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NFT Research Essay

Research · April 2021

DOI: 10.13140/RG.2.2.24950.93761

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 Khawaja 1

Arhum Naseem Khawaja

Ms. Syeda Habibah Hussain Rizvi

Writing and Communication

21 April 2021

Are NFTs the Future of Digital Art?

Art being sold for ludicrous amounts of money is no alien concept to those even remotely

familiar with the world of fine art. Modern works like Damien Hirst’s “Lullaby Spring'' are

worth millions of dollars and are often auctioned for even more when sold (“Hirst Under the

Hammer”). So when a renowned artist auctions off a library of work for $69 million, surely,

nothing would seem out of the ordinary right? But how is it that miscellaneous “vulgar Internet

kitsch”, produced not by a famous artist, but by a lesser known digital artist, was able to attain

such a value (Chayka et al)? In many ways, the success of Beeple’s sales can be attributed to

Non-Fungible Tokens (NFTs) and their promise of digital exclusivity.

NFTs use a blockchain identity and encryption system to store information in unique

“blocks” that cannot be interchanged (Clark). Owners of an NFT have exclusive ownership

rights to information and when sold, transfer the ownership of the information. This is important

because even if the information itself is accessible to many through the internet, people now have

a reliable means to own it. As a result, the format has been popularized by both consumers

looking to invest and artists of all scales looking to sell work ranging from images and

animations to music and trading cards.

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To be able to completely understand NFTs and their success, however, an understanding

of 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 (Khawaja 9;

Nakamoto 3). The reliability of the system stems from the “proof of work”, wherein, a

computing system needs to decrypt the hash in a block through complicated cryptographic

techniques; this process is computationally extensive as the subsequent, chained-blocks also need

to be decrypted (Antonopoulos; Nakamoto 3). The information remains secure since an attacker

would not only have to do the work without a key (making the computation exponentially more

intensive), he would have to do so faster than the “honest nodes” can revert the altered

information (Nakamoto 3).

With the reliability of blockchain and the popularization of NFTs as a new form of digital

art trade, the question arises: are NFTs the future of digital art? Whilst NFTs promise exclusivity

and lucrative profits for both digital creatives and investors, they pose unique risks to the artists,

are systematically exploitable, pose significant risk to the environment and are therefore

unsustainable in the long run.

As a tool, NFTs may have the potential to solve a longstanding issue in the digital art

community: the undervaluation of digital creative work. Creatives in all fields of art are

criminally underpaid and are often exploited for their work. Nastia Voynovskaya reported that

despite “a valuation of $1 trillion” in 2018, “Apple doesn’t pay artists performing in their stores”,

instead opting to offer “low-end merchandise” as a form of compensation ( Voynovskaya “Why

do Employers Lowball Creatives?”). The company instead uses the “exposure economy” to

instead incentivise the performers to accept inappropriate compensation in exchange for

 Khawaja 3

“exposure” (Voynovskaya “Apple Isn't Paying Artists”). This issue is not just limited to Apple

however, and is instead a much larger issue wherein, employers exploit artists’ need to stand out

from competition by claiming that being given the opportunity to do so has an equivalent

monetary value. Consequently, many employers are quick to claim that if an artist does not

attribute monetary value to the opportunity, they lack passion (Voynovskaya “Why do Employers

Lowball Creatives?”). NFTs offer protection from this “exposure economy” through the

exclusivity that the system promises. By attributing a unique identity to every token, the system

ensures that the artist does not need to assure a client that the work is unique. Additionally, NFT

marketplaces handle the marketing of tokens, displaying them on their website and social media,

alleviating that responsibility from the original artist. For example, marketplaces like OpenSea

systematically construct their user interface to facilitate the exploration of art created by a

plethora of artists. By doing so, NFTs make the argument that exposure opportunities have

monetary value, redundant, since there is no need for such opportunities.

The value of exclusivity however, is not restricted solely to security from pay

exploitation, but it also helps to make digital art more valuable. Traditionally, artists in the digital

space had no control over scarcity, with the only controllable factor being accessibility. With the

introduction of NFTs however, artists can now also properly control ownership of the art and can

limit the number of copies of the artwork they intend to sell. By doing so, digital artists can now

reliably create supply-induced scarcity. Clare McAndrew, a leading arts economist, argues that

“the work’s scarcity is a key driver of its price”. In the field of traditional art, the phenomena of

scarcity and its ability to inflate the value of artwork can be seen at art auctions. Damien Hirst’s

“Lullaby Spring” is valued by art appraisers to be worth approximately $13.5 million; however,
 Khawaja 4

Sheikh Hamad bin Khalifa Al-Thani bought it at auction for $19 million, for almost 41% more

than the estimated worth (“Hirst Under the Hammer”; Cascone). This price driving component

explains how Pakistani artist Muhammad Nafay went from selling $15 prints to NFTs valued at

thousands of dollars each (Nafay; “Reaching for the Ether”).

