NFT – the token exchange: Unique, but high-risk, world of non-fungible tokens

It’s raining non-fungible tokens (NFTs) this year. At the March 11 auction of Christie’s in London this year, an artwork by American artist Mike Winkelmann, also known as Beeple, sold for whopping $69 million. The sale positioned him “among the top three most valuable living artists”, according to the auction house, the other two being Jeff Koons (one of the stainless-steel sculptures in his Rabbit series sold for $91.1 million in 2019) and David Hockney (his Portrait of an Artist sold for $90.3 million in 2018).

Beeple’s work—Everydays: The First 5,000 Days—not only smashed the world record for the most expensive NFT ever sold but also started a global conversation around the way digital collectibles will be traded or acquired going forward.

“NFT is about democratisation of art and additional forms such as photography, installations and digital art—anybody can download the art, but the token belongs to only one person. This is a technological innovation that is likely to see a lot more visibility in creative sectors,” says New York-based Deepanjana Klein, international head of the Department for Contemporary Indian & Southeast Asian Art at Christie’s.

To simply define an NFT, it’s a unique, digital certificate based on cryptocurrency technology called blockchain. It is stored on a blockchain to provide certain ownership rights of a digital asset space. They are described as ‘non-fungible’ as each one of them is unique and of different value. This contrasts with ‘fungible’ assets such as dollars or bitcoins, which are identical and interchangeable.

An NFT is generated (or ‘minted’) using a ‘smart contract’ which is a computer code stored on a blockchain. The NFT includes a few different fields such as the NFT’s unique identifier (typically referred to as a ‘TokenID’); the blockchain wallet address of the current owner; and an identifier of where the digital work of art associated with the NFT may be found. Since blockchain transactions are fully transparent, anyone can view its underlying information including the blockchain address of the owner or ‘minting’ of the NFT.

Early forms of NFTs have been around since the mid-2010s, but it wasn’t until 2017 when a digital cat-trading game CryptoKitties went viral that NFTs gained momentum. NFTs became more widely adopted within the blockchain community in 2018 with the release of a common digital standard (ERC-721) for minting NFTs on the ethereum blockchain.

Inclusive framework

NFTs have already taken the art world by storm and its use cases can be found in every possible sector. Until the end of 1H2021, Christie’s sold NFTs worth approximately $93 million, including Beeple’s artwork, but still most sales do not offer NFTs and account for a small percentage in an overall offering.

Digital art has been around for decades, but until now the artists who created it have found it difficult to monetise their creations. Sotheby’s introduced sales of NFTs less than six months ago, but has already seen more than $70 million in sales, with one auction of Bored Ape Yacht Club collectibles making $27 million alone—a record for an NFT auction at the auction house this year.

However, digital art and NFTs are not superior to traditional art, they are just different. “The world’s leading museums have embraced digital art for decades, and this new medium is an extension of the contemporary category. Many famous ‘traditional’ contemporary artists are now creating NFTs. This is a once-in-a-generation opportunity to create a bridge between the digital medium and the institutional art market, not too dissimilar from when we first launched sales of contemporary art at Sotheby’s in the 1970s,” says Sebastian Fahey, Sotheby’s managing director of Europe, Middle East and Africa (EMEA).

Empowering the artists, NFTs protect their authorship and make a viable secondary market for digital art. “When artists create NFTs, they can set rules around licensing, royalties, and profit sharing to lay the ground for the future. Many NFTs are minted so that the artist receives a percentage of the sale each time it is sold. At Sotheby’s, NFTs can be attached to physical objects like traditional paintings to enhance the transfer and proof of ownership and secure the authentication process of physical works. It would certainly increase confidence for the market,” feels Fahey.

Traditional artworks are also being sold as NFTs; so, the possibilities are endless. The value and fame grow as an artist is rewarded from time to time. “While every transfer or purchase of an NFT is recorded, it is accessible record documenting the ownership history which no one can alter,” says Yashika Kalra, a passionate, self-taught multimedia and contemporary artist based in Chandigarh.

