NFT 2.0: Lessons Learned for the Great Restart? Part 1

To understand NFTs, it's essential to consider their origins, so let's delve briefly into digital art history. Some might cite László Moholy-Nagy's 1920s experiments, where he dictated tasks to apprentices by phone, as precursors to digital art. Others might go further back to Albrecht Dürer’s use of the printing press for lithographs, seeing a union of art and technology there. Our starting point is the mid-1960s — the early development of algorithms for generative art, i.e., computer-generated art based on human-programmed algorithms.

Mass attention to digital art, with attempts to situate it in art history, emerged in the next decade with the "Demoscene." Here’s a chronological outline of subsequent digital art directions:

• 1970–1985: Demoscene

American artists experimented with light, sound, and scenography, supported by major brands and corporations during the "golden age of advertising" in the USA. Besides artist fees and production revenue, Demoscene objects were non-commercial — selling them was as profitable as selling performances today. Yet the use of video projections is credited with advancing digital art, video art, virtual and augmented reality, and metaverses.

• 1990–2000: Computer Art

The first digital tools for artists — Adobe Photoshop and Illustrator — created new opportunities for illustrations and graphic design, shaping a distinct art form. By the 2000s, many artists skilled in digital tools were absorbed into the film and gaming industries. The last "traditional" artist of this style, creating artworks with a finger on an iPad during COVID-19, remains David Hockney.

• 2015–2016: Crypto Art

The 2008 advent of cryptocurrency concepts like Bitcoin and the digital asset ecosystem divided the world into "digital enthusiasts" and everyone else. Crypto fans quietly traded Bitcoins for years, often on black screens, until boredom led to visual experiments — eventually including digital images in contracts for selling cryptocurrencies. Thus, early collectible editions like Pepe the Frog were born. Crypto art became popular among programmers, though the official art world largely ignored it.

• 2017: Blockchain Art

Due to speculation in cryptocurrencies, regulators and media placed the market under scrutiny in 2017. Thus, some collections initially coined as "crypto art" (e.g., CryptoPunks and CryptoKitties) were rebranded as "blockchain art." Blockchain, the infrastructure for cryptocurrency circulation, was then regarded as unrelated to the speculative nature of cryptocurrencies.

• 2018: Digital Art

Within six months, blockchain fell under regulatory suspicion. All digitally wrapped assets, from "plots on Venus" to CryptoKitties, faced security-like regulations. To avoid complications, the blockchain art fair CADAF rebranded itself as a digital art fair shortly before its May 2018 opening, a move followed by a Tokyo museum. The term "digital art" became a diplomatic choice, promising stability amidst legal flux.

Thus, the term "non-fungible token" was born.

Over recent years, many definitions and comparisons have emerged to simplify understanding NFTs. Here’s ours: imagine you buy a painting at an auction — a traditional canvas piece in a lovely frame. The purchase comes with an addition: a pocket attached to the back, containing all the accompanying documents — provenance, artist biography, expert evaluations, sales contract, and ownership proof. In short, everything that rarely accompanies a sale in full.

This pocket is regularly updated with news about the artist, price indices, exhibition invitations, and more. A "magic button" also lets you instantly resell the artwork at a set price. Essentially, the collector has an automated management system included with the artwork!

This is the NFT format’s theoretical foundation. An NFT is a digital algorithm combining the asset, sales contract, and ownership rights into one computer code.

In the art world, NFTs were theoretically expected to fulfill several responsibilities:

• Authenticity Verification: Since all works were initially registered in a blockchain system, the system could automatically present the needed certificate upon request.

• Originality: The algorithm could check a work for "resemblance to the point of confusion" and identify stylistic borrowings, themes, or outright duplicates.

• Uniqueness: Blockchain entries setting edition limits prevented the creation of copies beyond the original artist’s specified number.

• Liquidity: NFT algorithms monitored the market, notifying collectors when their asset was requested for purchase and assessing the adequacy of the offered price.

NFT algorithms were designed specifically for digital assets, meaning that this integration of work and documentation in code applied exclusively to artworks created in digital form. Yet, some innovators attempted to "fit" physical artworks into NFTs (more on this in the next section). It turned out, however, that no legal connection existed between a physical asset and its digital certificate, as legislators had not yet established one.

From the promised system of managing artworks, only a few NFT features functioned fully: the ability to buy and sell quickly and to automatically allocate royalties to artists (5%–30%) with each resale. This appealed to two main groups: speculators, who saw a new high-liquidity market, and artists, who saw an opportunity for unprecedented earnings.

When the NFT concept officially launched in spring 2018, it initially gained little traction; the crypto market was in a downturn, and marketplaces barely survived with small user bases propped up by constant "giveaways" and encouraging social media engagement. For the next two years, the digital art asset market was like a suitcase without a handle: cumbersome to carry but hard to abandon. Still, platforms that had received development investments in 2017–2018 remained optimistic, buoyed by faith in decentralization and reliable salaries, secretly hoping for a cryptocurrency market rebound... or a miracle.

Observing events from 2024, it’s easy to identify the factors that triggered the NFT boom. However, it’s crucial to recognize this: from its inception to global fame, the NFT technology lay virtually untouched for nearly three years! What helped it "wake up famous" one day?

