Articles

So what is blockchain?

Introduction

It is clear that blockchain will affect various areas of today’s economy, not only those based on cryptocurrencies. Blockchain will take part in redefining the art world in a multidimensional manner- from the popularization of digital artworks and the registry of digital certificates of authenticity to the democratization of fine art investment. While it will directly affect artists, collectors, and dealers, introduction of blockchain to the art world presents itself as a disruptive technology that can lead to a revolution in the market.   

So what is blockchain? Blockchain is essentially a system of memory; a transferred chain of information which elegantly codifies all previous transactions into “blocks”. This database technology pushes the boundaries of our financial system, and is trickling gradually into a whole suite of other applications, most notably, into art, a traditional industry that seems all but overlooked by innovation. Between the time that an artwork changes hands from its commissioner, to aristocrat, then innumerous times between nobles, princes, dukes and kings, sometimes things go awry. Records are destroyed or distorted over time and collectors habitually lose track of everything from documents to receipts. This has meant that come auction time, questions of authenticity and attribution often arise.  

In today’s art world, blockchain serves to verify. Soon, gone will be the days that each art transaction requires a mob of experts. At the source, when the piece is first sold, a collection of experts verify and certify the work and log the identity of the seller. This information is then stored on the blockchain to be viewed by each consecutive buyer. Hereby, we can not only track provenance, but also effectively democratize the process of buyer due diligence. Forget about endless back-and-fourths with Christie’s, just send over your digitally vetted certificates and sell! This way, one day you and I may be able to step into the world of fine art, sans the need for hopeless intermediaries, and endless customs squabbles. Then, when you yourself sell your artwork, it changes hands and the new owner’s identity is simply added to the chain, where it is stored forever.

Authentication litigation: Outlining the problem

In 2014, the Fine Arts Expert Institute (FAEI) in Geneva stated that around 50% of artworks they examined for authenticity were forged or misattributed. Bearing in mind that verification requests are usually lodged in instances of reasonable suspicion, we should not treat this number as representative of all artworks being sold around the world. Nevertheless, it prompts us to question just how many dubious artworks might be circulating between collectors, who often spend fortunes on their acquisition. It is widely accepted that authentication of artworks from deceased artists is a responsibility of the foundations that bring together specialists on the artist, often close family, who aim to promote and preserve the artist’s heritage. However, since 2006 the art market has seen the voluntary closure of numerous authentication boards. This includes those for works by Alexander Calder, Roy Lichtenstein, and Jean-Michel Basquiat. Why? They didn’t want to devote the time and the money to court battles initiated by collectors disagreeing with the board’s judgements. Authentication processes incite many disputes since a failure to attribute the real author to a given work results in the decimation of its value. Many of these cases have proved the inability of the legal system to provide a definitive determination of authenticity. A good example of a case where a court ruling had no effect on the market value of an artwork, was the federal case Greenberg Gallery, Inc. v. Bauman. Relying on the opinion of Linda Silverman, a US District Court found that the mobile Rio Nero was an authentic piece by Alexander Calder. Yet, when Klaus Perls, one of the leading authorities on Calder, declared the work to be a copy, the piece became unsellable.  Court trials, such as the one mentioned, showed that a court order may not have any effect on the value of an artwork if the marketplace does not agree with the court decision. As a result, many authenticators are effectively deterred from doing their job, as they fear being held privately liable for their opinions

With no authority to determine the authenticity of an artwork, subtle and sometimes changing factors help people assess what is considered authentic. Often, the authenticity is recognized based on provenance records, usually stored by auction houses and galleries. However, the documents, inaccessible to the public and unsecured, can be easily forged and may contain mistakes. Does this mean that the buyer simply needs to trust their dealer?

Traceability of provenance

Blockchain technology is considered to be particularly useful in overcoming issues pertaining to the lack of authority for artworks’ authentication as well as in preventing the forgery of provenance records. Thanks to the immutable database, the secured chain of ownership of the registered artwork is fully transparent and updated every time a transaction occurs. Therefore, the buyer can trace the artwork back to its origin which provides valid grounds for certainty that it can be attributed to the signed artist.  