Kalra finds great value in NFT as it helps her earn name and fame globally which could not have been achieved in the art world. “It’s a great way to earn a substantial amount but it calls for a 24-hour job to update, track and view your minted transactions. But since it is time stamped, it will always have a greater value in future,” says Kalra, who ventured into the space in February this year.

In the business

The content on the Internet in the form of an NFT can be definitively owned by a specific person independent of a centralised intermediary. This is unlocking exciting opportunities for digital commerce and engagement. While NFTs are focused on building launch pads for creators, it has sought out additional revenue streams in the digital distribution during the pandemic. When an asset is sold, the original creator gets a percentage of the sale, with the platform getting a small percentage and the current owner the remaining revenue. Thus, there is potential for ongoing revenue from popular digital assets as they are bought and sold over time.

“For creators, NFTs are a great way to capitalise on unique assets, engage with their fans, generate more value in the form of royalties and potentially generate revenue for their passion projects from their fans directly,” says Vishakha Singh, VP & advisor WazirX, a creative marketplace which has sold more than 1,200 digital collectibles across gaming, sports, music and visual arts in India and South Asia. Currently in the beta phase, a total of 3,208 NFTs have been minted on the platform, of which 1,068 were sold via fixed price model and 204 via auctions.

Besides exclusive collectibles, trading companies like Colexion are creating personalised digital museums for celebrities, multiverse gaming platforms where users can play and earn. The brand has roped in Bollywood stars, musicians and cricketers to be part of its NFT marketplace. Musicians Mika Singh and Salim-Sulaiman, actor Sunil Shetty, Australian cricketers Glenn Maxwell and David Malan, and more than 50 celebrities have signed up for NFTs and own rare gifs and dialogues of favourite stars.

“With more than 1 million NFTs sold, the NFT market cap is currently worth $40 billion. Sports and entertainment are the most celebrated domains with massive fan following and notional value. Everyone wants to own a part of their favourite star, movie, or artwork. With NFTs, the ownership of such rare digital collectibles becomes flawless. And the original creator will always make revenues throughout their lifetime,” says Abhay Agarwal, founder, CEO, Colexion.

NFTs worth $2.5 billion were sold in the first half of 2021, reported Reuters in October this year. Marketplace Ethernity launched NFTs with popular Argentine footballer Lionel Messi under its ‘Messiverse’ collection in August this year and generated around $3.2 million in sales in an hour. It was sold out. Platforms like Crypto.com, Mintable, Opensea and Raible have also been selling digital art and videos of players from top sports like F1, football, tennis and more. Fantasy sports platforms like RARIO (cricket) and RealFevr (football) have also jumped into the sports NFT wagon.

Hope and hype
Authenticity and distinguishing information can make one distinct from other NFT and this is easily verifiable. “Creating and circulating fake collectibles don’t work as each item can be traced back to the original creator or issuer. Unlike crypto currencies, they can’t be directly exchanged with one another because no two are the same, thus benefiting the artists and the owner,” says Priyank Mahajan, co-founder of Token Runway, an invite-only premium NFT service provider.

However, currently, there is no law in India that regulates NFTs. There are various views on transactions being governed by the Indian Contract Act, and others that attempt to portray an NFT as a security/a derivative under the Securities Contract Regulation Act. According to Kartik Ganapathy, founding & senior partner, Induslaw, “It is a high-risk asset, and advisable to be acquired only by persons with a high-risk tolerance. A non-fungible item, like the painting of the Mona Lisa, or a Faberge Egg, is not interchangeable because of its unique properties. You can exchange the Mona Lisa for a Van Gogh painting, or one Faberge Egg for another, but you then own something intrinsically different.”

For example, if an NFT merely represents ownership (and chain of title), then it may not be a security. If, however, the NFT is positioned as an investment, or a derivative fraction of an NFT that merely represents a title, then there could be circumstances under which the NFT may be similar to security. There is some debate as to whether NFTs are commodities instead, which only goes to show their complexity.

“While there have been comments by the government and the RBI, and news of a framework being developed for cryptocurrencies—all these do not address NFTs themselves,” adds Ganapathy.

Agrees Aditya Malik, CEO and MD of ed-tech startup Talentedge. “NFTs are a nascent and emerging trend. The interoperability of platforms is limited and so is its penetration whereby a select few are today aware about what it means and how it can be an asset class going forward. Early adopters of technology are looking at NFTs as another digital asset mined for value in times to come,” he says.

