Tokenization in the Art World
I. Context
New technology has affected how art is produced and reproduced since the earliest days of civilization. It has affected how it moves, is accounted for, how it is exchanged, stored, collected, and who collects it. In some cases, this technology affects the structures that support art while in others it affects the content and craft of the artwork itself. In either case, the relationship between art and technology is a dynamic exchange. When that technology has a profound impact on broader society, reflecting this technology in the artwork allows the artwork to form a greater bond and relevance within this societal context.
Non-Fungible Tokens (NFTs)–and tokens more broadly–do not reflect a fundamental paradigm shift in the trajectory of art history, but simply a new technology that will allow artists and works of art to accomplish goals that have been intrinsic to the work of art for centuries. The specific way in which they do so is currently being tested and coming into focus just as the underlying technology of blockchain and the cryptocurrencies that utilize this technology are also maturing. These tests will help determine how NFTs are utilized to support artwork through tracking, accounting, provenance, and authenticity verification. It will also become clear how they are incorporated as an integral part of the content of the artwork as a medium supporting serialization, fractionalization, the use of augmented and virtual reality, the temporality of the artwork, the ways the artwork can be experienced and by whom, and, more broadly, the relationship between the physical and the digital dimension of an artwork.
II. The Underlying Technology
To understand how NFTs can affect the future of art, it is important to understand the underlying technology. An NFT can exist with sole reference to digital objects such as a jpeg as well as with reference to a physical object such as a painting. In either case, the process begins with tokenizing something. This token contains a range of information from the content of the object to ownership and future contractual obligations. It is recorded on a ledger. As such, it is not all that different from a certificate of authenticity (COA) or set of instructions for how to create a Sol Lewitt wall drawing.
The difference between a traditional COA and an NFT, however, lies in the fact that this ledger takes the form of a blockchain–a shared and immutable set of data that records a series of transactions, connected to each other using cryptography. Such infrastructure allows parties to enter into transactions securely, despite the lack of prior relationships between market participants, and without the need to rely on a centralized trusted authority. Blockchain operates as a digital platform that validates and stores the history and timeline of transactions of all users throughout the network. By creating a new “block” in the chain, the platform contains all the information created from the transactions, and timestamps them in order to preserve all the information unaltered. When a piece of art is sold on the blockchain, the transaction is recorded in the form of a “smart contract”.
Any transaction of art that takes place via blockchain technology enhances the trust and transparency of what is being bought and the conditions of the sale. Information on the work’s origin, any subsequent sale or terms of licensing, its conservation status, any security interest or other encumbrances granted over it, as well as any export restrictions imposed by the relevant authorities could be embedded through metadata in the blockchain ledger and be immediately accessible to all market participants, in a secure and immutable way.
The revolutionary nature of this technology is fundamentally a result of how it allows art objects to move through space and how they are accounted for over an extended period of time. This spatial mobility is not merely the digitization of a formerly analog process, but one that allows both for the physical asset to move with greater security and thus with greater ease and for a digital twin of the object to circulate and even be displayed with far greater speed and availability than the physical object alone.
The temporal implications, meanwhile, are just as profound. The capacity of a token to code a smart contract allows for the terms of future sales, loans, restorations, and ownership structure to be set at the time an artwork is created and enforced throughout its lifecycle. For time-based and serialized work, this capacity is particularly impactful because it creates opportunities for residual earnings and the capacity to collect earnings from increasingly fractionalized art objects such as jpegs that proliferate across the internet.
Tokenization continues this trend of extending the reach of art across space and time while, at the same time, democratizing who has access, how art is defined and valued, and what art can do from an aesthetic point of view and more broadly within society. With this in mind, the following will explore how tokenization and blockchain can build on these trends, benefit the content of art, enhance its durability and resilience, and, in the process, support the value of that art. It is important to not only illuminate how tokenization can support the digital and physical art object, but how it can contribute to the process by which art is made. Only through doing both will tokenization and blockchain truly become an integral and highly valued feature of the artworld.