The first company to apply blockchain technology to the physical art and collectibles market was “Verisart”, a start-up founded in 2015 founded by Robert Norton (the current CEO), Bradford Schlei, and Dan Riley. The company uses the world’s most popular blockchain, the Bitcoin blockchain, to provide users with a trusted timeline of registered artwork transactions. Through this platform, contemporary artists, dealers, and collectors can easily generate permanent certificates of authenticity, which are signed by the artists, encrypted and permanently stored on the blockchain. The physical objects are linked with the digital certificate by QR codes, or detailed photographic documentation and description. All subsequent buyers of a certified work can access its chain of ownership, which, resistant to any changes and forgeries, constitutes concrete proof of origin. Just imagine how many future disputes about the authenticity of artworks could be avoided if only all artists had registered to Verisart….

Decentralization of the fine arts market

When provenance and property titles are missing from a work’s documentation, it can often be a deal-breaker for sale of an artwork. However, with the blockchain entering the scene this issue might end quicker than anyone could expect… With the blockchain secured data resolving concerns about authenticity, the sale process becomes much quicker and much simpler. The pioneer auction house using blockchain to increase the trust of their clients was Christie’s, which during an auction in 2018 worked with Artory (another art registry service) to produce digital certificates for the collection of Barney A. Ebsworth worth over $300 million. Even though auction houses can benefit from the technology by increasing their transparency and trust,  for them blockchain is likely to be disruptive. In 2020 the secondary art market was almost 80% controlled by Christie’s and Sotheby’s. So, with the introduction of democratising technologies, these houses may see their relevance decline. Buyers will soon be able to rely on a transparent database instead of the brand, and avoid paying high commission fees that for auction houses are usually 25% of the price. The shift to new online sales channels seems to be very attractive for both buyers and sellers.

Lowering the entry barriers to Fine Arts Investment

Even though in 2018 the art market was valued at $64.1 billion, it is notoriously illiquid due to the complexities of the trading process. Dealers, auction houses, and galleries usually incur in complex processes to complete a transaction which makes the transaction costs in the art market substantially higher than in other financial markets.

However, it seems that art-backed tokens have the potential to inject new liquidity into the global art market. Divisible asset-backed tokens bring the possibility of partial ownership of real-world assets that would otherwise be indivisible — such as artworks. The fractional ownership implies that fractal investment in fine arts for the first time could be accessible to small investors, as the tokenization significantly lowers the entry threshold to this traditionally very exclusive market.

The leading player in that area is undoubtedly Maecenas, which, since its launch in 2018, pursues its goal to democratize access to fine art. This blockchain-based platform allows anyone to buy, sell, and trade part ownership of certified masterpieces. Through Maecenas, investors can purchase a share of ownership of a blue-chip artwork valued at least at $1 million for a minimum investment of $1000. The platform is successfully redefining the meaning of investment in fine art.

Besides applications in authentication, blockchain technology is pushing into the art market in other meaningful ways. “Crypto-art” allows collectors to buy, trade and store limited runs of digital artworks. The blockchain allows collectors to easily transfer ownership of the digital property, and allows buyers to vet authenticity. Crypto-art is thus essentially unforgeable, and hugely accessible.

These artworks rely on NFTs, or “non-fungible tokens”, a cryptic name given to digital property which is both scarce, and verifiable. Their applications span not only the crypto-art world, but also the crypto-collectibles (crypto-kitties anyone?), and crypto-gaming markets. These markets are served through art & collectibles exchanges such as opensea.io, rarable.com and “BAE” (blockchain art exchange).

Much like crypto-currencies, these markets are, by many, considered to be in their infancy. Not every collector is looking for a modern “Monet-on-a-flashdrive”, or for a dancing cat built on the Ethereum token network. They do however, represent a rapidly accelerating change which the conventional gallery has been unable to accommodate. They serve a market of young consumers, and they do so online. Certainly food for thought.

 

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