The world’s first blockchain auction took place last year.
A 31.5% stake in Andy Warhol’s painting 14 Small Electric Chairs was tokenized and sold to bidders who could pay with bitcoin, ethereum, or a native cryptocurrency ART. Each token share was determined by a smart contract on Ethereum.
Is this fractional ownership system the future of artwork auctions?
75% of Auction Houses Are Looking Into Blockchain
According to one of The European Fine Art Fair Reports from 2017, called TEFAF Art Market Online Focus, 75% of auction houses are looking into offering some sort of blockchain technology within the next five years.
The tokenization of assets is a huge theme across the blockchain industry. And, alongside real estate, the art world is among the first to embrace the revolution.
But Why Blockchain and Artwork?
Let’s dig into some stats and think about it.
Issue #1. Even though art is considered a great investment, there’s no consistent data on value
The Mona Lisa was evaluated at $100 million back in 1962. More than 50 years later, in 2017, ERGO insurance specialists now estimate that figure at $750 million – $1 billion considering inflation and other factors.
But there are only a handful of masterpieces in the world. So, the overall return on investment is quite unpredictable. Even the data points from different market players are entirely inconsistent.
For example, a well-known art expert, Melanie Gerlis, who combined “all the research on the broad market points to an average compound return on investment-grade art” came up with 4% annual return.
When the researchers from Stanford Business School tried to do the math and analyze data from 1972 to 2010, they found out that the return was closer to 6.5%. And The Blouin Art Sales Index, popular amongst art dealers database, estimates a 10% annual return. For reference, the average yearly return from the S&P 500 was about 11.46% from 1988 to 2018.
Even experts not sure about the changing value in fine art. How are average folks suppose to deal with all that?
By recording auction and gallery sale prices on an immutable, transparent blockchain, we could theoretically bring some clarity to art values over time.
Issue #2. Investing in art is not easily available to the general public. Selling art is easier for dead geniuses.
Works by 52,105 artists appeared at fine art auctions in 2017 according to the Art Basel and UBS’s The Art Market | 2018 report. But only 1% of those names accounted for 64% of the sales (works priced and sold higher than $1 million per pop).
According to the same report, nearly all artworks up to $1 million declined in value. On the contrary, the market for works priced over $1 million increased. The number of items sold in that segment grew by 76% along with the 50% value increase.
Successfully investing in art is therefore limited to those who can afford million-dollar auction prices.
Apart from the price, think of the transaction fees. There’s no “fair” price for art. It’s just a matter of what are you agreeing to pay as a buyer plus fees (those are sometimes negotiable), that can reach up to 25% depending on the price of the piece. And don’t forget about the ongoing costs of purchasing such a valuable lot – insurance, video surveillance, top-notch security system, etc.
All that means that you’ve got to have a couple of millions of dollars to spare if you are really into purchasing some fine art. And it’s not clear when you’ll be able to sell your acquisition in case you urgently need your money back. Those investments are amongst the most illiquid.
Blockchain auctions, like Andy Warhol’s 14 Small Electric Chairs, could change this. By tokenizing a fractional share of expensive paintings, anyone can get into art investing, even with a small amount.
Issue #3. Fraud and lack of transparency
The art market is not as regulated as more traditional investments classes. There is more temptation to do things wrong. And even when you deal with the most authoritative galleries and auctioning houses and paying the highest fees, there’s still a risk of fraud.
Let’s remember Christie’s case. Christie’s has reportedly sold forgeries from La Horde by Ernst Max to Heinrich Campendonk’s Girl with a Swank. More than that, The Independent claims that at least 20% of the paintings held by world-class museums are fake.
But imagine, what if there was a database with the history of ownership and proof of the authenticity for all the pieces of art ever existed? Doesn’t it ring “blockchain” to you?
Who’s Leading the Artwork Blockchain Evolution?
The revolution is already happening. At the moment there are two main types of players in the field:
- Those solving infrastructural problems – e.g. recording and verifying artwork authenticity on a blockchain, creating a service solution those tokenizing artwork.
- Those democratizing fine art as an investment – e.g. companies selling fractional ownership of artwork via token sales or auction.
Here are some of the biggest players:
Blockchain App Factory is somewhat equivocal and mysterious. They provide an extraordinary number of services (due diligence, creating of a token, auditing, and legal services for assigning a value for the token).
ArtWallet is a “blockchain-based ecosystem” which aims to verify the authenticity of artwork by tracking its ownership, history, and provenance on a blockchain. Their whitelist is opening soon.
The much more open and clear Monegraph allows artists to register their works on the publicly verifiable Bitcoin blockchain. It provides users with a certification of authenticity for the tokens, representing pieces of art.
Blockchain Art Collective also aims to track and prove artwork authenticity. It tags artwork with a tamper-evident, NFC-enabled Certificate of Authenticity, complete with timestamps, to a blockchain. (Blockchain Art Starter Kit starting at $20).
Verisart was founded by Robert Norton, the former CEO of Saatchi Art & Sedition Art. It strives to build evidentiary infrastructure for artworks and collectibles that are verifiable by anyone based on a public blockchain.
My personal favorite from this list is Artory. Founded in 2016 by Nanne Dekking, the former chairman of Sotheby’s, the company tracks provenance of fine artwork and collectibles. Due to his background, Dekking has some aces up his sleeves, so in November Artory partnered with Christie’s New York to sell $318 million Barney A. Ebsworth collection and keep the transactions data recorded on its blockchain.
Maecenas is the company that powered the sale of 31.5% ownership of Andy Warhol’s piece last summer. Maecenas is currently working to organize a second auction, this time featuring Picasso. The auction is preliminarily scheduled to be held during the 1st quarter of 2019.
Masterworks was founded by Scott Lynn, who has been a passionate art collector for more than 15 years and accumulated a pretty impressive selection of Abstract Expressionism including Mark Rothko, Willem de Kooning, and Barnett Newman. And now Masterworks offers a clear framework for its users along with well-researched analytical data about the investment in fine arts. The team has acquired Warhol’s “1 Colored Marilyn (Reversal Series),” and at the moment of writing 97% of it has been reserved by retail investors. A minimum investment of $1,000 will give anyone 50 shares of an artwork. Payment can be made via bank transfer (for the citizens of the US and Canada) or via credit card (5% fees applied). The next on the Masterwork’s selling list is Claude Monet.
TAT was issued by Swarm, a non-profit provider of open infrastructure for digital securities. The project’s team already owns a pre-funded art collection of $4.1 million value and currently is in the process of its own token sale that is due to end at the middle of January 2019. Each token sold represents partial ownership of a Post War & Contemporary Art collection. It is stored in a Swiss bonded warehouse and managed by FineArtDigital AG.
R.A.R.E is a company selling digital artwork. Using blockchain technology, each piece of digital artwork can be given a unique identity or a limited run. It brings scarcity and value to digital artwork that was never possible without blockchain.
Snark is selling “atoms,” which represent fractional ownership of Eve Sussman’s acclaimed video 89 seconds at Alcazár.
As mentioned before at BlockExplorer, tokenization of real assets is something I am very excited about. For now, the only thing that’s left to do is to relax and observe how all of those startups will bring the technologies of the distributed ledger to a new level of adoption at least in the art space.
How long will it take to allow anyone in the world to purchase a share of an authentic Rembrandt or Van Gogh in a matter of a couple of clicks from a mobile device? Go ahead and share your predictions in the comment section below.