Why would anyone pay good money for a picture of an ape or a lion? In this episode of Understanding Crypto, James Burtt and Paul Abercrombie make sense of generative art. They break down NFTs, why there’s so much hype around them, and how they can be a viable business decision.

Two Main Markets

Two types of people buy NFTs. The smaller “real-world” market are people who belong to a community such as the one James and Paul lead. These community members buy NFTs for the utility attached to them. The wider market consists of people who buy NFTs because of generative art. “There’s a whole raft of people that are out there that will invest because it’s a new generative art project,” Paul says. They take a speculative approach to buying NFTs: they buy projects on OpenSea that interest them, betting that the value would increase and they would profit on resale. Paul and James acknowledge that they would be missing out on a whole market if they ignore this large segment of the NFT market when they launch their own NFT project. [Listen from 2:25]

Layers, Traits and Rarity

What gives generative art NFTs its value? James points out that many of these projects are making huge sums of money. “There's nothing backing it or underpinning the value other than the piece of art,” he says. Rarity is built into generative art projects through layers and traits. “So you can't argue that to some extent if the project’s right and the hype is created around the project and you know it's a notable project in the right way, that the rarity is going to add to the value of certain NFTs,” Paul comments. He explains how layers and traits work together in generative art. A graphic designer would draw the character - most commonly an animal - as a layer, and the background as a separate layer. Traits such as skin color, clothes and accessories would be built on top and randomly overlaid onto the character and background.  The smart contract generates the art based on a rarity table. “Now based on a rarity table, which is a calculation which is how many traits you have and how many NFTs or pieces of art you want at the other end, that will determine how many traits you need to do. And the more traits that you create, the more rare that each individual NFT becomes,” Paul explains. Each NFT has metadata attached to it, and prospective buyers can look up the rarity score on OpenSea or Rarible.com. The rarity is trackable and tradeable as it’s recorded on the blockchain. “There's a whole group of people that are just trading NFTs based on that information, and then using it like old school collector cards,” Paul remarks. [Listen from 5:47]

Real-World Use Case

While Paul and James are building an NFT project for a specific audience with a particular set of utility, their strategy is to make the art interesting and beautiful to attract the “digital art punters”. When people buy and display the NFTs as their profile pictures, “that just adds to the community feel and the community vibe; it gives everybody a sense of ownership,” Paul says. It all adds up to more value for everyone, he points out. He describes the process of creating their NFT project, from graphic design to minting. James remarks, “You've got a real-world use case for massive value and utility within the NFT.” They are creating a mine farm, and the NFT is an easy way to give their community a stake in the project. “So I've got the community of people that we want to lead into the world of crypto,” Paul says, “we've got a basement full of space - that because we know about crypto mining and proof of work, proof of stake and can see the value that that generates - the two worlds can get put together.” Buying an NFT allows anyone to “be part of the community about learning all things crypto, and benefit from the crypto assets that are generated by the mining farm or the crypto farm that is set up with the proceeds of the NFT sale,” James adds.  [Listen from 14:51]

Built to Last

“What the NFT does,” Paul says, “it just unifies a community… [Community members] all have a common interest and common cause united around that particular NFT.” People would want to stay and grow with the community as they’re being rewarded in crypto assets generated by the mining farm. “That underpins the value of the community and provides longevity of the community,” he continues. “There's a real business with 200,000 square foot of real estate with 53 tenants with close to just high six-figure income turnover a year in terms of rental income from the property company that's here. So that crypto farm is not going to go anywhere - it's not disappearing, it’s here for the next 25 years if the equipment lasts - so that community is going to be underpinned by that, which means the community is going to survive and stay there and thrive.” [Listen from 26:51]

Part 2

Paul and James debate how rarity is calculated in generative art projects and promise listeners that they’ll come back and explain in a follow-up episode. [Listen from 30:16]

Key Takeaways

• Many people buy NFTs just for the generative art.
• You can trade NFTs just like you would baseball cards.
• Could buying an NFT that’s cool art that has utility attached as well, be a win-win for you? 

Resources

James Burtt on Twitter | LinkedIn | Instagram | Clubhouse

Paul Abercrombie on Website | Twitter | LinkedIn | Instagram