These financial benefits of NFTs are dependent on the stability of the market; however,

NFTs are in an economic bubble and as such, significant volatility proves to be a serious risk for

artists. Historically, early manias are known to inflate prices beyond the actual value of the

product being offered until the mania dies down and demand returns to normal. After the

Netherlands began to cultivate unique tulip breeds in the 1600s, an excessively large influx of

buyers caused tulip bulbs for certain breeds to be greatly overvalued (Garber 37). Gaber states

that the price of a Semper Augustus bulb was “$16000” during the peak of “Tulipmania” in

1625, and fell to $0.8 by 1725, a price fall so drastic that it would “cause economic distress in the

Netherlands for years afterwards” (Garber 37-38). This volatility and devaluation prompted

many to seek out other fields and whilst the Dutch flower market in 2019 was worth $215

million, it only constituted 0.02% of the country’s GDP (Gelder; “Netherlands GDP”). The rise

and decline of Bitcoin is another example of price volatility following a mania-induced

economic bubble. April 2021 saw an immense bitcoin devaluation of 8.5% after blackouts

temporarily interrupted a large bitcoin mining facility in the Xinjiang region of China

(Coingape). This resulted in a mass liquidation of bitcoin assets worth approximately $10 billion.

Not only do these examples show the future financial risks faced by artists opting to make NFTs

their primary source of income, but the Xinjiang blackout highlights just how volatile blockchain

proof of work systems are despite their cryptographic prowess.

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All in all, the nature of NFTs and NFT marketplace infrastructure helps protect artists

from pay exploitation and 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, in most cases, has a substantially lower value. The volatility in price

falls as the market readjusts poses a significant threat to artists who want to commit to NFTs as

their primary source of income in the long-term (Moadel).

Despite NFT prices being heavily inflated, there is still a great demand for them, not just

attracting art collectors but also investors due to the misplaced belief that NFT resale has

enticingly large profit prospects. Investors undoubtedly look to NFTs as an investment to be

resold later, when the art they purchase becomes more valuable, just like traditional fine art

pieces. The aforementioned price bubble poses both a greater risk and greater reward. For

example, with the case of the GameStop artificially created price-bubble, many early investors

made gargantuan profits; Jaydyn Carr, with just 10 shares was able to raise $3200 from shares

gifted to him in 2019 (Morales). NFTs offer very similar benefits; Pablo Rodriguez-Fraile

bought Beeple’s “CROSSROAD” for $66,666, resold it just four months later for $6.6 million,

making a profit of almost 10,000% (Kastrenakes). It is important to note however, that even as

prices fall and stabilize, the argument that NFTs make for good investments is inherently flawed.

As a result of its structure, NFTs can be treated similarly to traditional art, it follows similar

pricing laws, based, just like any other product, on supply and demand. Unlike shares, each NFT

is unique and therefore, the impact of the economic bubble is not proportional for all works of

art; likewise, not all works of art are produced by famous artists like Beeple. In 2017, a painting
 Khawaja 6

painted by DaVinci was sold for $450 million; however, in 2001, that very same painting was

believed to be produced by one of his “followers” and as such was valued at only $62 (Hope).

Consequently, large investment firms like Chase de Vere “[do] not recommend their clients

invest in art” as more often than not, the risk of incurring a loss is far greater than the prospect of

significant profit (Hope).

Like any inefficient economic trade system, NFTs have a gargantuan 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 be able to process the ‘proof of

work’ when editing blocks. The hashrate, or computational power per second, correlates to

energy consumption. This is shown by studies done on cryptocurrency mining systems that use

the same proof of work method as NFTs, showing a value of almost 0.97 for the coefficient of

determination, showing statistically, that there is almost no unexplained variation and that the

correlation is in fact, almost directly proportional (Li et al 166). 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 and does so

by charging capacitors such that a charged capacitor represents a binary 1 whilst an uncharged

capacitor represents a 0. This is done in extremely rapid succession in order to activate logic

switches and execute complex algorithms and instructions; the frequency of capacitance is

directly proportional to the power consumed, and as such, computers utilizing a higher hashrate

with a much greater capacitance frequency consume much more power than an ordinary

computer (Intel 5). This causal relationship has a hugely detrimental impact, with the carbon

emissions and power consumption of bitcoin mining rivalling that of whole nations at energy
 Khawaja 7

consumption levels of approximately 22 terawatt hours, contributing to a total carbon emission

of more than 13.8 million tons in 2018 (“Why Bitcoin uses so much Energy”; Li et al 167). With

other blockchain systems also gaining in popularity, the carbon emissions are expected to

exponentially increase, with predicted peak blockchain processing carbon emissions of more

than 130 million tons in 2024 (Jiang 4). Evidently, this system is not sustainable in the long run

and the popularization of NFT transactions would have an international impact on global

warming and environmental degradation.

