NFT (non-fungible token)— Bubble in the Art Sector?
Let us talk about NFTs and the rise of a new market. NFT stands for non-fungible token and wikipedia describes it quite well:
“A non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.[1] NFTs can be used to represent items such as photos, videos, audio and other types of digital files. Access to any copy of the original file, however, is not restricted to the buyer of the NFT. While copies of these digital items are available for anyone to obtain, NFTs are tracked on blockchains to provide the owner with a proof of ownership that is separate from copyright.”
So the usage can be manyfold: art, gaming, fashion, license and certification, collectible, name service or domain etc. One key element of NFTs is ownership. This ownership provides you with certain key attributes, i.e. scarcity and uniqueness. Both of this elements have throughout history been proven to extremely effect individuals (in positive as well as negative ways). If you want to know more about the impact of scarcity on human development I recommend reading the article of Boserup (1983) in the Journal of Interdisciplinary History.
Let us take a simple and hypothetical example of todays (less during the COVID times but still applicable) life. You stay before a disco where people are waiting in two lines to get in. One is empty (i.e. VIP) and the other is full. Let us assume, both lines bring you into the same club with no difference at all regarding the service. The only thing: You are faster inside. Moreover, the disco inside might be full or empty, you don’t know. Nevertheless, you feel like there is something special inside and while you watch the line getting longer and longer, you see one or two person getting in the club via the VIP entrance. Well, would you pay more to get into the club via the VIP entrance?
Different studies show that possessing status is a fundamental human motive (e.g. McFerran and Argo, 2014) and that such element influence the pricing of certain goods and services. Similar as described within the VIP entrance example, NFTs therefor can give the owner the same feeling of uniqueness and scarcity. Examples can be found with recent rallies in selling prices of such NFTs as art pieces. The big ones can currently be counted on one hand: e.g. Beeple sold an NFT for $69 millions or Hashmasks Digital Artwork sold for $650K in Ether. Newer players such as Injective Protocol (e.g. BurntBanks), Krista Kim or SMUGSHOT are on the way with unique value proposition in order to further revolutionize the market. Former burned an art piece and made it only available via an NFT, latter provides digital homes and SMUGSHOT created apparently the biggest NFT riddle ever existed. In one way or another, this can be considered “digitale art innovation” (DAI). However one question needs to be answered to say if there is a NFT bubble or not?
This one question is: What is considered “valuable” (digital) art? I purposely put digital in brackets because the question also relates to the classical art market itself. While in the past beautiful art pieces of Michelangelo or Caspar David Friedrich were created over a longer period with a corresponding effect on mind, eye, culture and beauty itself, today’s art (if it can be called like that) became to a certain extant a “one-day-catch” leading to fast made pieces such as “banana on the wall” (sold for $120'000). So what is the price of art, may that be digital or not? Scarcity. And given this element is predominant in the NFT sector, this trend won’t fade away that fast making. Thus, the bubble may burst but it will blow up as fast as the art market in the past did, over and over again.
