Non-fungible tokens (NFTs) use a blockchain identity and encryption system to store information in unique ‘blocks’ that cannot be interchanged. Owners of an NFT have ownership rights to information and data transfer particularly. That is important because the data is accessible to diverse individuals through the internet, and they have a reliable means to own it. Therefore, the format has been publicized by consumers looking to invest and artists of all scales looking to sell work ranging from images and animations to music and trading cards. To completely understand NFTs and their success, however, understanding the blockchain system and how it works is also necessary. Blockchain stores information in a decentralized ledger, where one block is chained to many subsequent blocks. NFTs have diverse participation in art and creation industries globally, posing several questions to researchers, such as whether they are the future of digital art hence being a crucial area of research.
NFT Arts and Creation
As a tool, NFTs have the potential to solve a longstanding issue in the digital art community: the undervaluation of digital creative work. Content creators in all fields of art are illegally underpaid and are often exploited for their work (“Art and creation marketing,” 2021). For example, research shows that despite a valuation of $1 trillion in 2018, Apple Inc does not pay artists performing in their stores as a form of compensation (Chiu & Allen, 2022). The company uses the ‘exposure economy’ to incentivize the performers to accept improper payment for the experience. This issue is not just limited to Apple; however, it is a much larger issue wherein employers exploit artists’ need to stand out from the competition by claiming that being allowed to do so has an equivalent monetary value (Chiu & Allen, 2022). Consequently, many employers quickly claim that they lack passion if an artist does not attribute economic value to the opportunity. Therefore, NFTs offer protection from the exposure economy through the exclusivity that the system promises.
In addition, NFT marketplaces handle the marketing of tokens, displaying them on their website and alleviating responsibility from the original artist. For example, marketplaces like Open Sea systematically construct their user interface to facilitate the exploration of art created by a plethora of artists. By doing so, NFTs argue that exposure opportunities have monetary value, redundant since there is no need for such options (Chevet, 2018). However, exclusivity is not restricted solely to security from pay exploitation; it also helps to make digital art more valuable (Mukhopadhyay & Ghosh, 2021). Traditionally, artists in the digital space had no control over scarcity, with the only controllable factor being accessibility (“Art and creation marketing,” 2021). With the introduction of NFTs, however, artists can now also correctly control ownership of the art and can limit the number of copies of the artwork they intend to sell. Hence, digital artists can now reliably create supply-induced scarcity by doing so.
These financial benefits of NFTs depend on the market’s stability; however, NFTs are in an economic bubble, and as such, significant volatility proves to be a severe risk for artists. Historically, early manias inflate prices beyond the product’s actual value until the trend dies down and demand returns to normal (Schaar & Kampakis, 2022). After the Netherlands began cultivating unique tulip breeds in the 1600s, a massive influx of buyers caused tulip bulbs for certain species to be significantly overvalued (Schaar & Kampakis, 2022).
The rise and decline of Bitcoin are other examples of price volatility following a mania-induced economic bubble. April 2021 saw a massive bitcoin devaluation of 8.5% after blackouts temporarily interrupted a large mining facility in China’s Xinjiang region (Borri et al., 2022). This resulted in a mass liquidation of bitcoin assets worth approximately $10 billion. These examples show the future financial risks faced by artists opting to make NFTs their primary source of income. Still, the Xinjiang blackout highlights just how volatile blockchain proof of work systems are despite their cryptographic prowess. The nature of NFTs and NFT marketplace infrastructure helps protect artists from pay exploitation (Ito et al., 2022). The promise of exclusivity and the consequential supply-induced scarcity may make producing NFTs a financially lucrative opportunity. However, the mania-induced economic bubble means that the high prices awarded to NFTs are severely inflated, and the art itself has a substantially lower value.
NFT Theory Relationship
As with any inefficient economic trade system, NFTs have a massive impact on an involved third party due to carbon emissions. NFTs, like every other blockchain-based system, need to utilize many machines with high computational power to process the ‘proof of work’ when editing blocks (Kugler, 2021). The hash rate, or computational power per second, correlates to energy consumption. This is shown by studies on cryptocurrency mining systems that use the same proof of work method as NFTs (Borri et al., 2022). They indicate a value of almost 0.97 for the coefficient of determination, showing statistically that there is nearly no unexplained variation and that the correlation is, in fact, almost directly proportional.
The reason that this correlation is theoretically directly proportional has to do with computer architecture itself; for an instruction to be processed, the computer’s processor needs to ‘flip’ a series of binary switches. The computer does that by charging capacitors that represent a binary ‘one’ while the uncharged denotes a ‘zero’ (Wilson et al., 2021). This is done in rapid succession to activate logic switches and execute complex algorithms and instructions. The frequency of capacitance is directly proportional to the power consumed, and computers utilizing a higher hash rate with a much greater capacitance frequency consume much more power than an ordinary computer (Ito et al., 2022). Therefore, this causal relationship has a hugely detrimental impact, with the carbon emissions and power consumption of bitcoin mining equaling that of whole nations.
Moreover, the NFT marketplace has a poor legal framework, leaving artists’ work susceptible to exploitation. Blockchain’s information storage means that the blocks are stored on decentralized ledgers (Regner et al., 2019). While countries can impose legal restrictions on the transactions themselves, they do not always have jurisdiction over the overall sale of an NFT (Wilson et al., 2021). This leaves artists open to exploitation, wherein the only moderator is the marketplace itself, where, more often than not, the massive volume of content makes moderation extremely difficult.
Though the NFT system helps prevent pay exploitation of artists and allows for artists to control supply-induced scarcity, the financial benefits are not without risk. The mania-induced economic bubble creates volatility in price falls, and in the long run, artists investing their resources into NFT production will face significant financial issues. As for buyers looking to invest, the financial risks outweigh the potential benefits even after the market stabilizes. Furthermore, uninvolved third parties are at risk of incurring significant losses due to the devastating environmental impact that NFTs have on the local and international scale. Therefore, NFTs, as they are currently, are not a sustainable model and the future of the digital art industry.
Art and creation marketing. Creative industries. (2021). Sorbonne University
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