Financial innovations often feel like insanity at first. Pay bills with a piddly piece of plastic? Get cash from a faceless machine rather than a bank teller? Stop trying to beat the market and just own all the stocks, including the bad ones?
Yet credit cards, ATMs and index funds went on to make the financial world easier, safer and more convenient for millions of people. One of the nuttiest-sounding ideas in years, NFTs, could do the same.
You've heard of nonfungible tokens even if you don't yet know what they are -- because the people buying them sound so crazy.
In February, an NFT representing the Nyan Cat video meme, which looks like a feline Pop-Tart dragging a rainbow through outer space, sold for more than $500,000. A video NFT of LeBron James dunking a basketball sold for $208,000. On March 11, an NFT attached to a digital collage by the artist known as Beeple sold at Christie's for $69 million.
Although such prices are baffling -- and may, in fact, be crazy -- NFTs could solve problems that have dogged the art world and other markets for centuries. Think of a nonfungible token as a unique digital serial number that certifies the authenticity and ownership history of an associated object.
That information, along with other data, is recorded on a blockchain. This is a ledger, or immutable record, that resides on a decentralized network of computers world-wide. The blockchain technology underpins bitcoin and ethereum, the leading cryptocurrencies. Any of the ledger's millions of users can instantly verify that the information is accurate and complete.
By connecting the blockchain to art and other creative work, NFTs bring the objectivity of computer code to fields that are notorious for subjectivity. Artists, writers and musicians struggle to find audiences and make a living. Curators, dealers, collectors and art historians bicker nonstop about the quality and value -- and the authenticity -- of major works.
Consider the French artist Jean-Baptiste-Camille Corot, who was jokingly said to have painted 3,000 canvases, 10,000 of which were bought in the U.S. Is a particular Corot genuine or a forgery? Who were its previous owners? Has it ever been exhibited at a museum or previously sold at auction? Was it ever seriously damaged and extensively restored?
Until now, buyers often had to take the answers to such questions on faith. An NFT, however, can integrate reams of information about an artwork into an authoritative, permanent digital record.
Today, for the most part, NFTs are linked to digital assets like electronic images or audio and video files. People are already experimenting with tying physical objects to blockchain records of ownership, which would make NFTs feasible for material assets--although some technical challenges remain to be solved.
With NFTs, all the relevant knowledge about a work of art "can be permanently systematized, automated and accessible by anybody," says Noah Davis, the specialist in postwar and contemporary art at Christie's in New York who arranged the $69 million sale of Beeple's work.
Some people in the art world see the explosion in NFTs as "absolutely absurd and appalling," he says. "But I studied the theater of the absurd in college, and I don't think it's ridiculous at all. I think it's inevitable."
NFTs also are giving creative people an ownership stake they've never had before. Consider Josie Bellini, an artist based in Chicago who majored in finance in college and worked briefly at an investment-advisory firm. Since late 2018, she has sold about 300 of her paintings this way.
One of her NFTs, a dazzling digital work titled "Yours Truly #0," is on sale by its current owner, an account called BitBuzz, for 250 ether. That's a cryptocurrency, worth a total of about $450,000.
Ms. Bellini, who sold the NFT for 50 ether in February 2020, will receive a 5% royalty if it sells -- now and anytime again in the future.
Typically, when an NFT is traded on the blockchain, that network won't allow a sale and purchase to be completed without forwarding the predetermined royalty to the wallet, or account, of the artist who created it.
"It's so amazing that even if it gets traded 10 or 20 times or more, I'll still be getting my fee for it," Ms. Bellini says. "That's totally not how the art world has worked until now."
Earlier this month, Mario Gabriele, an investment analyst and newsletter writer, prepared to turn his research report on cryptocurrency trading platform Coinbase Global Inc. into an NFT. "Tokenizing" the report, illustrated by digital artist Jack Butcher (who earned half the initial proceeds), quickly raised nearly $36,000 in ether.
For that, the 119 backers each got tokens they may be able to exchange for ether, now that Mr. Gabriele has opened an auction for access to the NFT of his research. If buyers of the report pay more than his supporters already put in, then the original backers will share in those proceeds -- and in future sales as well.
Mr. Gabriele's goal, he says, is to put investment research "within the reach of those who don't have a multimillion corporate research budget to deploy."
Because NFTs are so new, using them isn't cheap.
On OpenSea, an online marketplace, the typical NFT changes hands for the equivalent of $100 to $1,000, says Devin Finzer, the firm's co-founder and chief executive. But transaction costs on the cryptocurrency to fund those purchases run roughly $40 to $60. So small buyers incur giant expenses. (OpenSea also charges a 2.5% fee of its own.)
"That's why the high-value things make a lot of sense for buyers who can afford them," says Mr. Finzer.
Are buyers getting carried away?
"I'm sure that some of this is a bubble," says Ms. Bellini, the Chicago-based artist. "Sometimes [buyers] just hear it's cool and good and they don't even know what an NFT is, but they want to buy anyway, and I think some of those people are going to get hurt."
NFTs bring objectivity to the objects being sold, but they can't bring it to the buyers of the objects, because those are human beings. In the long run, I think NFTs will make markets better. But nothing will remove bettors from markets.