NFTs and Custodians
An introduction to NFT
Just as Bitcoin became the internet’s most searched term at the height of the 2017 crypto craze, searches for the phrase “non-fungible token” (“NFT”) saw a constant and rapid increase since the start of this year. Google searches for NFTs reached an all-time high as of 28 March 2021.
“Non-fungible” means that something is truly unique and cannot be replaced. A baseball card with a low serial number cannot be replaced for an identical card with a high serial number. Typically cash and bitcoin are considered ‘fungible’ as, baring rarities, you could swap a $20 note for any other $20 note or one bitcoin for any other on the network.
Rather than being financial in nature, NFTs have come into the spotlight recently as digital collectibles. They can be anything digital like images (jpegs), short clips (gifs), or even music and video.
The origin of NFTs
In 2017, CryptoPunks and CryptoKitties first came to the surface in the crypto world. CryptoPunks are 10,000 digital images of human and animal characters in an 8-bit-style animation, while CryptoKitties are feline characters, each with different attributes. This marked the start of NFTs as collectibles.
While both CryptoPunks and CryptoKitties were initially given away for free, the value of some especially rare or coveted NFTs has risen tremendously since then. The most expensive CryptoKitties sell well over US$100k while CryptoPunks sell over US$1 million!
2020 saw an influx of artists leveraging user-friendly online platforms such as Mintable, Async, or Cargo, etc.) to ‘mint’ or tokenise their artworks. This creation and registration of their artworks on the blockchain gives each of them a unique identity. Following this, creators can transfer their tokenised artworks to platforms, such as OpenSea, Rarible and Nifty Gateway, for sales.
One such NFT artwork, “Everydays,” recently sold for US$69 million at Christie’s. While some people may attribute it to pure hype, we should also consider that the artist, Mike Winkelmann (a.k.a Beeple), spent 14 years creating a new digital artwork every day. His US$69 million artwork, “Everydays,” is an accumulation of 14 years of his work.
NFTs are a new form of traditional art
As artwork like Beeple’s “Everydays” surface, NFTs are starting to be compared to traditional physical artworks where scarcity and desirability drive value. NFT’s evolution is interesting for the art industry. NFT rarity and authenticity can be easily proven since it is recorded and publicly viewable on the blockchain.
Conversely, traditional art has faced issues forgery that cannot be settled. La Bella Principessa was valued at US $160M as a Leonardo Da Vinci original, but recent evidence suggests it may just be the work of another painter worth only $20,000. To this date, there is still no definite consensus about the artwork’s real painter.
Traditionally, artists have sold their artworks at auctions and galleries that encountered transportation, storage, and display costs, as well as artwork security problems and issues collecting payments post-sale. While more events are now held online, traditionally, artworks are sold via physical auctions and gallery events, where the prospective buyers would have to be physically present.
There is significantly less friction to purchase and sell NFTs as more online platforms and marketplaces launch. Creators would have to pay gas fees for the minting and transacting their tokens, but that is about it. As a creator, the NFT smart contracts allow you to earn royalties every time the NFT is sold, and each time it is resold, usually for between 2.5% to 10% of the sale price. Also, NFT-selling platforms are available to access 24/7 globally, providing creators with the opportunity to access buyers at any time.
Creators can create NFT works with physical art features, plus unique features of digital art (e.g., animations). Kane’s “right place right time” is an ever-changing art piece to reflect the daily changes that represent BTC’s volatility. This is an art form pushing digital art boundaries, probably sitting between still art and video format. The work can be seen here.
NFTs are gaining popularity quickly
NFTs represent traditional artwork’s inevitable evolution. As a buyer of art, collectibles, or NFTs, you buy bragging rights and an asset that can be resold later at a much higher price.
Platforms such as NBA Top Shot are continuing this tradition in digital form. The digitized NBA trading cards contain a short 5–10 second video highlight of a player. The platform has seen over US$500M in sales in its first six months. Recently, an NBA Top Shot clip of a LeBron James dunk was sold for over $200,000.
Celebrities like Paris Hilton, Snoop Dog, and Tom Brady accentuate the hype of NFTs while Twitter CEO Jack Dorsey has sold an NFT of his first-ever tweet for over $2.9 million.
NFT trends and the future
The attention and hype surrounding NFTs are at an all-time high. Based on Google search trends, the current surge of ‘NFT’ searches is 25% higher than searches for ‘ICO’ during the peak of 2017’s ICO hype.
Could the NFT hype tail off in the same way ICO interest waned back in 2017? An extreme case would see the public lose interest in NFTs, resulting in the sky-high NFT prices collapsing as most ICO token prices did. We believe the hype might taper off a bit into a form of normalcy to talk about NFT, like how people talk about Bitcoin today — especially in the consumer-friendly format like collectibles.
On the contrary, the potential for NFTs is very promising. Crypto artwork saw an all-time high sales monthly volume in 2021, crossing into US$14 million in February 2021, with nearly US$12 million and about US$9 million done in January 2021 and December 2020 respectively.
This sales volume only represents the transactions on Async Art, KnownOrigin, Foundation, MakersPlace, SuperRare and Nifty Gateway. The relatively seamless transactions of NFTs mean that NFTs may expand to beyond just digital art and collectibles. In April 2021, Vogue Business reported that Gucci and a number of other luxury fashion brands are reportedly close to launching NFTs. Fashion collectibles platform Neuno, for instance, is working with luxury fashion houses on launching NFTs.
NFTs are not perfect
Given the hype, many people are suddenly interested in owning NFTs, so it comes with no question that some works of questionable value are being sold at hype-driven prices. Fraudsters have also jumped on this opportunity to create a run of NFTs in someone else’s name, tricking inexperienced buyers into paying for fakes or simply non-delivery of the product. Lastly, there is the underlying security issue.
Most NFT platforms work with wallets such as Metamask, which are non-custodial and intended mainly for individual use (except the institutional version). Since blockchain technology is irreversible, it is near impossible to retrieve the stolen works. Also, an individual investor needs to plan for succession with will and recovery measures.
NFTs and the role of custodians
In light of NFTs’ potential importance in the future and some of the issues mentioned, there is room for custodians to help institutional and sophisticated investors secure their highly valued NFTs. Custodians typically have operational procedures in place, robust security, and insurance for assets under custody.
These custodians’ attributes make it worthwhile for investors to consider outsourcing the responsibility of handling and safekeeping NFT to third-party custodians. In the future, NFTs might even be recognised as collateral for loans, other than serving as an investment or bragging rights by the owner.
Onchain Custodian is looking at how the business can best serve existing customers and holders of NFTs. We love to hear your thoughts! Do you have an interest in such a service to custodise NFTs and any of the requirements?
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We are keen to hear your thoughts on NFTs. Contact us directly.
