Tokenization in Art

Art has long been one of the most dynamic and compelling of markets for many both a personal passion or a lucrative field of investment. However, it is also a very challenging market to enter. With the best pieces of artworks often demanding astronomically high prices and access to quality opportunities in the high end can be difficult. It is not easy to gain an overview of what is available in the global markets and be sure of the provenance or value of a piece or to guard against counterfeit and fraud. 

According to the latest edition of the Art Basel and UBS Global Art Market report, in 2019, global art sales eased 5% year-on-year to an estimated $64.1 billion – while the volume of transactions hit a decade high of 40.5 million. However, in 2020 with the impact of COVID-19 on the Art Market Sales have fallen by at least a third across the industry. In the first six months of 2020, because of the pandemic, reported cancellation of art fairs saw a sharp decline in sales of galleries from 46% to 16%. 93% of galleries were forced to close their premises for an average period of 10 weeks. With many travel restrictions remaining in place, countries still battling waves of coronavirus, the road to recovery for businesses is still surely a long journey.

But, dealers need to sell art and living artists in particular need them to do so too. Therefore, we can see that most of the fair organizers and auction houses seemed to adapt more readily to virtual business now. Hence, with the introduction of art tokenization, everything could be a change.

The process of tokenization involves the fragmentation of the asset property in thousands of segments called token. For example, by converting a monolithic painting into thousands of digital tokens, the company managed to fragment the ownership of the artwork using blockchain technology. The value of the artwork can fluctuate depending on the market movement.

Given that blockchain is an immutable and transparent technology, its features and other advantages are automatically applied to the tokens stored on the platform without losing the real value of the good. Tokenization benefits parties below:

Gallery owners get a better option for immediate liquidity that doesn’t come with hefty interest rates on loans. Until now, the only option available to an art owner seeking immediate liquidity without having to sell their artwork has been to seek an art loan that could potentially jeopardize their ownership of the artwork itself.

Tokenization of fine arts empowers collectors, investors, dealers and artists with immutable on-chain storage of all the data related to artwork including authenticity, history of ownership, exhibitions and other important information.

By tokenizing the art market, the ecosystem offers investors transparent accessibility to the fine arts market. At any time, collectors can make an offer to buy paintings that an investor owns a token in, and if the majority of shares voted to sell the investor would net proceeds if any.

Opening this market to new investors will likely draw more capital and growth in the overall market. Everyone from crypto holders to traditional art investors can now invest in art pieces through security token offering and get exposure to an asset class previously only reserved for a select few.

Artists typically don’t retain any stake in their early works. Through tokenization, artists can retain a percentage of tokens at the first point of sale and have more ownership over the fate and streams of revenue of their artwork. The artist’s retained tokens allow the artist to become an early stage investor of his or her own work, perfectly aligning the interests of artists and their collectors.

In 2018, a 31.5 percent stake worth $1.7 million in Andy Warhol’s “14 Small Electric Chairs” sold through Maecenas, the first blockchain platform for investing in art — specifically, valuable post-war and contemporary art. This 1980 work is a silkscreen on canvas. The auction was a private beta launch of the Maecenas platform.

The Dutch auction was conducted via smart contract, and buyers could acquire a stake in the artwork by paying in ETH, BTC, or Maecenas’s ART token. Of more than 800 bidders, 100 secured partial ownership of Warhol’s artwork. 

The art ownership stakes sold by Maecenas are minority stakes, and the majority stake remains held by a single collector. What happens if that collector wants to sell? Maecenas requires the majority owner to buy back the ownership stakes of all current investors at market price plus a discretionary premium. A minimum percentage of the minority investors must agree to the terms.

Before it agrees to sell artwork, Maecenas conducts an in-house assessment of the work’s provenance and secures it in a storage vault, where it is insured. Art sellers pay Maecenas a fee of 6 percent and buyers pay 2 percent. These fees are much lower than what art auction houses and galleries typically charge.

A partial source of assurance lies in the blockchain. All pertinent information about the artwork Maecenas tokenizes, such as provenance, storage method, location, insurance, independent valuation, condition, and verification, is recorded on the blockchain in an immutable way for all to see.

In conclusion, the process of tokenization allows investors, collectors, art dealers, and galleries to have higher transparency, increase liquidity, and lower transaction costs. With blockchain technology, art tokenization is reshaping the industry on how we buy, sell, trade, and even create and enjoy art.