III. Mobility
One of the most untapped verticals is logistics. Blockchain technology is redefining supply chain management by offering traceability and transparency among transactions. Ritchie Etwatu, a professor of blockchain management at Syracuse University, said recently on the subject, “Blockchain in supply chain management is the next revolutionary milestone since the printing press in the 1400s, the combustion engine in the 1800s, and the internet in the 1950s.” There is no clear front runner in the fine art logistics space who is utilizing this transformative technology. There are four main benefits blockchain provides in supply chain management: 1) traceability and transparency, 2) optimal security, 3) improved cohesion, and 4) increased automation and forecasting.
Traceability and transparency are the most commonly known benefits of blockchain in supply chain management. The distributed availability and permanent storage of blockchain entries make every transaction transparent and traceable. Therefore, it will be much easier for parties to be held accountable for inconsistencies.
Blockchain supports optimal security by being an immutable digital ledger – making it extremely difficult to falsify, hack, change, or cheat. This rigid security decreases the possibility of forgery or fraudulent activities. The security that blockchain gives companies in their supply chain management boosts their credibility and reputation. It also reduces operational costs which, in turn, saves businesses money.
The major problem with the present supply chain management model is a lack of trust. Where there’s a lack of trust, it will be difficult for participants with competing interests to create a cohesive chain of operation that moves the product from the point of manufacture to the end-user.
Increased automation and forecasting is supported via constantly adding data about the digital / physical object to the token and making this data accessible and interoperable in real time. The blockchain supply chain model promotes an increase in automation. Most of the data in a typical supply chain is analog. With the help of an analog-digital converter (ADC), this analog data can be converted to digital signals which are then recorded in the blockchain. The automation of production activities throughout the supply chain significantly decreases the potential for human error. As a result, inaccuracies that lead to miscommunications and conflicts are minimized – making the supply chain more efficient in the process. The real time data collected on products in the blockchain supply chain helps businesses make better forecasts and predictions. Thereby improving their operations and creating a better experience for their customers.
IV. Ownership and Provenance
Based on certain estimates, up to 50% of the art circulating on the market is forged or misattributed. Therefore, the main sources of concern among the market participants in fine art transactions relate to due diligence. Significant resources are deployed to assess the authenticity, provenance, lack of forgery, and artwork conservation status. By creating certificates of authenticity in the form of blockchained tokens, provenance can be more accurately tracked and traced. In the process, authentication procedures can be improved, thus removing the need for trust among market participants.
With respect to new artworks, the artist could immediately register the piece of work on the platform. Every subsequent sale and any other circumstances relating to it would therefore be tracked from the moment it is created. Absolute grounds of certainty on the origin of the artwork and its attribution to the author could therefore be cataloged and viewed by each subsequent buyer. Legacy arts organizations have an opportunity to provide a team of specialists or strategic partners who have the capabilities of helping artists realize this vision and establish authenticity from the earliest moment in the creation process. From connecting a conceptual and performance artist looking to create their next NFT in a motion capture studio to a visual artist exploring the relationship between sound in the physical space created in a sound studio and the visual representation of that sound through soundwaves, legacy organizations can provide a support to help artists bring their dreams to life.
With respect to already existing artworks (where the author’s certification is not possible), it is possible to include off-chain data collected as of the date of its registration on the public ledgers. Although the certainty of the authenticity would rely on separate, off-chain assessments, the deployment on the blockchain would set a specific moment in time starting from the information available on a piece of art, crystalizing it for the future. Artworks will have a set of identifying features that connect them to a certificate of authenticity in the form of a token that is maintained on the blockchain and must be updated to reflect changes of ownership, location, status, insurance, and any other identifying features.
V. Legal Opportunities
The fine art industry has been reluctant to consistently rely on traditional legal services. Emerging artists typically do not focus on seeking adequate legal protection when entering the market. Transactions involving major art collectors and dealers are often executed on the basis of trust and “gentlemen’s agreements,” rather than relying on heavily negotiated and detailed legal contracts that are appropriate for assets of such high value.
While this approach may have benefits tied to exclusivity, flexibility in pricing, secrecy, and ability to engage in arbitrage, it is increasingly risky in an era where tolerance for using art and digital currency to launder money is rapidly decreasing amidst increasingly stringent regulation. In this context, tokenization presents the opportunity to provide a legal infrastructure for enforceable cross-border transactions.
