NFTs and CryptoArt: Blockchain Technology for the new Art market

In May, the famous auction house Christie’s, during its 21st Century Evening Sale, will auction a lot of 9 digital images, 24 × 24 pixels, depicting as many CryptoPunks created by the collective Larva Labs in 2005 through generative software.

The estimated price is expected between 7 and 8 million dollars; the transaction will be guaranteed by a certificate of originality and ownership in NFT format (Non Fungible Token) and supported by Blockchain technology, and for the occasion Christie’s will accept payments in cryptocurrency as well as in dollars.

UPDATE OF 10.5.2021: THE LOT WAS SOLD FOR 17 MILLION DOLLARS!

According to Noah Davis, specialist in Post-War and Contemporary Art at Christie’s New York office, this is a historic event: “With this special lot in the 21st Century Evening Sale, the advent of CryptoArt is really and indisputably among us. Welcome to the future!”.

But what are NFTs and how does Blockchain technology make it possible to make digital artworks unique?

What are the problems connected with the reproducibility of digital works, and why does the art market suddenly seem to be in turmoil over these issues?

Why are we too about to launch an important initiative in this field?

The issue is rather complex and understanding what now seems to be an irreversible process in the art market certainly requires an evolution of our mentality.

To understand it, let’s start from the technology and begin with the Blockchain. What is a blockchain and what is its relationship with payment transactions?

Blockchain technology (literally a chain of blocks) was defined with the first cryptocurrency project: BitCoin.

The goal of BitCoin’s creator was to build an electronic currency that would not be controlled by a single central entity, as is the case with conventional currencies.

In conventional currencies such as the EURO, the conventional value is linked to certificates issued and printed by a Central Bank, which decides the quantities present on the market — that is, in circulation — establishes their form (banknotes of different denominations) and the rules for withdrawal.

Even when transactions take place electronically, the value exchanged refers to an equivalent quantity of currency that in some way will be printed on banknotes deposited physically or virtually with operators authorised by the Central Bank.

The currency has its value because all of us, conventionally, agree that such value must be attributed to the banknotes, and we implicitly grant trust to the central bank and its rules.

Even in the case of cryptocurrencies such as BitCoin, their value is the result of a convention — and therefore an agreement between all the actors involved in a monetary transaction — but unlike conventional currencies, there is no Central Entity that governs the currency. The authenticity of a transaction therefore cannot be guaranteed by some digital or physical certificate issued and authenticated by a body considered authoritative.

How is it possible to guarantee that an exchange of BitCoin (or another cryptocurrency) is authentic? If there are no banknotes and authorised parties for their deposit, how can we be sure that the payer actually had the amount paid? How do I distinguish an authentic BitCoin from any digital information of the same format?

This is where the Blockchain comes into play. A blockchain is a publicly accessible digital file, made up of a chain of records, called blocks, each of which represents a transaction. The blocks of the chain are linked using advanced cryptography techniques. The position of each block in the chain is significant, as are the cryptographic keys that authenticate its content and position.

Where is this file stored? Who manages it?

The system foresees that a large multitude of users participate in the management of the blockchain. Anyone can make their computer available — all that is needed is to be connected to the Internet and have a specific software installed.

The file is therefore present in multiple copies distributed on a large number of computers. Each time a system carries out a new transaction, it publicly sends a message to all the computers connected and active on the blockchain. A complicated and sophisticated set of protocols decides which systems are called upon to process the transaction and to add the new block to the chain after generating the cryptographic codes. Within a short time, all the computers participating in the management of the blockchain will synchronise their local copies of the file containing the chain.

This is certainly complex, but the technology works, and it is all the more secure the more nodes participate in the system. The Blockchain is in effect a large shared public ledger. The reliability of the ledger is extremely high, since to falsify information one would have to break complex cryptography on the majority of the computers participating in the management — something practically impossible.

In the case of BitCoin, its blockchain has been designed to represent only exchanges of money. A block can represent the issue of a new BitCoin (the issuance process is managed by a specific pseudo-random algorithm that rewards the computers that make their resources available to the system; in jargon this process is called mining), or a transaction transferring a certain quantity of BitCoin from one electronic account to another (accounts are anonymous and called wallets).

Money is a fungible good. By this term, in Economics, one indicates a good that is characterised only by its value but does not have a uniqueness of its own: if Alice lends 10 euros to Bob using a specific 10-euro banknote, it is not necessary for Bob to return exactly the same banknote — Bob can return any combination of coins or banknotes whose total value equals 10 Euros. What counts is the value, not the object used to represent it.

By contrast, a sale contract or a certificate of authenticity issued by an artist for his work are non-fungible goods, as they have their own specific value and cannot be replaced by other files or different documents.

BitCoin’s blockchain can only manage blocks relating to fungible information (tokens).

Inspired by the BitCoin project, other more elaborate blockchain standards have been developed, capable of also managing transactions that are identifiable by non-fungible digital certificates (tokens).

The Ethereum blockchain, for example, is designed to also manage so-called smart contracts, which are similar to notarial recordings of contracts. The blocks of the Ethereum blockchain can therefore contain non-fungible tokens (NFTs).

Through NFTs it is therefore possible to manage the recording of sale contracts or certifications of authenticity with the same security characteristics as economic transactions carried out with cryptocurrencies such as BitCoin or Eth, which is the currency used on the Ethereum blockchain. In this case, therefore, in addition to banks, parties such as Notaries or Land Registries are also disintermediated.

If we have understood this passage, we can understand how Christie’s is able to handle the sale of a digital file containing a bitmap representing a CryptoPunk.

The steps are as follows:

• The author of the digital work generates a Non-Fungible Token containing information that uniquely refers to the image file — for example using a digest algorithm. This Token represents the certificate that attests ownership of the work. The Token is inserted into the Blockchain (for example Ethereum) and from this moment it is unique and perfectly recognisable and verifiable by all. The Token belongs to its creator — that is, to the Artist’s wallet.
• The Auction House holds the sale and the buyer makes the payment (with an ordinary transaction in dollars or with cryptocurrency).
• The transaction transferring the Non-Fungible Token from the Artist’s wallet to the Buyer’s is generated. From this moment anyone can verify that the Token attesting ownership is associated with the Buyer’s wallet.
• Anyone can duplicate, print, view the Artist’s file — the system is not meant to prevent copying. Anyone can continue to have a copy of the file, but only the Buyer will be able to certify that they are the Owner.

Does all this seem absurd to you?

Are you wondering why you should pay 7 million dollars to have the “ownership” of an image that anyone can download to their PC?

If you can’t find a sensible answer, it’s only because you are probably boomers, or you think like boomers.

Let us ask you a question.

Why do collectors pay millions of dollars to own a Van Gogh painting that is in a museum and will remain in the museum, visible to all?

Welcome to the future!

In the meantime, we dedicated an episode of our Friday Splash to the topic covered in this article, with exceptional guests: Fabio Giampietro, Italian artist born in 1974 and one of the pioneers of digital art on the blockchain; Fabiola Iraci Gambazza of the E-Lex firm, in the fields of data protection and intellectual property; Stefano Monti, cultural economist, entrepreneur and publisher (Monti & Taft).