Worldwide phenomenon
Popular music band Euphoria launched their album titled SALE in the form of NFT in September this year. “It’s a whole new distribution mechanism without affecting the artist’s other revenue streams, especially when it widens the outreach of work to the global community,” says singer Palash Sen, founder of Euphoria, whose album was created by Token Runway.

On November 3, BeyondLife.club, a curated NFT platform and part of Rhiti Entertainment, revealed 2021’s most awaited NFT auction featuring Bollywood megastar Amitabh Bachchan. Since the auction went live, Bachchan’s Madhushala (Hindi) NFT surged by almost a whopping 1,500% as compared to its base price and is currently being sold for a staggering $480,000 (close to Rs 3.57 crore). His Madhushala (English) NFT also attracted enormous bids leading to an upswing of almost 820% as compared to its base price and is now being bided for $276,000. “The beauty of this medium is you can keep your favourite star’s signature or memorabilia just like a fan for times to come. Bachchan’s NFTs have seen a phenomenal response and we plan to launch more with other stars soon,” says Arun Pandey, CEO of Rhiti Entertainment.

In October, short-video app Chingari launched social crypto tokens, called $GARI. This platform enables content monetisation and allows users to obtain tokens for creating or watching content. “Users can carry out e-commerce transactions with the token and benefit from a decentralised system. Now the power of content creation rests in their hands where they can earn directly in the form of GARI which will have a global value,” says Sumit Ghosh, CEO, co-founder of Chingari.
Recently, fashion designer Manish Malhotra launched five exclusive NFTs of sketches and gifs on WazirX. It featured a vintage picture of supermodel Lisa Ray from the ’90s, a custom-made constellation sketch for Kareena Kapoor Khan sold for a whopping 3,000 WRX ($3,558) to Mike Blue, an NFT artist and collector.

Across the world, NFTs have already been a huge hit. Rapper Snoop Dogg is an NFT collector and works under the pseudonym Cozomo de’ Medici. NBA star Stephen Curry, social media influencer Jake Paul, and TV personality Steve Harvey have also been involved in collecting NFTs. Golfer Tiger Woods released 10,000 digital images to be sold through Autograph, a company co-founded by Tom Brady.

Superheroes such as Batman, Superman, Green Lantern, and Wonder Woman are part of NFT collectibles where American comic book publishers DC Comics DC will dole out free NFTs to fans.

NFTs EXPLAINED

• A non-fungible token or NFT is a unique, digital certificate based on blockchain technology
• It can be used to represent easily-reproducible items such as photos, videos, audio and other types of digital files as unique items
• It is stored on a digital ledger (blockchain) to provide certain ownership rights of a digital asset
• They are described as ‘non-fungible’ as each one of them is unique and of different value. This contrasts with ‘fungible’ assets such as dollars or bitcoins, which are identical and interchangeable
• An NFT is generated (or ‘minted’) using a ‘smart contract’, which is a computer code stored on blockchain
• Since blockchain transactions are fully transparent, anyone can view its underlying information including the blockchain address of the owner or ‘minting’ of NFT
• When a buyer purchases an NFT, they must have a digital wallet to receive, access and transfer it
• NFTs worth $2.5 billion were sold in the first half of 2021, as per reports
• However, currently, there is no law in India that regulates NFTs
• NFTs have also drawn criticism with respect to the energy cost and carbon footprint associated with validating blockchain transactions

NFT is about democratisation of art and additional forms such as photography—anyone can download them, but the token belongs to only one person— Deepanjana Klein, international head, dept for Contemporary Indian & Southeast Asian Art, Christie’s

Many ‘traditional’ contemporary artists are now creating NFTs. This is a once-in-a-generation opportunity to create a bridge between the digital medium and the institutional art market — Sebastian Fahey, MD, EMEA-sotheby’s

For creators, NFTs are a great way to capitalise on unique assets, engage with fans, generate more value in the form of royalties and generate revenue for passion projects directly from their fans — Vishakha Singh, vp & advisor, Wazirx