When a piece of art is sold on the blockchain, the transaction is recorded in the form of a “smart contract”, which is an automatable and enforceable agreement. In legal terms, smart contracts are, in fact, neither contracts nor smart. They are business deals converted and stored into a software program. Simply put, the code of a smart contract operates on top of a decentralized, distributed ledger. The stored business conditions can be applied to any party included in the blockchain and even beyond.
Converting contractual conditions into computer codes, however, does not automatically make such agreements legally-binding among the agreeing parties. At the same time, tokenization can open the door to regulation – especially as the SEC continues to encourage regulating tokens as securities. Both of these concerns are made more complicated by the inherent ability of tokens to fluidly cross borders via a distributed network. In this context, it is both important for legacy institutions to have the appropriate guidance and for the community to start building rules and infrastructure guided by a vision of what can be achieved and who ultimately will benefit.
VI. Expanding and Broadening the Market
Many people both within and beyond the artworld associate NFTs with finding a super rare ape or a punk wearing the elusive blue bandana. As this essay hopefully makes clear, tokenization and blockchain offer artists, dealers, and collectors a much wider set of opportunities. To realize these opportunities, however, more infrastructure needs to be put in place, greater collaboration between industry leaders must occur, and greater interoperability between how tokens are collected and exchanged must come about.
For centuries, the art market has had systems for the collection and sale of paintings, sculptures or any manner of collectibles. While an oil painting can only be displayed in one place and has a definitive owner, a digital image, video, or gif can be infinitely duplicated and enjoyed on screens around the world for free. This has often posed problems for prospective collectors, who don’t know how to price digital art and fear it will lose resale value. NFTs offer two things for the digital art market that the physical art market has always depended on: scarcity and authenticity. Blockchain’s digital ledger serves as an irrefutable proof of ownership, meaning that “original” artworks and their owners can be identified via the blockchain, even if an image or video is widely copied and disseminated. For this capacity to have a truly revolutionary effect, it will be imperative for the community to work together to develop a common protocol.
VII. Legacy Organizations & Their Token Journey
In August 2021, Gartner released a report that located emerging technologies along what is called a “hype cycle,” which illustrates the maturation of new industries and products. It placed NFTs at the top of a curve termed the “Peak of Inflated Expectations,” a moment in time when a technology receives a great deal of publicity, both positive and negative, attracting some companies to embrace it while scaring off others. However, many argue that NFTs are still at the “Innovation Trigger” stage, where the technology’s commercial viability is still being developed.
Legacy organizations have an opportunity to leverage an early-mover advantage to establish leadership. This can be achieved through strategic partnerships with platforms, artists, and companies at the forefront of tokenization innovation. These organizations will benefit significantly from help in evaluating near-term and long-term goals for NFT integration and identify potential partners who can help establish competitive expertise and sustainable business practices to stay at the top. This should occur while understanding the new risks and associated legal, regulatory, compliance, cybersecurity, and accounting issues. Understanding exposure is key to protecting NFT assets.
VIII. Conclusion
Tokenization and blockchain present a number of compelling opportunities for artists, dealers, and collectors. We are only just beginning to see the true extent of how this technology will disrupt the art world as well as many other adjacent luxury industries. As was the case with previous paradigm shifts in the art world that were propelled by new technology, extensive value will be unlocked, the market will expand exponentially, and considerable wealth will be generated.
In order to truly maximize this new wealth, it will be essential for tokenization to become a tool of both the artist as well as the dealer and collector. For this to happen, it will be essential for those currently collecting the most respected artists to support experimentation with this new medium in much the same way that occurred with electronic, new media, conceptual, minimal, video, and performance art in the 1950s, ‘60s, and ‘70s. Moreover, it will be important to take advantage of the capacity of tokenization to support interoperability across industries in order to foster collaboration on content and a more diverse, efficient, and growing economy. Ultimately, doing so will contribute to the quality and value of the art object, how it is experienced, and how it moves us in a deeply human manner.
