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On the Proliferation of NFTs in the Blue-Chip Contemporary Art Sector

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Metaculus Journal

This essay was contributed by Sam Cabot.

A new multi-billion dollar market

On November 8, 2021, a non-fungible token (NFT) for Beeple’s HUMAN ONE sold just shy of $29 million at Christie’s 21st Century Evening Sale. It joins several others that have sold at auction for millions of dollars in the past year. The works include:

  • EVERYDAYS: THE FIRST 5000 DAYS by Beeple (Christie’s sale for $69,346,250)
  • Bored Ape Yacht Club #8746 by YUGA LABS (Christie’s sale for HKD 9,610,000)
  • The Fungible by Pak (Sotheby’s sale for $16,825,999)
  • REPLICATOR by Mad Dog Jones (Phillip’s sale for $4,144,000)
  • Quantum by Kevin McCoy (Sotheby’s sale for $1,472,000)

What relationship will NFTs have with the contemporary fine art sector years from now? In this essay, I consider the growing demand for digital art and make forecasts at the intersection of contemporary art and NFTs. Attitudes toward NFTs from both collectors and dealers are positive, and dealers are increasingly looking to engage younger clients on online platforms, which provides the infrastructure for NFT sales. Here are my forecasts:

What is an NFT? In these cases, it is a digital token that includes a link to an image, video, or other form of digital media. The artwork can be downloaded, shared, and viewed by anyone on a phone or computer, simply by following the link. Proponents argue that owning an NFT is similar to owning a Rembrandt painting on permanent display in The Louvre.

In the blue-chip contemporary art market, however, prominent artists are represented by galleries. Art Basel is the world’s premier contemporary art fair for these galleries (Gagosian, David Zwirner, White Cube, Pace, and other prolific galleries regularly exhibit physical artworks there). The 2021 exhibitions featured digital artwork, and importantly, their NFTs were available for sale:

  • Hong Kong (May): NFTs from Ora-Ora gallery (the first exhibition of NFTs at an Art Basel fair).
  • Basel (September): NFTs from Galerie Nagel Draxle.
  • Miami Beach (December): NFTs from Pace Gallery, and NFT portraits of attendees by Mario Klingemann.

The majority of NFT sales are on online marketplaces; not galleries, fairs, or auction houses. Artwork-related NFTs of these online marketplaces have grossed $2 billion in sales — a significant share of the $13 billion market for all NFTs, including those that represent artwork, collectibles, and video game assets.

Some marketplaces allow anyone to list NFTs for sale at zero cost. As a result, many of the listings are by obscure artists, or opportunists hoping their NFTs will sell for millions of dollars. However, a number of prominent contemporary artists have turned to galleries or marketplaces to sell NFTs of their digital works: Damien Hirst, Takashi Murakami, Banksy, Urs Fischer, and Jeremy Deller.

High net worth collectors are buying digital art

Art Basel and UBS, the investment bank, make an important finding in their 2021 Mid-Year Review: Digital art is gaining traction among young, wealthy collectors. In fact, digital artwork accounted for 12% of their art expenditure in H1 2021. The survey includes responses from 500 collectors with net worths exceeding $1 million. Nearly two-thirds were millennials aged 25 to 40. The median expenditure by millennials on artwork and antiques was $378,000 in H1 2021, but digital art was especially popular in the highest spending bracket:

The share of millennials who had spent $1 million or more on digital art in this period was around the same as those who had spent at this level on paintings (6%), with a slightly higher share of those spending at this level on photography (9%).

The report also found 8% of millennials’ collections are digital art specifically. Gen Z comprises fewer buyers, but 18% of their collections are digital art.

The outlook appears positive: 48% of all collectors indicated they were interested in acquiring digital artwork over the next 12 months. 58% of dealers foresee growing artwork sales on online NFT marketplaces, and another 30% foresee sustained sales.

However, how does one make an educated investment in digital art and protect its value? For a physical piece, like an oil painting, I trust a gallery to vouch for the work, and they might provide a certificate of authenticity and provenance. For a digital work, I turn to its NFT.

Interactions between owner, artwork, and artist

Artists can write blockchain or web applications to interact with NFTs, which gives them functionality beyond just provenance. For example, an NFT could represent ten pictures stored at ten different, immutable links. The owner may visit the artist’s website, which randomly selects one link and displays its image. The artwork is dynamic because the picture that the owner sees changes each time they visit the site.

By using a blockchain program, an artist can restrict who is allowed to purchase their new artwork (e.g. by requiring that you own an NFT of their previous work); or an artist may coordinate a real-world meetup, where a blockchain program announces the time and location only to the current owners of the artist’s NFTs. An artist can use these features to create an exclusive community for their patrons.

Many artists use NFT standards that are safe and predictable, but an NFT could be poorly or maliciously designed. For example, it might allow someone to change the link and prevent the current owner from viewing the artwork; or, it might allow someone to initiate a transfer without the current owner’s consent. Also, a fraudulent artist could copy the link in another NFT to use in their own, in an attempt to pass it as the original.

