What isan NFT? How does it work?

NFT is the abbreviation of "non-fungible token". Behind this rather technical vocabulary is actually something quite simple: an NFT is a digital token registered on a blockchain.

The specificity of the NFT compared to other tokens and cryptocurrencies is that it is "non-fungible", i.e. not replaceable by another token, in other words it is a unique digital object.

To understand what this means, let's take the case of a 10-euro bill. There are more than 2 billion 10-euro bills in circulation, and their particularity is that they all have the same value: 10 euros. They are interchangeable, so they are "fungible" objects.

To make sure you understand, let's take the example of a drawing. Lucie is an artist and has drawn a series of whales in ten copies. Each drawing is different from the others, none replaces the other, they are all unique. We will therefore say that these drawings are non-fungible, i.e. they cannot be replaced by one another.

And that's where NFTs come in.

To guarantee the uniqueness of Lucie's whale drawings in their digital form, they can be recorded on the blockchain and made into NFTs (Lucie could also have drawn her whales directly on the computer). How can we do this? By doing what is called "mining". This formula comes from the English word "mint" which means "to mint a coin", which should be understood as creating money or monetizing an asset. In the example, if Lucy wants to sell her whale drawings this is the process she will have to go through.

The "mint" therefore corresponds to the creation of the NFT of the whale drawing and its registration on the blockchain. From now on, your ticket is registered on an unfalsifiable digital register that can be consulted by anyone with a computer and an internet connection. The blockchain recognizes you as the sole owner of this photo. You can use your NFT as you wish.

Why are we talking about NFTs?

Now that you normally understand what an NFT is and what technology is used to create them, it is important to understand why they are so talked about today.

A few figures on what the market represents: In 2021, transaction volumes on NFTs reached $44 billion - notably via the use of Ethereum's native currency, the ether - according to several reports. If sports, luxury goods or gaming are affected by the phenomenon, it is mainly the art market that is concerned. And for good reason: the "uniqueness" of NFTs refers directly to the uniqueness of a work of art.

One of the most iconic cases is that of the artist Beeple. In 2021, Christie's auction house sold one of the artist's works, "Everydays - The first 5000 days", for $69,346,250, making him the 3rd most expensive living artist on the planet behind David Hockney and Jeff Koons.

The rarity of a digital token defines its market value. For example, Yuga Labs' famous Bored Ape Yacht Club and Mutant Ape Yacht Club collections have only 6,400 and 13,000 owners respectively. The uniqueness of these NFTs plays a huge role in their price. Some have sold for millions of dollars.

But this kind of NFT and these prices are quite exceptional. While no "average" price is available, most NFTs, even in art, trade at prices around a few hundred euros. According to a survey by KPMG France for the Association for the Development of Digital Assets (Adan), 3.5% of French people have already bought NFTs. This figure would be about twice as high for cryptocurrencies.

The NFT, an artistic revolution?

The big news with crypto-assets and NFTs is digital ownership. From now on, one can be the owner of a material and also... virtual asset! This obviously opens up huge opportunities for artists. Any designer, painter, singer or other "creator" can create one or more NFT and sell them directly to potential buyers. Is this the end of art galleries? Not quite.

On the model of classic art galleries, other "online galleries" have been created. The best known of them is probably OpenSea.

In 2022, the American exchange platform, valued at just over $10 billion in 2021, claimed 600,000 "artists" or art resellers and nearly 120 million visitors per month! With so much traffic on these platforms, the exposure is potentially huge for artists (and owners), even if their numbers are also proportionally much larger than in a "physical" gallery.

In addition to the income from the sale of works, NFTs have a considerable advantage for artists since they allow them to continue to receive "royalties" on each sale. How does this work? This is provided for in the information inherent in the NFT contract. As soon as the "owner" wishes to sell the work, the artist will automatically receive a percentage of the transaction.

For collectors, the advantage of NFT is that they can shop from a distance. Some works are only in NFT. Others are an NFT with a physical version. It is no longer necessary to invest in a safe to protect its precious works. The digital wallets commonly called "wallet" are secure and allow everyone to have control over their properties and their financial assets in general.

These new works are not without consequences on the art market, which has begun to take this evolution into account and adapt to it.

The case of museums: taking NFTs out of the virtual world

Digital art now has its museums. In Seattle, in the United States, a museum dedicated to NFT opened its doors in early 2022. It is not the only one. In Paris, the NFT Factory, which should be opened soon, should also allow artists to exhibit their works.

The idea of the museum is simple: to take the works of art out of the virtual world and make them directly available to the public, exactly as for the "classic" exhibitions. Since the Covid crisis, some institutions, and not the least, like the British Museum, have rethought their economic model and turned to the sale of NFT in order to diversify their income.

There are also "dematerialized" museums only accessible in the... metaverse (yes yes). It is in particular a question of using this alternative virtual world, in order to present and use the NFT. These museums are supposed to offer a virtual but immersive access. The dematerialization inherent in the metaverse does not allow physical access to the different art objects, but the underlying technology challenges the notion of accessibility to certain collections. This is another subject, but the metaverse is not only a game as some people like to think, it is already an art gallery in several cases (Decentraland, Multiverse...).

Why are NFTs valuable?

The question of the value of NFTs is much debated, as it is for "classic" works of art. A simple way to define the value of an NFT is to look at its price. But is that enough?

What is certain is that the NFT market like the crypto market is very speculative. Some artworks like Beeple's or NFT collections (Bored Apes, etc...) are particularly mediatized and have a strong popularity. It is therefore supply and demand that define the market price.

Artists play on the uniqueness of a work, on the story they tell via their collection, and also on what the NFT can offer as services (access to specific events for example if one holds an artist's work) to entice buyers to snap. However, one should not be mistaken: the risks associated with NFTs are definitely present and the volatility of crypto-assets should be taken into account for investors.

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