In a field currently rife with crashing valuations, it seems the critics hold the upper hand.
But what if everyone’s missed the point, and the real value of NFTs is not as an asset class in and of themselves, but in their application to already existing asset classes? Perhaps we’re just one successful lawsuit away from market players self-enforcing NFT ownership rights in certain industries. After all, if real long-term returns were supposed to come from bad pixellated art, we would already be laughing our way to the bank.
Since August, cryptos linked to NFTs and the Metaverse have been sinking. USD volume on NFTs dropped 25 per cent in Q2 of 2022, and NFT resell profit fell 46 per cent for a total loss of $1.4bn.
The floor price (i.e. asking price) of an NFT from the Bored Ape Yacht Club (BAYC) is down over 50 per cent from its April 2022 heights. In a sign of plummeting asking prices, almost $5.3mn in ETH loans borrowed against NFT collections are set to be automatically liquidated – about 2.72 per cent of the BAYC collection. The collapse in floor prices is hitting several NFT projects outside of BAYC, including CryptoPunks – which has also dropped 20 per cent from its July peak floor price of 83 ETH.
The damage is extending to popular trading platforms. For instance, OpenSea’s trade volume is down 99 per cent since it peaked on May 1. It processed just $5mn in August 28, compared to $405mn on May 1, and is down 90 per cent from the January 2022 peak of $4.85bn.
Representative of this value crash is the NFT of Jack Dorsey’s first tweet.
Dorsey initially sold it for $2.9mn to Sina Estavi in early 2021. Estavi put the same NFT for auction in April 2022 at an asking price of $48 million. The highest bid for the token was just 0.09 ETH, or $280…
The situation was not helped by China’s shutdown of Tencent’s NFT marketplace Huanhe, which had initially attracted attention from Chinese NFT investors.
The slowdown has even affected the art-world elite. Christie’s latest NFT sale by Sara Meiojas in July significantly underperformed, according to an auction house insider we spoke with. “We have seen a few clients pause ongoing work on their NFTs”, another software and NFT developer who works with several blue-chip artists told us, preferring to remain anonymous, “and we have noticed a decrease in the number of clients interested in developing NFT projects”.
Tools are understood, or misunderstood, through their use cases; you can use a hammer as a pickaxe, but it won’t be a good pickaxe.
Similarly, perhaps NFTs’ current fate was sealed since the Beeple sale’s success promised investors outsized returns.
Maybe the problem with NFTs isn’t NFTs – but NFT fanboys, and NFT hype.
Under a sector-wide NFT crash, those interested should consider a pivot.
Away from the crappy pixellated art, the unoriginal, copy-paste nature of most collections, or the idea that outmoded aesthetics and pump-and-dump squads would remake the art world.
Perhaps the real solutions that NFTs are just too boring for either side to pick up on?
Rather than revolutionising markets, NFTs may just end up reforming them.
Towards the Boring in the Contemporary Art Market
Hitechies believes the ongoing NFT crash will move investors toward a utility-first approach to NFT assets.
If this is true, we may all be guilty of judging a fish on its ability to climb a tree.
Hitechies believes the growth of utility NFTs will be in the gaming and Metaverse sectors.
Our bet is that boring use cases for NFTs will first emerge out of the existing contemporary art world and mainly apply to prevailing market structure challenges.
The land of stuffed sharks and industrialised polka-dot factories can significantly benefit from NFTs in two yawn-inducing ways. The first is a guarantee to pay artists (and the original gallerist) royalties on a piece’s resale. The second is to limit the damaging influence of predatory flippers with resale limitations. Currently, this is practically unenforceable in the industry.
For those who don’t know their art history, Robert Scull’s 1978 auction was the first high-profile example of profitable flipping in the contemporary art market. The artist Rauschenberg, who originally sold a piece to Scull for $900 famously confronted him after it was re-sold for $85,000. Rauschenberg rightfully considered this to be unfair.
But half a century later, artists are still expected to keep quiet about benefits from secondary-market sales. Assurances on royalties are nowhere to be seen – at least not in the largest market, the United States.
Another recurrent problem is the lack of enforceable resale limitations.