Legitimate artists typically make their NFT code publicly viewable and verifiable. It is up to the collector to understand an NFT’s functions, and to check its provenance. The artist must also choose a reliable host for the artwork; for example, Google Drive, Dropbox, a decentralized hosting service like Interplanetary File System, or a private server. If the host computer or network shuts down, then the link will no longer work. An artist could hypothetically add their artwork to the blockchain directly, but would have to pay an extremely large fee.

Younger collectors are entering the contemporary art market

The Art Market 2020, another Art Basel-UBS report, found a six-point increase in the number of fine art collectors under 40: up to 19%. They are big spenders too — the 2021 Mid-Year Review stated that 35% of the millennial bracket held more than 30% of their personal wealth in art.

Millennials are posed to inherit significant wealth from their boomer parents, which could make them an even larger fraction of fine art collectors. Indeed, The Art Market 2021 states:

Forecasts vary widely, with estimates that millennials could inherit anything between $20 trillion and $70 trillion from billionaire and UHNW parents by 2030 in wealth and assets, including art in what has been termed the ‘great wealth transfer’.

Millennials and Gen Z are the most familiar with digital media, and appreciate it the most. They are also the most equipped to understand and use blockchain technology. As younger generations become a more significant consumer base, it seems reasonable that sales of digital artwork and their NFTs could continue to grow.

Gallery-owned online platforms are a key sales channel

Online platforms are critical for NFT sales: they allow collectors to browse digital artworks, and they interface with the blockchain network. Galleries understand these connections and are making efforts to enhance or develop their own online platforms. For example, Pace Gallery’s dedicated NFT site. Indeed, 50% of dealers surveyed in the 2021 Mid-Year Review listed online sales and exhibitions as a top priority over the next year. 

Will collectors use these interfaces to purchase digital artwork? It is highly likely, since 80% of collectors prefer buying through galleries instead of online marketplaces. Collectors turn to galleries for their high-quality of works, trustworthiness, and reliability. Indeed, while anyone can list NFTs on marketplaces like OpenSea and Rarible, galleries help set the standard for blue-chip artwork. In H1 2021, 37% of fine art sales were from online channels including websites, online viewing rooms, social media, and email.

Since galleries have only recently started selling NFTs, we will have to wait some time to find out whether these NFTs will carry resale value. Outside of the gallery setting, NFTs can be very risky investments. For example, there were 17 sales in the Cool Cats NFT collection on October 5, 2021 for about $88,000 each. Right now, there are about 15 sales per day at $32,000 each. As another example, the Ethereals collection is currently trading at prices 10 times lower than those at the time of launch, and 24 times lower than all-time highs. The market caps of collections like these can change by millions of dollars over just several days.

Outlook and predictions 

The most prominent galleries, fairs, and artists make it clear: NFTs have secured footing in the blue-chip Contemporary art market. Their emergence reflects strong demand for digital artwork — and digital artworks need NFTs for the sake of provenance. Furthermore, galleries are prioritizing online platforms, which will make it easy for collectors to browse digital artworks and purchase NFTs.

Here again I link to relevant questions and include my own forecasts:

A primer on an NFT’s inner-workings

This section includes code snippets of the Solidity programming language.

An NFT is created and managed by a smart contract, which Ethereum defines as:

…a program that runs on the Ethereum blockchain. It's a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain.

A smart contract sets variables and stores them on the Ethereum network. It creates an NFT by storing an owner (wallet address), an identification number (integer), and a uniform resource identifier (URI, a string) that links to metadata.

Let’s look at a concrete example. On September 27, 2021, Christie’s auctioned Bored Ape Yacht Club #8746 for HKD 9,610,000. Ethereum storage is publicly readable, so we may look at the actual smart contract code behind this NFT. Like class inheritance in object-oriented programming, this smart contract contains all functions in the ERC721 and Ownable contracts:

contract BoredApeYachtClub is ERC721, Ownable

These two contracts, provided by the company OpenZeppelin, are secure, optimized, and often serve as a starting point for NFT projects. Ownable enforces that only the person who deployed the smart contract can call certain functions. ERC721 contains methods to create new NFTs (the collection is capped at 10,000 total), transfer an NFT to a new owner, and set the location of a given NFT’s metadata and media. Its API includes:

ownerOf(tokenId)            // Returns the owner

transferFrom(from, to, tokenId)  // Transfers NFT ownership

_mint(to, tokenId)           // Creates a new NFT

_setTokenURI(tokenId, _tokenURI) // Sets location of metadata

_setBaseURI(baseURI)         // Sets metadata prefix 

 

Next, let’s look at the line:

function mintApe(uint numberOfTokens) public payable

This public function lets anyone purchase a new NFT. It calls _mint, which creates the NFT. Since it has a payable modifier, you would simultaneously send a specific amount of Ethereum’s native currency, ETH. The contract acts as a sort of holding account for the ETH. The artist can collect their revenue at any time by moving the ETH into their private account:

function withdraw() public onlyOwner

Christie’s auctioned the NFT with tokenId 8746. By calling the function tokenURI and providing this tokenId, we obtain a link to JSON formatted metadata with an image attribute. Both files are stored on the decentralized Interplanetary File System (IPFS). The NFT is a blockchain-recognized certificate of this metadata and image.