. There are many benefits to NFTs, especially for digital artists, who have until recently had a very hard time, not just selling their art, but convincing the world that their work was just as important, demanding and challenging as other ‘legacy’ art forms. NFTs have the capacity to cement the reputation of the digital artwork, though insane valuations unmoored from reality don’t seem to be the way to go. Changes in the NFT space are inevitable as are public attitudes toward it. The most important thing for artists to do is to understand the benefits and pitfalls of working within that space or indeed within any market place.
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