Artists in the primary market, however, are not the sole victims of the cutthroat art marketplace. Non-blue-chip galleries lack the resources to distinguish between helpful collectors and predatory flippers.
Conscious collectors are galleries’ and artists’ lifeblood. Such long-term buyers know the piecemeal evolution of an artist’s hand, and the value of withholding the artist’s supply from the market. They understand that how you manage an artist’s free float of works is as important to their long-term value as their talent.
Flippers instead tend to immediately hike up the price of artists and re-sell, often selling large numbers of pieces from the same artist at the same time, doing little to benefit artist or gallerist. Those trying to launch their own successful crypto tokens, will surely sympathise with the challenges. As ever it’s all about the Hodl.
Non-blue-chip galleries, carrying younger artists and poorer collectors, often cannot support these elevated asking prices. Tricked into raising prices higher and higher and selling more and more, it can be a death knell for younger players.
Bond Market Structure for Art
Artists aren’t immune, either. Besides not benefiting from resales directly, they may end up poached by a blue-chip gallery that will exploit their manufacturing capacity for short-term profits, hounded by buyers who care more about tomorrow’s auction price than their artistic development, or simply unable to consistently make sales at such elevated prices.
The art market has long tried to enforce re-sale limits precisely to prevent the growth of predatory flippers. But without legal or regulatory support, such non-resale clauses amount to wet paper.
How can we solve this with NFTs?
First, we must divorce the concept of NFTs from bored monkeys.
NFTs represent digital ownership, but this needn’t be limited to ownership of a digital piece. The Fashion Law wrote on NFTs, calling them essentially “a digital certification of ownership rights that can be attached to often-digital assets.”
Instead, it could be the digital key to ownership rights over a physical piece of art – art galleries could bundle an artist’s physical pieces for sale through digital contracts; creating ‘bundled art’. This practice is already taking off in the world of fashion; Tech Crunch reported on designer Schirin Negahbani, who is linking his physical clothing items to digital ownership via NFTs.
As a proxy for physical ownership, the NFTs smart contracts could be the repository of re-selling restrictions the buyer agrees to uphold in purchasing a physical piece. The first would be NFT royalty contracts, which guarantee a certain percentage of resale income would flow back to the original beneficiaries. The second would be re-selling restrictions, which have already been discussed in the context of tying NFTs to luxury goods.
This could make the NFT the sole channel for all sales past, present, and future.
It’s Not Over Yet
The above does not stop a motivated flipper from selling a contemporary piece directly by bypassing the NFT.
It does, however, create a universe of incentives to prevent this.
The key for the described NFT use cases relies on successfully claiming digital ownership rights, ensuring the enforceability of such digitally embedded conditions.
If the NFT works in tandem with the law, this could make a flipper’s attempted re-sale of a bundled physical piece problematic. To bypass the NFT’s restrictions a flipper would have to operate in a universe that doesn’t recognise the rights of parties inscribed into the NFT’s royalties or re-sale contract.
It needn’t require far-reaching government regulation or an industry-wide agreement by auction houses or major gallerists.
Perhaps all it would take is one successful legal claim against an auction house for selling a bundled piece without the digitalised restrictions. Fearful of additional claims, legal precedents could force auction houses to become the enforcers of these digital ownership rights.
Smart NFT bulls are precisely betting on such boring use-cases; “What stayed behind with NFTs (after the crash) is a story about rightful compensation and ownership,” the software and NFT developer told The Blind Spot.
“The branding of NFTs has been damaged because of things like BAYC” he continued.“You’ll have to wait up to a year to get rid of that haze.”
All you need to understand that NFTs aren’t going away is to observe the major players, he claims.
“Balenciaga is continuing to build up their NFT brands, which says a lot”, the developer explained, “it’s the ones that continue investing in good use-cases that will pull huge returns by the next round. We will scoff at $69,000,000 (the Beeple sale).”
While the right hand must dismiss the youthful naivetes of NFT hypemen, it probably pays to swat away boomer-led concerns with the left too.
Remaining cautious about the over-excited claims of either side, peering into the boring will define the next generation of successful NFT investors.