Crypto-art and NFT tokens

The principle of operation of NFT

Ordinary coins within the same network are interchangeable: they have the same value and attributes. With NFT, things work differently. Each token is unique and cannot be copied. The identifying data is contained in the asset code, and cannot be changed or deleted.

Most NFT tokens are issued on the Etherium network in the following standards:

• ERC-721 – an individual smart contract is used for each crypto asset.
• ERC-1155 – it is possible to create different types of tokens (interchangeable and non-interchangeable) on the same blockchain and transfer them between decentralized networks.
• ERC-875 – allows multiple artifacts to be sent in a single transaction.
• ERC-998 – combines the functions of two (e.g., rights to a game character and its equipment) into one digital asset.

It is also possible to create non-interchangeable assets in other networks: Tron, NEO, EOS, Cosmos, Flow. Like regular digital coins, collectibles are tied to a specific address and stored in cryptocurrency wallets.

Features of trading

Buying and selling crypto artifacts is different from trading digital currencies. Artifacts are exhibited on special platforms (OpenSea, Rarible, Binance and others). Transactions take place in the format of direct sale or through an auction. In the first case, the price of the asset can be negotiated with the counterparty. In the second – the lot goes to the one who offered the highest bid. The purchase is paid for with cryptocurrency or fiat.

In February 2021, the NFT-marketplace Foundation named 6 reasons why it is worth kpripriobytuet digital artifact:

• It’s a way to become the sole owner of a tokenized object.
• An opportunity to help establish a new cultural paradigm.
• Crypto-art has a huge potential for development.
• Tokenization of art objects creates a market for new creative communities.
• Collecting NFT tokens is seen as a way to demonstrate one’s taste.
• NFT is considered the technology of the future and it is better to start engaging with it early.

Who and what is being sold

Crypto-art has become a new livelihood for artists and collectors. For example, American Michael Winkelman, known by the pseudonym Beeple, has been creating digital paintings since 2007. Until 2020, the highest amount he received for his work was $100. In 2021, Beeple is known as the creator of the most expensive NFT painting in history. In March, Christie’s auctioned his collage Everydays: The First 5000 Days for $69.3 million.

In Russia, artist Pokras Lampas (Arseny Pyzhenkov) was one of the first to place his works on NFT services. From 2020 to 2021 he managed to sell several of his works. The most expensive one, a digital photo of the Chirkei hydroelectric power plant, was bought for 16 ETH ($28 thousand at the time of the transaction in March 2021).

In September 2021, the Hermitage entered the cryptoart market.

The museum put up digital copies of paintings by Kandinsky, Monet, da Vinci, Van Gogh and Giorgione on the Binance exchange. The starting price of each lot was $10 thousand. The most expensive was sold “Madonna Litta” by Leonardo da Vinci – for $150 thousand.

But crypto-art is not only paintings and photographs. Virtual artifacts are sold by musicians, soccer players and other media personalities. Rapper The Weeknd sold at auction an unreleased track for $2 million, and DJ 3LAU – a whole album for $11.6 million. In 2021, tokenized clothes and shoes created by famous brands Gucci and Burberry appeared on trading platforms.

The NFT marketplace sells everything from soccer cards to works of art. The seller can be a media personality or a regular user. But the big money is paid not so much for the artistic value as for the brand.

How transactions take place

Popular marketplaces (OpenSea, SuperRare, Rarible) offer tools to create, sell, and buy NFT items. Finished artifacts are added to the trading terminal. On the OpenSea site it happens like this:

1. Connect a wallet (e.g. MetaMask).
2. To place a token, click the Add New Item button.
3. Select NFT-object, add the name, description, quantity.
4. Confirm the information by clicking Sell.
5. Select the method of sale – fixed price or auction.
6. Set the price in pounds sterling or ETH.
7. Click Post Your Listing.
8. Pay a transaction fee (standard fee on the Ethereum network).

Once published, the artifact will be verified and put up for auction. The money from the sale will go into the cryptocurrency wallet. Many platforms also have a royalty system – the author receives additional remuneration from subsequent sales of the art object (usually 10%).

The most high-profile NFT sales

According to the analytical portal NonFungible.com, the trading volume on the market of non-replaceable tokens in Q3 2021 amounted to $10.2 billion (8 times more than in the previous quarter).

In November 2021, the Beeple Everydays: The First 5000 Days picture remains the most expensive NFT transaction ($69.3 million). Other high-profile virtual art sales in 2021 include:

• A 7523 Alien digital avatar from the CryptoPunks collection – went under the hammer at Sotheby’s auction for $11.8 million.
• Tokenized drawing of a rock from the EtherRock collection – bought by TRON head Justin Sun for 187 ETH ($611k).
• NFT drawing of a monkey from the Bored Ape Yacht Club series – bought by NBA player Stephen Curry for 55 ETH ($180k).

Where the purchased art object is stored

Most of the NFT tokens are part of the Ethereum blockchain. Artifacts can be stored on any compatible wallet (MetaMask, Trust Wallet, Ledger). They support popular collectibles standards and allow you to view and manage them in a convenient format. NFT tokens can be found in the Wallet section under the Collectibles tab.

