This article will explain in detail how the disruptive blockchain technology can merge finance, tech, and law to build the perfect solution for the gradually emerging “digital renaissance.”
In the world of art, single pieces are at times sold for millions of dollars, and one would expect that a universally applicable technological, legal, and financial standard that supports the processes in the background of such a transaction has already been implemented.
The infamous Mona Lisa alone inherits an estimated worth of over $2.6 billion, even though not even available for purchase. Nevertheless, paintings offered on the market, like Da Vinci’s Salvatore Mundi, require outdated processes to sell them.
This particular piece was sold for more than $450 million to the Saudi Arabian Crown Prince Mohammed bin Salman. This leads us to another major issue within the industry — centralization.
Only high net worth individuals are able to stem the extraordinary price tags for fine art. Where is the cultural value for society here? Originally, the core intention for the creation. Blockchain and the accompanied tokenization enabled by pioneers aim to cope with these and more issues in the fraud-prone industry.
Introduction to the art industry
Looking at the history of art, one would definitely agree on the fact that its diverse products have been around a lot longer than financial products like stocks or bonds. Ancient pieces like the Bhimbetka and Daraki-Chattan petroglyphs date back to around 700,000 BCE. Just recently, the oldest painting (44,000 years old) was sold for millions of dollars.
Throughout the world’s history and economic volatility, one steady aspect has always prevailed: sold objects made by humans in visual form for aesthetic purposes, commonly known as art.
However, it is quite challenging to actually determine the overall market capitalization, simply because of the intransparent regional fragmentation and the fact that just about anybody can produce a piece of art. Some better, some worse, but that always depends on the perspective as even bananas on walls at Art Basel were sold for hundreds of thousands of dollars.
Therefore one cannot really make a final statement about the industry’s value. It fluctuates somewhere between $70 billion and $800 billion depending on what you clarify as art.
There is a diverse spectrum of applied arts and fine arts, which range from traditional sculptures and paintings to film, photography, graphic designs, performance — though it will be quite hard to tokenize this — animation, and even video games. The average sales of art by sector worldwide from 2017 to 2019 are illustrated in Figure 1 below.
The history of mankind is depicted as a chronology through masterpieces. Each period of civilization had its own specific trends. While it used to be a story of “high culture,” more recent developments change this paradigm toward a far greater exposure to the masses.
Figure 1: Estimated value growth of the online art market worldwide
Problems of the contemporary art industry
First of all, this very illiquid industry can be described as heavily localized. Not only from the perspective of artists following their respective cultural traditions, but also in terms of access to certain objects solely sold in elite circles and for investment purposes.
Additionally, acquiring art requires a great amount of paperwork that has to be signed and exchanged, as well as the physical storage and transportation. Shipping a regular painting from Denver to New York, for example, will cost you approximately $2,500.
Tremendous storage and insurance costs are further aspects, as to why the industry is lacking behind from becoming a true asset class. Let alone being economically suitable for the current and long-lasting fourth stage of the industrial revolution.
Sure, art galleries and auctions urgently aim to significantly reduce the pain points by implementing enhancing structures. But especially the maintenance and custody of art is something even the most ambitious minds within the industry can only limit to a certain extent.
Theft is another constant threat to buyers and aficionados. In 1990, for instance, artwork worth more than $500 million were stolen at the Isabella Stewart Gardner Museum in Boston, often referred to as the largest-value theft ever.
In line with the degree of criminal activity, forgery of artwork is omnipresent: in 2011 for example, a painting believed to be from the 17th century was sold through an auction at renowned Sotheby’s for about $11 million. Only in 2016, it was discovered that the painting had been synthetically modified, thus morphing it into a forged piece instead of a valuable historical representation.
As mentioned, mostly high net worth individuals dominate this special market. The relatively rare funds market is strongly dominated by Chinese institutions. Therefore broad access to retail investors is often denied and barely ever granted. Moreover, physical meetings are usually needed to conduct business.
Especially now during the COVID-19 pandemic, this aspect is of particular importance, due to the substantial dependence of trading value on the physical presence at galleries or auctions. A general lack of standardization in determining prices of certain objects and the process of transactions are causing significant liquidity issues for the industry.
Last but not least, a lack of transparency is caused by the chronically present gray areas and the stunningly large black market used to trade artwork below the radar of authorities and rule-abiding collectors.
Ultimately, you can say the market is definitely not yet on par with the all-encompassing digital economy we are gradually steering into. But which technology is best suited for the needs of this industry? The answer is simple — blockchain technology. And more precisely, tokenization.
Blockchain and art
The disruptive technology of blockchain can provide major benefits to the beforehand stated issues. A pioneer in this space is professor Yang Xiang, Dean of the Digital Research & Innovation Capability Platform, Swinburne University of Technology, Australia.
He developed a product that utilizes the cryptography approach of bitcoin (BTC) to help prove the authenticity of art objects. Further, a blockchain-based auction house launched by technologist Jason Rosenstein was backed with almost $6 million in funding.
In addition to this, all around the globe dedicated blockchain conferences like 2018’s “Ethereal Summit — Blockchain and Ethereum Conference” shift their focus to merging these two different industries, by, for instance, holding a live auction for the tokenization of paintings. Generally, a significant increase in news releases regarding the combination of these topics can be experienced.
The vibrant conversation around blockchain and tokenization in this space is heating up not without reason. The following part will explain the benefits from the perspective of each market player: artists can take advantage of verifying art thanks to the timestamping capability of blockchain.
They also benefit from the inclusion of historical art ownership and sales data by applying blockchain technology to their business. Online auction houses enabled by authentication through a blockchain will lead to higher exposure to the marketplace for artists and to receiving the appropriate price for their product.
Pricing models can now be standardized in an efficient way
Overall, the artwork is saved and tokenized using not only blockchain but also the InterPlanetary File System (IPFS), in order to reaffirm the attribution of the artist who created the piece and to ensure ownership.
From a collector’s point of view, blockchain features, such as transparency and traceability, will significantly reduce or even fully eliminate fraud, a major issue within the industry. Investors especially benefit from instant transfers of ownership, when art is tokenized and tokens can be traded 24/7.
These trades can take place without border limitations and at the bare minimum of costs in this international market. They also benefit from the fact that now they do not have to worry about aspects such as storage and theft anymore, as a collective approach through fragmented ownership caused by tokenization eases risks and limits costs.
Last but not least, when looking at the auctioneer’s perspective, it becomes quite evident that they make no exception in terms of perks with blockchain adoption. Data regarding the large possession of artwork as well as historical records have to be maintained. The security of this data and the comprehensive tracking of the transportation of precious and valuable pieces have to be guaranteed.
Here, blockchain ledgers efficiently facilitate the process. Smart contracts on the Ethereum (ETH) platform can for instance handle delivery and automated payments like no other system before.