Distributed Ledgers, Blockchain, and the Art Market
A ledger is basically a trail. It generally exists in a book or database of transactions in which separate accounts can have their history summarized. In the economic sense, this is a way of keeping track of separate financial accounts. For the art world, a ledger can track the history of an art piece, including its previous owners, origin, and transaction history. In the early days of record keeping, a ledger would help a museum or collector keep track of an artwork’s location and the date it was acquired through short handwritten entries on paper. Digital ledgers have increased the amount of information that can be listed about each object as well as make creating and retrieving entries much easier. However, ledgers aren’t necessarily public entities because of their difficulty to be maintained as well as their ability to be tampered with. New technologies such as Blockchain and Distributed Ledgers, help alleviate some of these concerns, creating a more transparent art market that is available for all to view.
A distributed ledger is a ledger that can be shared with a large number of institutions, which is constantly validated by separate nodes. The ledger can either be centralized, meaning that only certain parties can use it, or decentralized, meaning that anyone can use it. With a centralized ledger, only reputable parties have control over the ledger, keeping it safe from outside tampering. However, a downside of the centralized ledger is having to put complete trust in the parties that maintain the ledger. With a decentralized ledger, since anyone can use it, there needs to be systems in place to keep the data secure. Blockchain technologies help monitor ledgers through a process called mining. Each block on a Blockchain contains what is known as the “hash value” of the previous block. To create a new block, the mining node must ascertain the hash value by solving a complex mathematical equation. This process is costly and resource intensive which is an obvious deterrent to hackers or bots. When a new transaction is made a new block is created, a process which can take up to ten minutes. The process of solving equations to generate Blocks is known as proof of work (POW). Cryptocurrencies such as Bitcoin or Litecoin are examples of decentralized ledgers since anyone can purchase shares. Blockchain technologies help keep the transactions secure and ensure that users cannot steal others cryptocurrency or create new cryptocurrency.
What is exciting about Blockchain is that data entered into the chain is relatively unchangeable. The mining system allows various miners to police each other on the blocks that are created. A block cannot be added to the chain without consensus from the other nodes. A node controlling more than 51% of the Blocks is a sign of trouble. At 51%, a node starts to have control over the chain, allowing them to reverse transactions and prevent other nodes from completing blocks. To gain 51% control would require an enormous amount of computing power and money. Pretty soon the public will figure out the chain is compromised, causing it to fall out of use. With cryptocurrencies, for instance, this will cause the value of the currency to plummet. Simply put, gaining 51% control is not an easy or profitable endeavor.
A distributed ledger does not necessarily need Blockchain to run, however Blockchain is an added method of security, especially if the ledger is decentralized. The combination of Blockchain and distributed ledgers with the art market has exciting implications because of the added level of security. When buying an artwork, there are concerns about the authenticity of the piece as well as the reputability of the seller. A collector or a museum, for instance, might want to know the history or “provenance” of a piece to know if it is legal, authentic, and in good condition to purchase. Determining provenance is generally a process of research and collecting documentation. It is a paper trail that is ripe for errors and tampering. A distributed ledger keeps track of an object’s history in a form that is almost immutable. If subsequent loans or transactions take place, they can be easily added to the ledger. The distributed ledger can also be put in front of anyone, making the art market significantly more accessible.
Art is being sold in wholly new ways thanks to the distributed ledger, including buying shares of artworks (similar to cryptocurrencies) or selling finite copies of artworks online (a venture that was once ripe for piracy). While the distributed ledger is not going to automatically solve all of the art markets problems, it is a useful tool to combat them and increase transparency.
Article by: Christopher Rahmeh