• A New Cycle of Cryptocurrency Capitalization Growth

Suddenly, young people under forty found themselves with more money than they could imagine. Some had bought Bitcoin consciously, others by chance, while some had even been paid in cryptocurrencies when they were worth a fraction of today’s value — turning them into dollar millionaires (or billionaires). This newfound wealth fostered two behaviors: some spent it recklessly, while others sought to preserve it. For those trying to invest Bitcoin quickly in case of a market crash, NFTs seemed a convenient solution.

• Centralized Holdings of Large NFT Collections by a Few Hundred Owners

Remember the marketplaces' "careless" distribution of digital assets to retain users? In fall 2020, they had their star moment! Not only were platforms showcasing their offerings, but social media was flooded with chronicles of the opulent lives of early collectors, who had acquired coveted NFTs at bargain prices. Inspired newcomers hurried to join, but cheap NFTs were no longer available, forcing them to buy at market rates.

• Generation Z’s Rejection of Parents’ Collecting Values

Those who profited from the crypto market included not only crypto-millennials (born 1980–1996) but also Generation Z, the youngest generation with purchasing power. After reading high-minded remarks about the "classic" art market in the media and from their parents, young people rebelled and created their own value system — with their own idols, pricing, and a clear line between "art" and "everything else." This generation's rapid embrace of NFTs was also a backlash against the established art world.

• Ethereum’s Ambition to Challenge Bitcoin

Without delving too deeply, Ethereum and its associated cryptocurrency, Ether, were reliant on Bitcoin by 2020, with investors and speculators typically trading them as a pair. Ether decided to chart its own path by offering its blockchain for NFT sales, conveniently timed with a few high-profile NFT transactions to cement its status as the top blockchain for digital art. Consequently, Ether’s value growth in 2021 sometimes outpaced Bitcoin’s, netting several hundred billion dollars for those who took advantage.

• A Collective Effort by Key Players

The Winklevoss brothers’ exchange Gemini acquired Nifty Gateway, an NFT marketplace, in 2019 for $91 million, with market turnover at $25 million, suggesting they had a plan. The traditional art world, feeling the squeeze, saw galleries like Acquavella invest in NFT marketplaces (e.g., Foundation App) in 2020. Figures like Elon Musk fueled interest with social media posts, setting the stage for a collective push.

Together, these markets created a digital art “earthquake,” followed by a wave of euphoria. NFTs were rapidly labeled "art," akin to calling a museum ticket “art” for the experience it facilitates. Serious publications began classifying NFT art as a distinct field, parallel to (not part of) digital art, capturing the imaginations of young collectors.

The following data illustrates the NFT market’s key metrics from 2019–2023:

Data sources: Nonfungible.com, NFT18.com, Art Basel & UBS Report 2023, 2024

Key takeaways from this table: the share of digital art, graphic design, and collectibles created by professional artists and subsequently sold as "NFT-art" is minimal, averaging 13% over five years since the market's inception. Fifty-two percent of NFT sales volume comes from the online gaming industry, where items such as swords, artifacts, and potions enhance virtual characters. Since 2021, however, many gamers also consider these images "art."

Let’s return to the end of 2020, the start of the NFT boom. To avoid an extensive historical review, we’ll focus on a few key moments from 2021–2022:

• Beeple and the Epochal Sale at Christie’s

In February 2021, Christie’s held the largest NFT sale to date: digital artist Beeple (real name Mike Winkelmann) sold a piece for $92 million. This sale cemented NFTs as a cultural and economic phenomenon, inspiring thousands of artists to follow Beeple's success. Christie’s earned its usual buyer’s premium, but most importantly, it registered hundreds of young participants, selling them “traditional” art for half a billion dollars by year’s end.

• Brands Enter the Game

From late 2021, major commercial players like Kering (Puma, Gucci, Balenciaga), LVMH (Louis Vuitton, Tiffany, TAG Heuer), Nike, Hermes, and Audemars Piguet joined the NFT space. Notably, leading contemporary collectors François Pinault and Bernard Arnault, heads of Kering and LVMH, respectively, endorsed NFT collections. These brands partnered with stars and influencers, effectively embedding NFT culture into the lives of youth previously unconnected to crypto culture.

• ArtTactic and Art Basel

British analytics company ArtTactic released the first NFT report in spring 2021, cautiously detailing facts and figures about the new market without endorsing it. Art Basel picked up the baton, incorporating an NFT section into its annual report with UBS. In Miami Beach, Art Basel even invited blockchain Tezos to participate with a gallery pavilion. However, traditional collectors were drawn to the “costly funny pictures,” leading galleries to pressure Art Basel to relocate the NFT pavilion to the second floor in 2022, which only partly succeeded in reducing traffic.

• Startups and Ecosystems

Major blockchains (Polkadot, Tezos, Solana) and crypto exchanges (Binance, Uniswap) created ecosystems to support NFT startups, drawing investment from giants like Microsoft and Samsung. By July 2022, Christie’s announced a venture fund to finance digital tech startups. In total, young NFT-focused companies attracted just under $4 billion over 2021–2022 — 80% of all art-tech investment since 1988! The most prominent investments included $300 million in the marketplace OpenSea and $450 million in Yuga Labs, creators of the Bored Apes Yacht Club NFT collection.

Everything seemed set for NFT’s triumphant rise. Then political events in 2022 led to economic uncertainty, exposing hidden issues within the crypto community...