Written by: Florence Ip, Dr. Kyle Wong
2021 Digital Art Fair
The digital art fair was successfully held in Hong Kong this October. The digital moving image on the huge panels inspired unprecedented imagination to 25,000 audiences with euphoria. People had an opportunity to experience immersive art and feel the embrace of beautiful colours and digital images. A lot of people, who are interested in digital art, become art collectors. USD 7.7 million revenue was generated from Non-fungible token (NFT) sales in this 3 weeks event. Undeniably, NFTs will be broadly prevailing in not only art works but also in many other businesses in the near future.
Do NFTs Have Value In The Real World?
The value of NFT is supported by the acceptance and popularity of the underlying digital assets. Those digital assets can be a digital contract of real estate purchase, a shipment invoice, a loan collateral, an agreement of financial product, a voice recording, a video or digital image. The underlying digital asset gives the NFT value. For instance, when a 1 million USD worth real estate ownership document is hashed into blockchain as an NFT, the token should have a valuation of USD 1 million. Minting a digital asset as an NFT in the blockchain allows it to be bought and sold directly with anyone on the internet, while reducing the probability of fraud and eliminating the need of an intermediate agent. NFT is a digital token with an immutable piece of information of the initial minting person, content description and transaction history that are hashed in the cryptographic.
What Is So Special About NFTs?
Digital Art
Digital art is the most popular form of NFT. Their popularity is widely spread by big auction houses. The early NFT digital arts are similar to traditional physical art pieces. The latest NFT digital arts are very different to the traditional arts. The current NFT digital arts are using dynamic graphics designs. Some are videos which contain images and music. NFT creators now will apply smart contracts to make their products unique and more interesting. For example, a charging function can be added to a smart contract of an artwork, so that a commission fee of any transaction in the secondary market will be charged and paid to the original artist afterwards.
Mad Dog Jones, who is fascinated by Asian culture, is famous in creating and selling very beautiful NFT artworks. In April 2021, his NFT art, REPLICATOR, was sold for USD 4.144 million. Mad Dog Jones said “REPLICATOR is the story of a machine through time. It is a reflection on forms of past groundbreaking innovation and serves as a metaphor for modern technology’s continuum. I’m interested to see how collectors will respond as the work evolves and the NFTs in their possession continue to create new generations.”
Mad Dog Jone not only possesses artistic talent but also has an outstanding marketing strategy to differentiate his products with other NFT arts. His REPLICATOR NFT has a photocopying machine picture and background music. The photocopier will flash and produce machine noise when operating. This REPLICATOR NFT will self-generate a new piece of REPLICATOR NFT in 28 days, and the next generation will also self-generate another new copy in another 28 days too.
The original REPLICATOR will generate 7 copies. The second generation will generate 6 copies each. Each of the following generations will generate one less copy. Each REPLICATOR will produce 2 or 3 jammed REPLICATORs which will not generate. Eventually, around 220 pieces of REPLICATOR NFTs will exist, estimated by a simulation of a million trials. Mad Dog Jones will receive a commission fee, 10%, when a secondary transaction occurs in any piece of REPLICATOR NFT in the future. So, is it really an artwork? If you were the buyer, when and how would you sell to the secondary market?
Digital Luxury Products
In April 2021, a luxury jewellery and watch making brand, Jacob & Co., created a digital NFT watch which was sold for USD 100,000 in an auction. The NFT watch design was based on an actual physical model, SF24, which displays the time of 24 cities around the world. On the other hand, the digital NFT watch displays the price of 10 different cryptocurrencies, including BTC, ETH, ADA and USDT, in its split-flip system. This NFT wristwatch comes with a specially designed box and a ‘Tourbillion’ certificate, which is unique to the digital version, to welcome the buyer to the luxury experience in the digital world. The sale figure has proven that there is a market for high-end luxury digital assets in the crypto world, and the anonymous buyer can show off his luxury NFT watch on an LCD monitor as well as a mobile device.
Financial Products
Loan collateralized assets are also minted as NFT’s by financial institutions such as banks, and other decentralized financial organisations. When a borrower pledged a digital asset to a bank, its value will be recorded into an NFT. The prepayment schedule of the loan will be programmed in the smart contract which will manage the loan outstanding balance automatically. Once the loan amount is fully paid, the smart contract will terminate the loan agreement and return the asset to the borrower automatically. This loan collateral smart contract NFT speeds up the transaction and enables lending businesses in the digital world.
Physical Assets
Apart from digital assets, physical assets, such as real estate, can also be tokenized in blockchain. Utilizing a tokenization system to fractionalize a real estate investment into many units with small value, smaller investors can purchase the tokens to own a portion of the corresponding real estate. Although the token holders do not really own the whole real estate, they are still able to get reward from asset price appreciation.
In July 2021, the first real estate related Time Sharing NFT was sold by Labs group which tokenizes real estate investment. The right of one night staying in an Indonesian resort hotel room on a particular day will be sold in an auction on a marketplace. Successful bidder can either spend a night in the resort or rent it out to earn rental income on that day. If the particular day falls onto an international special day, especially New Year Day, Valentine’s Day, Christmas and New Year Eve, the price of the NFT will be higher. Anyway, this method provides flexibility for the NFT holders to sell their hotel rooms anytime if they cannot fulfil their travel plans unexpectedly.
The Future Is Bright
The global market of NFTs sales turnover surged to new high at USD 2.5 billion in the first half of 2021, up from USD 13.7 million in the same period last year, reported by marketplace data. In an interview with the CEO of OpenSea, the largest NFT marketplace, he revealed that the sales turnovers were USD 1 million in August 2020, USD 8 million in January and USD 50 million in February 2021, experiencing a fifty-fold growth within 6 months. Simultaneously, he raised USD 23 million in March as well as USD 100 million in July this year and valued the company at USD 1.5 billion, aiming to make OpenSea a giant company like Amazon.
As technology is improving everyday, more new advanced features can be programmed in the smart contract to operate autonomously. Combining advanced technical elements together in the blockchain, the coming NFT products must be more innovative and interesting in the future. Ultimately, everything will be tokenized as NFT and trade on the internet effectively with immutable transaction history and all relevant information available for anyone to read.