Reflections on NFTs — Royalties and Valuation
Never has it been so easy to own unique artwork and to directly support artists.
Recently, like so many, I caught the NFT bug. What drew me to them is the ability to become a collector without having the need for physical space. That might seem strange, but as a minimalist, I don’t like owning too many physical things. Enter NFTs. (What are Non Fungible Tokens? International auction house Christie’s has a great explanation here.)
Rarity and Authenticity: NFTs vs “Real” Art
NFTs exist on a blockchain. (The most common blockchain for NFTs is the Ethereum blockchain.) A blockchain is basically a history of events, mostly transactions, that cannot be altered. New events are constantly added to the blockchain, but what happened in the past cannot be altered.
As such, I and everyone else can see who created a particular NFT, how many were created, who owns it, and how much they paid for it. The same cannot be said for physical art. How certain are you that this vase is Ming dynasty? Or that this photo print hasn’t been reprinted 10,000 times?
While entirely digital, NFTs are real. And their rarity and origin are immutable and demonstrable.
NFT Royalties
Just like in the physical art world, when you buy an NFT, you either buy it directly from the creator or from a previous buyer. Because NFTs exist within algorithms (smart contracts to be precise), artists can program royalties into them.
Imagine an artist that bakes in a 10% royalty into his NFT. If he sells that NFT for $1, he receives $1. If the new owner sells it next year for $100, the artist automatically gets another $10. If that owner sells it the following year for $1,000, the artist gets another $100. And so on and so forth. There is no time limit on the royalty. The artist could theoretically die and his art would still be generating revenue for his children or foundation (as long as the blockchain still exists).
What makes an NFT valuable?
Of course the better question is: Why will this NFT be more valuable in the future? The same principles from the physical art world apply:
- Is it nice? People are usually more willing to give up their money in exchange for something aesthetically pleasing.
- Is the artist well-known? Will they be? We like famous people and we like the things that they made or owned. Buying from a young artist, is like investing in a startup… Most will wither away into the ether (pardon the pun) but some will be sought-after.
- Is it a collectible? Many NFTs are part of a series. They are like stamps, or baseball cards, or coins… The more people that are interested in the whole (active collectors), the more valuable the individual items. If no one cares about Pokemon, my mint condition Pikachu card ain’t worth jack.
- Is it momentous? Does the artwork capture or represent a particularly interesting time in society? A revolution in art?
- Is it rare? A true NFT is unique (non fungible). Creators can however “mint” (create) any quantity of that artwork. The quantity minted is public, so buyers can tell if an NFT is 1 of 1 or 1 of 500. All else being the same, scarcity equals higher value.
Any valuable NFT will check at least some of these boxes, but certainly need not check them all.
There are some ugly NFTs selling for millions of dollars mostly because of their notoriety. (You might think that the recent sale prices of some NFTs are insane... You could be right. But this insanity exists in the art world at large. Remember the invisible statue?)
At the end of the day, an artwork is worth as much as someone is willing to pay for it.
Final thoughts
Love ’em or hate ‘em, NFTs, like their underlying blockchain technology, aren’t going anywhere. They unlock a whole new realm for artists and collectors. And we’re just getting started.
I look forward to continuing my NFT education. I’ve also started creating my own! Here’s a link to my POTUS SOTU series. (Preview below)
