Non-Fungible Tokens (NFTs) and the Art World

In 2017, when new digital assets captured the attention of mainstream media and audiences for the first time, NFTs faced initial backlash due to the low-quality and highly speculative nature of the first tokens. The dissatisfaction grew as the audience mistakenly kept thinking of NFTs as images rather than tools to record and validate proof of ownership. However, the initial hype declined, which made artists and galleries less skeptical of the tokens and allowed them to uncover their true potential.

As a result, the NFT community not only gathered a significant number of followers among individuals and art institutions but also started organizing events worldwide. That helped legitimize the emerging assets among the mainstream public, create a sense of unity, and encourage even more people to discover NFT benefits. However, it's important to note that NFTs are not a panacea for the art world; they are a valuable technology with both advantages and disadvantages. While there is potential for further growth, all participants should carefully consider the most significant aspects and learn more about NFTs in order to make well-informed decisions.

Changing the Art World

For a long time, digital artists were forced to face copyright infringement, lack of monetization opportunities, and unequal compensation for their craft. Several attempts to find a solution ended without significant changes until some artists started utilizing NFTs. Soon they discovered that although NFTs couldn't solve every issue, new assets provided a range of valuable benefits, such as:

Transparent and Verifiable Proof of Ownership: The blockchain technology used in art NFTs ensures that authenticity can be tracked and verified, including in deals on secondary markets. This means that artworks cannot be misused or stolen, as potential buyers can check the list of owners on the blockchain at any moment.
Increased Liquidity: Galleries can sell art NFTs through virtual marketplaces, bypassing governmental regulations on precious items and making artworks more accessible to the public than physical ones. In addition, NFTs can be stored and displayed in digital wallets, eliminating the need for physical storage space.
Fractional Ownership: NFTs allow for fractional ownership, meaning multiple individuals can own a portion of an artwork. This opens up investment opportunities for a broader range of buyers who may not have the resources to purchase an entire physical artwork.
Royalties: Instead of a one-time deal, galleries can incorporate smart contracts in their NFTs to receive royalties from purchases on secondary markets. Thus, the initial owner can benefit from their work in the long run and doesn't have to consider market volatility a deal-breaker.

Still, despite those benefits, there were both intrinsic and extrinsic disadvantages that slowed down the acceptance of the NFTs, including:

Lack of Tangibility: Although digital artworks are common assets in the art community, they are not tangible. As a result, some collectors may prefer the tangible nature of traditional art.
Oversupply: The NFT trend has led to a rapid influx of new NFTs on the market, making it challenging for galleries to gain visibility and sell their work at desirable prices. In addition, the emerging AI technology has also devalued the market by providing individuals with simple tools to generate low-quality NFTs, making it even harder for genuine art to stand out.
Market Volatility: Similar to traditional artworks, the cost of art NFTs can fluctuate dramatically over a short period. By being susceptible to speculation and inconsistent trends, the market may pose some risks for art collectors.
Lack of Artistic Value: Even after the initial influx of low-quality assets, NFT marketplaces still have a wide range of AI-generated or poorly executed works. As a result, some potential collectors may perceive NFTs as assets without actual value.
Technical Challenges: As with any new technology, NFTs require certain technical proficiency. Individuals and institutions willing to participate in the art NFT market should be familiar with setting up digital wallets, understanding blockchain networks, and navigating various marketplaces. Thus, technical challenges may create a barrier that makes NFT collecting less accessible for some galleries and collectors.

The Future of NFTs as an Asset Class

As previously mentioned, despite their valuable advantages, NFTs still have a range of negative aspects. In addition, compared to physical and well-established assets, potential buyers may need assistance in determining whether a certain NFT is really worth its price or artificially inflated. Thus, the future of NFTs and their popularity as a modern asset class depends on how effectively the community can address both of these issues.

Solving the Disadvantages

Most of the present issues can be solved by introducing intermediaries. They can help art institutions confidently navigate the new digital realm and facilitate negotiations between them and collectors. For example, companies like Digital Basel offer services beyond regular marketplaces, assisting galleries in tokenizing their physical assets, ensuring proper due diligence, facilitating communication with potential buyers, and even providing marketing support. Through this guidance, art institutions can ensure that their assets are tangible and artistically pleasing and mitigate market volatility and technical threshold.

Determining Value

Since the first appearance and gradual adoption of NFTs in the art community, three main factors have been established to estimate the value of NFTs: rarity, utility, and tangibility.

Rarity

Collectors are drawn to the premium assets because the fewer people who own the same item, the more they feel superior to others owning those assets. The same applies to NFTs. If art institutions want to increase the price tag for a particular digital copy of the artwork, they should minimize the number of tokens or create only one. For example, ukiyo-e artists create woodblock prints in large numbers which makes them less valuable in terms of a rarity compared to Leonardo da Vinci's painting Salvator Mundi, which exists as a single instance.

Utility

However, the NFT value isn't measured solely by rarity. Art institutions can utilize NFTs to provide visitors or supporters with exclusive services, products, or activities depending on conditions or objectives. Additionally, when combined with other forms of entertainment like video games, NFTs can be used as in-game currency, objects, or rewards. This provides galleries and museums with more options to engage their audiences.

Tangibility

Owning an NFT linked to the original The Starry Night by Van Gogh or A Sunday Afternoon on the Island of La Grande Jatte by Georges Seurat is clearly more valuable than an NFT of a computer-generated ape. In the former case, the buyer can understand the artistic and monetary value of such an asset, possessing the time-proven value of the original artwork. Meanwhile, the latter makes them one of many ready-made items with dubious value.

Ultimately, despite certain risks and disadvantages, NFTs have gradually established themselves as an integral part of the art world. Their benefits, along with the overall digitalization of the art industry and the emergence of platforms like Digital Basel, foster a more stable market environment and enable galleries and individuals to leverage modern digital assets with relative ease. Consequently, this paves the way for a more transparent and secure future in art collecting.

If you still have any doubts regarding the potential of art NFTs, we highly recommend diving deeper into the subject to fully explore the possibilities and seize potential business opportunities. After all, the future belongs to those who prepare for it today!