By Luis Alberto Huerta.
Reading Time: 7 minutes and 3 seconds.
- NFTs are encrypted digital assets. They are unique and exist as a string of numbers and letters stored in a ledger known as blockchain.
- Their main properties lie in their value as a digital file, they are scarce, unrepeatable, indivisible, secure and transferable.
- The first NFTs created were the CryptoPunks that launched on June 23 2017 on the Ethereum blockchain. Since then 10,000 have been created which are the only ones in existence, they are only exchanged from user to user.
- What happens to the creator’s property? Problem solved with smart contracts.
On February 19, 2021 CryptoPunk #6965, pixel art generated by an algorithm showing an ape wearing a fedora hat was sold for 300Ξ “ETH” ($1.54M), the cryptocurrency that powers the Ethereum network. It was purchased by user address 0x99b57c from user address 0x03911f at Larva Labs, home of the CryptoPunks and where the piece is currently on sale for 1,800Ξ ($5.08M).
How can a piece of pixel art bear such prices? Well, it’s because it was sold as a NFT (Non-fungible token). Despite sounding intimidating and finding headlines with exorbitant figures with increasing frequency, you don’t have to be an expert in everything related to blockchain technology or know every type of cryptocurrency out there to understand the new player in the art world.
In the first instance, we must understand what fungibility is and how it works. It refers to the ability of an asset to be exchanged or substituted for similar ones of the same value. A simple example of fungible assets is money. For example, if you had twenty coins and wanted to exchange them for a single bill, you could do so and it would not affect the value of the coins or the bill in the slightest. Now, non-fungible assets are just the opposite.
Each one is unique and cannot be easily exchanged for something similar. Think of Kandinsky’s “The Blue Horseman”, or Velazquez’s “Las Meninas”. Original works of art that cannot be exchanged, for example, for objects from museum gift stores, such as cushions, coffee mugs or poster prints, as if they were of our favorite band. This is because such objects do not have the same value.
Another way to understand NFTs is as another type of cryptocurrency, be it Bitcoin, Litecoin or Ethereum – each with its peculiarities, of course – but, unlike these fungible cryptocurrencies, they are unique. They exist as a string of numbers and letters stored in a ledger known as the blockchain. Within the blockchain, transactions that occur are recorded as blocks and these are connected to previous and subsequent transactions, generating chains -of blocks- that are accessible, but unalterable, allowing them to be read, but not edited.
NFTs shine in terms of their content, as it is as varied as digitally possible, i.e. they can take the form of whatever the creators decide, from digital illustration, through audiovisuals and even tweets or percentages of the total capital of sports teams. In this way they rise above the typical cryptocurrency, which remains unchanging and exchanged for equivalents, being completely rigid. By uploading or minting any digital asset on the blockchain the NFT is encoded; a price recommendation is given; a record of transfers -blocks- and unique ownership is established, protecting against counterfeits, so it is not possible to right-click and select “save as…” to be the owner of any piece.
It acts as a digital certificate of authenticity. Therefore, NFTs have digital signatures in the same way that works of art bear the signature of their authors. The piece is permanently authenticated.
In addition to guaranteeing security, it also guarantees scarcity. Despite being able to reproduce digital works ad infinitum, the authentic ones are kept in a low or even unique number, thus inflating their price. It is not possible to exchange them for something similar or equivalent. The amount of information included within the NFTs uses the price elevation and the limited number of pieces in the form of terms where the creator gets a certain percentage of royalties beyond the first transaction, depending on the platform on which the pieces are distributed. However, this does not exempt authors from registering copyrights for their works in case they have to proceed legally in case of misuse or possible counterfeiting.
In summary, the main properties of NFTs are the following:
- Uniqueness: Different properties that differentiate the part from others, generating unique blocks.
- Scarcity: Limited and verifiable number in the blockchain.
- Indivisible: It is not possible to buy, sell or generate fractions of NTFS.
- Secure: The ownership of the assets is guaranteed.
- Transferable: Each transaction is simple, based on the platform of choice, and each blockchain can be consulted, thus knowing the history of movements.
On the more technical side, ERC-20 (Ethereum request for comment), created on November 19, 2015, is known as a standard for creating fungible assets on the Ethereum blockchain-based on smart contracts in which to invest. Although NFTs can be implemented on any blockchain that supports programming of such smart contracts, the most notable examples are the ERC-721 (24/01/2018) standard, which takes into account physical properties, collectibles and assets of negative value, such as loans; on the other hand, it also highlights the ERC-1155 (17/06/2018) on Ethereum, which takes into account both standards mentioned, allowing the configuration of fungible and non-fungible assets within the same -possible- transaction.
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Let’s go back to CryptoPunks, launched on June 23 2017 on the Ethereum blockchain as one of its first NFTs, originating the ERC-721 standard and initiating the cryptoart as the movement it is known today. There are 10,000 CryptoPunks (6,039 male and 3,840 female) and there will never be more; they are all unique and to this day continue to move from user to user, increasing in value more and more. Suppose I own CryptoPunk #6965 -I wish- and I wanted to print it on a t-shirt to show off, could I do it? In the regular blockchain scenario, copyright ownership remains with the original author as the blockchain asset is transferred to new owners; therefore, I could not.
However, the creators, Matt Hall and John Watkinson have sought solutions to this problem legally, as for them the copyright would have to be transferred at the same time as the asset itself. In this case, the CryptoPunks – that’s where smart contracts come in – have drafted a couple of possibilities in drafts that explore the possibility of transferring all rights in a single transaction, which can be found here (copyright license agreement) and here (copyright assignment).
What would happen in the opposite case? That is, if some other asset decided to mark very specific copyright guidelines, as it used to be done some years ago, before the common use of ERC-721 and ERC-1155, where it was marked that every reproduction right was unique to the original author and kept the possibility to remove every graphic, leaving the owners of the -code- assets with series of letters and numbers on the blockchain, without any accompanying visual representation.
It seems that only the surface of the possibilities that NFTs promise has begun to be scratched. Content, discourses and aesthetic explorations represent a new stage in a medium that is no longer so new, and that is why legal security measures must be present, as well as a significant ethical burden when producing cryptoart.
What artistic possibilities – understood as aesthetic, technical, conceptual and political – can be explored in the future? How far will these possibilities go, taking into account the speed and quantity of works of different kinds that are produced daily, as well as their scope? How will the dissemination of NFT content and the NFT market be regulated? Does regulation promise diversity or censorship?
We are facing a new horizon with unexplored territories, therefore it depends on actions that generate new meanings and new meeting points.