The explosive, ten-figure growth of the NFT market over the past year will be remembered as a sea-change moment. And while it is difficult to imagine the market for new non-fungible tokens heating up forever, the rise and fall of individual objects should not damp the long-term outlook.
The speed at which this new, digital art market is taking shape is astonishing. You feel like an astronomer watching the formation of a galaxy in fast forward. The “modern” art market took centuries to develop, and it was only within the last 40 years that innovators (or depending on your view, greedy bad actors) introduced financial instruments such as credit lines to the sale of paintings and sculptures. By contrast, the financialization of NFTs is occurring moment to moment.
Michael Maizels is a technology researcher with Pilot44, a boutique innovation consulting firm in San Francisco, and is also affiliated with the metaLAB, a think tank and creative design studio at Harvard University.
NFTs are a perfect alignment between art and finance. They are two halves of a strange love-finance-aesthetics union hanging together with a precision that has never been achieved in any previous chapter of the interrelationship of art and money. Because NFTs themselves are a kind of currency, the creative possibilities they open (making, borrowing, sharing, rarity distributions, permissioned access, etc.) have direct analogs on the right side of the balance sheet (issuing, lending, pooling, risk curves, investor control, the beat goes on).
Call it finance as an aesthetic medium.
The world got a crash course in the emergent field of “creative economics,” or “token economics,” through the boom year of 2021. Though it began with the sale of a multimillion-dollar one of one, the story has been the rise of massive, community-driven projects epitomized by the Bored Apes (whose sales now top $1 billion). Just as one would rue the idea of building physical infrastructure with no consideration of physics, so, too, it has become difficult to imagine orchestrating the behavior of 10,000+ individuals – many of whom have come suddenly into wealth – without recourse to social psychology and elementary economics.
Seen from the perspective of creators and storytellers, this constitutes a paradigm shift with momentous consequences.
While poets, playwrights, concert musicians and conceptual artists have all worked through the aesthetics of co-created narrative art, no such figures could have wielded the medium of finance as a storytelling device until now.
And yet, this lens of the hybrid aesthetic/financial object has thus far been understood exclusively to apply within a single project: creative micro-economics. Beyond this lies a whole meta-universe of possibilities that might be referred to as “creative macro.”
As Defiance ETF’s co-founder Sylvia Jablonski recently explained, “The next generation of traders are not like traditional asset allocators. These people are interested in things that allow them to connect and create and be a part of something.”
The desire for investors and collectors to play across the boundary between financial value and aesthetic expression will be unleashed to massive effect. But the shift from blockchain as a store of value to a creative substrate will require a fundamental recalibration of decentralized finance (DeFi) itself.
NFT lending has already begun to heat up. Startups, including NIFTEX, Ark.Gallery, Charged Particles and Upshot, have introduced functions such as fractionalization, blind bidding for off-market works, community-owned index funds and crowdsourced appraisals into the NFT market. Standard math suggests that, with a loan-to-value ratio of 80%, the NFT market would expand by five times if collectors were easily able to access leverage. When this happened in the analog art world during the 1980s, it was more like an order of magnitude increase.
Read more: Jarrod Dicker et al. – NFTs, DAOs and the New Creator Economy
We believe that attaining such lofty heights for the marketplace layer will depend upon finding ways to map financial value onto expressive power. How might a seemingly simple transaction, such as a collateralized loan, be reconsidered not only as an economic exchange but also an artistic act? Indeed, artists have been figuratively “borrowing” one another’s work for a very long time through the act of simple copying.
NFT exchange holds the promise to make this borrowing literally as well as computationally interesting. Artists who wish to use each others’ ideas can now seamlessly buy, sell and trade, as well lend against, underwrite, securitize or any number of exotic derivations one another’s work.
As often the case in the metaverse, the key to transformation lies in meta-data. Permissions could be written into NFT contracts that grant rights to modify purchased or borrowed pieces in either temporary or permanent ways. What if each collector, as in the tradition of ancient Chinese manuscript holders, stamped works that came into their portfolios?
Other contracts could specify how exchanged pieces might be divvied up into non-fungible parts. What if Ape collectors could leave their simian friends safely in wallet, but then sell (or even rent) the NFT’s rarest attribute, say, his shiny diamond grill, out to the market?
The fractionalized liquidity of creative attributes may be extended to the intellectual property rights attached to NFT ownership. What if the diamond grill, only available for a limited time, could be editioned onto virtual merch that might disappear at a fixed date? Or merch that would revert royalty payments once the smile went home? The possibilities seem endless.
And NFT derivatives promise to create still stranger monsters. One could assemble hybrid pieces or form collages out of extant works. Untouched originals would become rarer, and new offerings would undergo a period of profound adaptive radiation as collectors find themselves able to gene splice across a whole metaverse of secondary marketplaces and tertiary securities.
Just as financial transactions can be fractionally resold through derivative “strips” or “tranches” that cut across entire asset classes, large groups of NFT artworks and permissions could be similarly securitized and recirculated, creating something akin to the shadow banking for creativity.
Perhaps the most important role for digital re-composition will be to preserve the work of the Web 3 world by continuously revitalizing it. Importantly, the way that hardware and software formats come and go has caused artifacts of digital culture to fare very badly through institutional preservation. A large part of the value of oil painting derives from its durability, by contrast.
Velazquez’s “Las Meninas” looks basically the same as it did in the 17th century, if not a little cleaner. The NFT will not win this game – oil painting has a head start of hundreds of years, marble sculpture several thousand. But if the odds are stacked against them becoming ancient, the artists of today are much better positioned to stay in front of modernity.
Read more: Michael Casey – The Value of NFTs Is Belonging
This moment is not entirely without precedent. In the 15th century, after a global pandemic rewired the social order and trust in public institutions had thoroughly rotted, there emerged a period of innovation. The achievements of Renaissance painting and Renaissance thinking are deeply inter-related. In the century that followed, the discoveries of mobile money (paper money/deposit slips), movable art (paint on canvas rather than fresco wall) and cross-ocean exploitation all fed into one another.
The joint stock company, the movable printing press, representative democracy and the editioned artist’s print all spun out of the next turn of the screw. Another two hundred years would see the telegraph, the railroad and the photograph follow the same well-worn grooves. What we are calling the metaverse is just the latest in a series of worlds that abstracted away from its predecessor by playing across the lines of telecommunications, finance and art.
This piece is excerpted from a longer white paper, which can be downloaded here.