The harmful effect of the high computer hashrates doesn’t just contribute to global

warming on an international level through carbon emissions, but also has a profound impact on

the local environment. In order for instructions to be completed quickly, as aforementioned,

processors need to be able to alternate capacitance very rapidly, the electric resistance of the

capacitor material generates a substantially large amount of heat that needs to be dissipated for

the computer to continue working as normal. Whilst modern cooling systems are able to handle

the majority of high-end computers well, computers that specialize in blockchain processing

require an exceptionally large processing power and the subsequent heat generated cannot be

efficiently diffused by even the most high-end cooling systems on the commercial market. For

example, in 2019, a total blockchain processing energy consumption of around 61 terawatt hours

corresponded to 209 trillion British thermal units per hour; enough residual heat to heat 4.2

million homes (Grassley et al). NFT marketplaces don’t just use a few computers for processing,

but outsource the processing to large industrial farms. Such farms have to look to one of two

cooling options for industrial blockchain processing sites: specialized industrial cooling systems

or a naturally cold environment. In the first case, companies like Green Revolution Cooling offer
 Khawaja 8

such systems, allowing for sustainable dissipation of heat at larger energy consumption cost. In

the second case however, although the heat can be dissipated through ventilation systems, in

doing so it severely degrades the immediate local environment. Iceland houses some of the

worlds largest industrial mines due to its weather being perfect for heat dissipation; however, in

order to setup these facilities, the surrounding ecosystems are destroyed- firstly by the

deforestation of the land required and secondly, many animals will, in the face of higher

temperatures (albeit, not drastically high), opt to relocate (Bjarnason).

Additionally, the NFT marketplace has a poor legal framework, leaving artists’ work

susceptible to exploitation. Blockchain’s information storage means that at all times, the blocks

are stored on decentralized ledgers; and as such, whilst countries can impose legal restrictions on

the transactions themselves, they do not always have jurisdiction on the overall sale of an NFT

(Khawaja 9). 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. One form of art being sold as NFTs are tweets; wherein, famous users like

Jack Dorsey can sell ownership of their previous tweets (Clark). To facilitate this, twitter bots

like Tokenized Tweets were created, allowing users to automatically token tweets; as of April

2021, this is the most common and convenient method used to steal people’s intellectual content

as these bots do not discriminate between the owner of the art and the user, allowing people to

not just steal tweets but any media attached as well. Whilst large profile cases of such theft is

noticed by online marketplaces, smaller, lesser known artists, have to follow a long process to

get stolen art taken down with no guarantee of the outcome. The question arises however, that if

someone unknowingly purchases stolen art that is claimed to be original, does that person
 Khawaja 9

reserve rights to that property? In order to work around this issue, many marketplaces have stated

that NFT transactions are done to secure a form of ownership and not complete ownership,

leaving the rights to the property in the hands of the original artist (Chintalapoodi). Whilst this

ensures that no one wrongfully attains complete rights to an artist’s work, it leaves a loophole

wherein artists can impose restrictions on the usage of the token after the sale, regardless of

whether the buyer was notified before the transaction or not.

Additionally, the structure of the majority of NFT marketplaces allow for poor

transaction tracking, allowing the system to aid phenomena like money laundering. Most

marketplaces require purchases to be made in cryptocurrency, making the transaction

untraceable. Whilst many argue this is a non-issue since the information is cryptographically

secure and the user needs to disclose personal information to be documented, the personal

information required varies from marketplace to marketplace. Many only require a username or

alias, allowing people to anonymously spend on art, allowing the system to facilitate untraceable

money laundering. The absurd variety of content available also does not help narrow down

legitimate sales as especially during the current mania where sellers like Ramírez-Mallis are

capable of selling recordings of fart sounds for upwards of $185 (Ewart), This poses a liability to

genuine users as this issue may prompt lawmakers to restrict access to NFTs in certain countries,

a motive not dissimilar from the prevalent cryptocurrency bans in places like Vietnam and

Bolivia (Bajpai).

In conclusion, whilst the NFT system helps prevent pay exploitation of artists and allow

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
 Khawaja 10

investing their resources into NFT production will face significant financial issues. As for buyers

looking to invest, even after the market stabilizes, the financial risks are far greater than the

potential benefits. Additionally, 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,

and due to the legal loopholes in the system that allow for it to be easily exploited. Therefore,

NFTs as they are currently, are not a sustainable model and are not the future of the digital art

industry.
 Khawaja 11

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