The best marketplaces to buy and sell NFTs

Non-Futurable Tokens are traded on special platforms. Most transactions are conducted in ETH. Some marketplaces accept fiat. The most popular projects in 2021:

• OpenSea. The largest trading platform for crypto art items. The service is decentralized and does not store users’ NFT tokens. Transactions are executed by a smart contract if the conditions embedded in it are met.
• Rarible. A project focused on digital artists. Anyone can upload their works. The service sells pictures, gifs, memes, video and audio files for ETH.
• SuperRare. The service offers exclusive art. Prices for artists’ works on this site are higher than on others. The administration conducts a strict selection of the posted lots.
• Nifty Gateway. The platform works in the Efirium network, but operations are conducted in dollars. To get on this site, you need to be a famous artist or make really exclusive products.
• NFT Showroom. The project operates on the Hive network and does not charge for transactions. Works can be uploaded by anyone.

Popular personalities in the market

NFT projects related to the creative industries are becoming the most high-profile. In early November 2021, Hollywood director Quentin Tarantino announced the release of an artifact collection on OpenSea that will include 7 scenes from Pulp Fiction. Each will feature digital excerpts from the movie’s original handwritten script and snippets of Tarantino’s audio commentary.

Earlier in October, director David Lynch posted an archival short film with Interpol on SuperRare in the form of 8 NFT tokens. That same month, his Hong Kong counterpart Wong Kar Wai presented a series of digital footage from the movie In the Mood for Love at a Sotheby’s auction.

More and more media personalities are creating NFT content. Singer Grimes, rapper The Weekend and other musicians have presented their crypto products.

In December 2021, Russian band Little Big joined the trend and released an NFT drop on the OpenSea marketplace. The collection will include 10 meme sculptures featured in a 4-second timed video.

Creating your own token

You can buy a collectible object, get it during a giveaway from developers, or win it in a contest. But the easiest way to become the owner of an artifact is to make it yourself. This option is available on many marketplaces. Digital tokens are created using an intuitive interface and do not require programming skills. The author needs to:

1. Fill out the form, specifying the technical parameters of the token.
2. Add a cover and a link to the page with a detailed description of the product.
3. Upload the file.

To record a transaction in the blockchain, a transaction is required and a standard network fee is paid.

Whether it is worth investing in crypto-art

Buying a digital object is becoming a lucrative business. In 2024, there are several ways to make money from NFT:

• Acquire crypto-art objects to sell them at a higher price in the future.
• Invest in native coins of NFT projects. For example, RARI management tokens from Rarible allow you to vote and participate in lot moderation. And the MEME cryptocurrency generates additional income from steaking.
• Credit cryptoart collectors. Such an opportunity is provided on the NFTfi platform. In case of default by the borrower, the right to possess the token is transferred to the lender.
• Buy tokenized index funds. For example, NFTX brings liquidity to digital projects, and its token allows holders to manage the project.
• Invest in insurance policies on blockchain. Yearn.finance mitigates the risk of losing returns in the DeFi and NFT sectors. Insurance products can be sold on the OpenSea and Rarible platforms.

Investing in NFT tokens also has its risks. Collectibles are low-liquid and their value is subjective. Therefore, choosing an object to invest in requires careful analysis.

Token Problems

Due to their decentralized nature, NFTs provide users with provable ownership, verifiability and availability of provenance history. However, digital art objects are stored in different ways. For example, images or videos cannot be hosted on a blockchain. Therefore, the asset code only includes a link to the product and its characteristics, which are hosted on external decentralized servers. Other problems of NFT tokens:

• Different interpretations of intellectual property law. Some assets can be freely disposed of. In others, the scope of artifact use is limited.
• Gas price spikes in ETH due to network congestion.
• Underdeveloped infrastructure for creating, buying and selling NFTs. In 2021, a large share of trading of non-interchangeable assets is concentrated in OpenSea, which is centrally managed.
• Lack of regulation of the crypto market. In 2021, the industry has already received attention from governments and regulatory bodies. Thailand has banned the sale of non-replaceable assets and FATF has recommended its inclusion in its anti-money laundering program. Taxes on non-mutualizable tokens want to be levied in South Korea.

The future of NFT

Most experts predict a growing interest in non-replaceable tokens. According to Mikhail Karhalev, an analyst at Currency Exchange, the technology opens up serious prospects for many sectors of the economy: real estate, media and others. The crypto market is a sandbox where innovations for various spheres are created and tested.

Given the rapid growth of meta universes and their need for collectible assets, virtual and augmented reality artifacts, it is worth assuming that the industry will develop and new players will enter it.

Summary

According to CoinMarketCap, the market capitalization of NFT tokens in November 2021 is $17.77 billion. However, a recent analysis by Bloomberg showed that only 3% of artifacts for sale are in demand – accounting for 97% of trading volume.

Most of the deals are made by media personalities and large companies. Private users can expect success with a strong, competitive product. NFT technology helps digitize anything: personal data, real estate, virtual objects. The world is rapidly moving forward, and non-replaceable tokens are becoming the foundation of the economy of the future.

Frequently Asked Questions