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What's an NFT? Blockchain technology poised to move beyond art world

TORONTO — The recent auction of an artwork has created a stir in the art and tech worlds, and not just because of the US$69.4-million final bid it fetched.

TORONTO — The recent auction of an artwork has created a stir in the art and tech worlds, and not just because of the US$69.4-million final bid it fetched.  

“Everydays: The First 5,000 Days,” a digital collage by artist Beeple was the first non-fungible token (NFT) item to be auctioned at Christie’s. NFTs — which are essentially a tool that uses blockchain technology to provide proof of ownership of a digital asset such as an image, audio clip or a tweet — have gained traction in the art world due to the benefits they offer to creators, such as authenticity guarantees and prompt payment. However, potential applications for NFTs go far beyond the creative class. 

While NFTs operate on the same blockchain ledger technology as cryptocurrencies such as Bitcoin, there are major differences between them. While one bitcoin is interchangeable with another (or fungible), each NFT represents a unique asset.

One aspect that makes NFTs so valuable is the sign-off from the artists themselves, says Vandana Taxali, co-founder and chief executive of startup Artcryption in Toronto. 

An NFT allows an artist to create an official registry for the “first” version of a work they release, Taxali says. In theory, no matter how many times a song is streamed online, the owner of the song’s NFT has the original, digital authentication. Like any collectible, the story is key: A dress worn by a celebrity in a movie can be auctioned off for thousands, while the same dress off the rack cannot. Similarly, artists can also register their earlier sketches or notes that give the backstory of their art as NFTs.

Taxali gives the example of her brother, who is an artist. His original work is likely to be the most expensive, because only one exists. Then, he might do a limited edition of 100 prints, but the original work remains the most valuable, just like a poster of Vincent van Gogh’s Starry Night is incomparable to the original canvas.

Canadian artists have not missed out on the excitement. Musician Grimes sold NFT projects for US$6 million earlier this year. Rock band Arkells tweeted encouragement to a photographer to turn an image of their performance into an NFT.

Taxali says the blockchain system that underlies NFTs can also be used to create “smart” contracts that automatically pay royalties to artists. 

NFTs are part of a blockchain ledger that cannot be altered, says Taxali, who is a lawyer by training. That means that if NFTs are adopted widely as a way to register ownership rights, the blockchain ledger could fill in holes that currently exist in government intellectual property registries, which can be expensive and difficult to navigate, she says.

NFTs also have potential uses beyond art, but many are still experimental, says Chetan Phull, a lawyer at Deloitte Legal Canada LLP in the national data privacy and cybersecurity group. However, he says there are also some significant hurdles to their widespread adoption. 

While the blockchain leger itself is designed to be immutable, Phull says the systems that allow access to NFTs must also have good cybersecurity. There are also questions about how laws will treat NFTs when it comes to taxes, securities rules and even concepts like "squatters' rights," he says.

Toronto-based digital artist Krista Kim recently released an NFT light sculpture artwork called “Mars House”, which includes digital files for a “house” designed by Kim, meant to be viewed as an augmented reality experience with music. An NFT was a fitting choice to auction the work, says Kim, because both augmented reality and NFTs reflect the changing ideas around assets in a digital world.

The NFT process is also a practical one for Kim to make a living as an artist, after being fleeced by middlemen and galleries in years past. Kim says the NFT auction was "simple" and resulted in immediate payment that will kick in automatically each time “Mars House” is bought or sold in the future.

“The intermediaries in the market would take 50 per cent of a sale of an artist's work. Therefore there's very little capital left to actually give back to society and for the community to benefit from the artists’ creative work,” says Kim. 

“In this case, the artist is given 90 per cent of the proceeds. The collector is also directly connected to the artists. So, you can actually become collaborators.”

This report by The Canadian Press was first published March 25, 2021.

— With a file from The Associated Press

Anita Balakrishnan, The Canadian Press