Headline: How are NFTs and AI being used in Fine Art?

Body: We’ve spoken before about NFTs.   As you might remember, some examples of these include user-designed weapons and armor for use in a game environment, and others include dressed up apes or moments in sports history on video.  But, there is one large area that I forgot to mention because it didn’t occur to me that “real” artists would do this; The fine arts market for NFTs is large and thriving.   I thought a shallow dive into this already deep pool was in order.  The questions that occurred to me are many.    Can people really create money for themselves doing this?  What protections are there for the artists?  There are several others too, so, let’s sketch out a primer, together.

Why might an artist want to create fine art NFTs?

Well, the first reason is easy; money.  These sketches and pictures can garner quite a hefty price tag, and this can fund an artist’s journey into other avenues of art.   Perhaps they are happy creating NFTs and they can go on to create more.    Remember; The pictures of apes are pretty rudimentary and sell for hundreds of thousands of dollars.   So  much to say that this is not monkey business.   The other financial arrangement that is interesting is that each time an NFT is sold, (even on a secondary market) the original artist gets at least a small amount of money in the form of royalties.  This is an important distinction when compared to the selling of other forms of art.  In a related vein, the NFT allows artists to sell their work directly to an excited buyer, cutting out the middleman of gallery or auction house.    The lack of commissions makes things more approachable for the artist, and the sale is consummated in minutes, not weeks.

The other reason is that people might get exposure that they might otherwise not receive.  Just to take one example.    Let’s say that an artist developed a really cool design, he or she might  consign it to the owner of a piece of digital real estate in a metaverse like Decentraland.  People “walk” by the  “windows”  where their art resides, and the people might then go to the artist’s website and order other works for sale there.  But for the NFT, this sale would not have happened, so exposure is very important.  (In point of fact, the artist’s website I cited down below explains that NFTs can be seen as yet another potential revenue stream for the artist.)  In a related manner, the NFT minting process can help foster a more direct and bi-directional conversation between artist and audience.

Back to basics: what IS an NFT?

An NFT is essentially a receipt on the blockchain, proving that a particular person owns or has licensed a work of intellectual property.  So, what trips many people up is the unfamiliar “non-fungible.”   Think of oil.   Billy, Bob & Joe (all from Texas, and not one person) each have some oil, and store it all in one tank.  Is Billy’s oil any different from Joe’s oil?   No, they are identical, they differ only in regard to what proportion belongs to who.  Thus, the oil is fungible because your Honda or Cadillac will run identically  with any oil that you pull from this containment.  Now, let’s say they each held paintings in the same secured warehouse.   Are the paintings identical and interchangeable for one another?   No, each one is unique and has qualities that are unique, thus these are fungible.  Just a weird word for a very understandable concept.

OK, so down to business, where can I do business?

There is one very important distinction to draw between  Open platforms and curated platforms.  Open platforms ( such as Opensea or Rarible) are permissionless, and allow anybody to mint an NFT there.  So, anybody can mint an NFT, and that is good.   But, anybody can mint an NFT, and sometimes copied works are used by nefarious actors.   Buyer beware.  The other platform is the curated one.  To get into the curated platform, a certain artist must be invited.  (Examples include SuperRare and NiftyGateway.)  With these sites and ones like them, the potential buyer can feel slightly more secure of their rights in an NFT after purchase.  (Think of other visual art.  Somebody might put up their art at Starbuck’s and another artist walks by and sees their work and is impressed.  They can then find the artist and offer them a spot in an upcoming show, somewhere  in  the real world.)  This is essentially the same process for a curated platform.

It should also be noted, that some of these platforms offer art that is both Physical and digital, or “Phygital.”   In this type of art, an NFT is purchased and may include a map or set of directions to follow.  When they do follow these  directions, they also get a physical work of art that may or may not be subject-related.  It is important to note that the link between the NFT and physical item weakens quickly in this type of art.  There is even a Professional Artist’s Accelerator program, to help artists understand the NFT market quickly, and soon begin to mint their own works.

The Verdict

The usefulness of employing blockchain in sales of art is manifold and I think  helps to solve what might seem to be mutually exclusive problems.  First, by  utilizing a blockchain, forgeries will be much more difficult to pass off as originals.   Through the blockchain, the truth of digital scarcity can be observed directly.  Using blockchain also serves to democratize the process of selling art.  The price walls are coming down, and people who were on the fence to become artists are, and the works that unfold will be quite diverse.   This seems very good to me.

The only reason I would not own an NFT is that it is that the law has not caught up with the technology yet.   First, when somebody makes payment for an NFT, are they buying the concept, outright?   Or, are they leasing the rights to the work of art for a definite term, as an equivalent to licensing?   Do they now have the right to use the image to sell as merchandise?   In preparing for this discussion, I have read a variety of sources on this topic, and the only consistency is inconsistency.    So, tread lightly, friends.  




Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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