In the previous article, we’ve explained that the art world has established a reputation as a dynamic, global, high stakes industry where record-setting prices often leave audiences awestruck. From the point of view of a casual investor , we have listed four reasons why art investment is a promising alternative to diversify one’s portfolio. Although the process of buying art is streamlined for simplicity, the barrier to entry into the niche market is still relatively high. Not to mention those blue-chip works that appreciate faster than inflation are hard to come by — and opulently expensive. The more accessible works, such as pieces by emerging artists, might rise meteorically but eventually fade to obscurity. With wealthy connoisseurs and collectors monopolizing the market, there are few options left for casual investors to explore. However, with the advent of blockchain technology, the status quo of artwork investment can be upended and a new prospect unfolds. The key to unprecedented transformation in the art market lies in art tokenization.
What is Art Tokenization?
To even begin talking about art tokenization, we must first examine the idea of blockchain. Blockchain technology, as we discussed at length in our cheatsheet series, is a technology that allows a single ledger to be spread across multiple nodes in the network, with each node having a copy of the complete ledger with real-time updates.
Art tokenization, in essence, is the process of converting a monolithic artwork into thousands of digital tokens, each representing a unit share of the ownership. In this way, the ownership of a tangible yet extravagant asset is fragmented into many affordable parts. Or think of it as purchasing equity in the most conventional sense, albeit sprung from blockchain technology and presented in binaries and codes. Art tokenization generally requires a blockchain-based platform to facilitate trading and relevant activities.
What Does Tokenization Bring to the Art World?
Leveraging on blockchain technology, asset tokenization naturally brings with it the advantages such as decentralization, immutability and traceability. If we apply the fundamental concept specifically to the scenarios of art investment, we may discover the potential to revolutionize the entire industry from the following aspects.
- Broadening Market Transparency
With the burgeoning of online market, information is made a lot more accessible, yet the market remains rather opaque as trading activities and information exchange are largely carried out within certain esoteric circles. Those in possession of market-moving information are free to use it for personal gain, and thus insider information remains and will continue to be a key determinant of returns. Consequently, those without privileged access are put at a significant disadvantage. However, the disruptive innovations engendered by blockchain technology may level the playing field by presenting information on a transparent and open platform.
Furthermore, the comprehensive data and records on-chain bridge the gap in the index-lacking art market. In today’s art market, it is almost impossible to create an reliable art index as half the market’s transactions take place in galleries where public disclosure is not required. If the trading activities of the entire industry are performed on-chain through digital tokens, the transaction records will be automatically made available for all. Art tokenization helps to paint a complete picture of the market and price movement over time, and in turn democratize the otherwise stagnant market.
2. Provenance Tracking
Owing to the transparency and immutability of blockchain, stock issuance and transaction details are fully disclosed to all users of the blockchain platform. This is extremely helpful to both artists and collectors as it irons out the archaic inefficiencies of the art world with the secured ledgers of blockchain. The authorship of an artwork, once stored on-chain, will remain there forever, which can serve as an excellent proof of authenticity and originality. The past transaction records will be stored on-chain, providing a convincing track record to potential buyers. Provenance tracking can also facilitate valuation, provenance studies, insurance claims and other activities in both the primary and secondary market.
3. Fractionalized Ownership
As we point out in the beginning of the article, artworks that are able to hedge against inflation, the true blue ones, are exorbitant. Casual investors simply can’t afford that. Asset tokenization enables fractionalized ownership of artworks. In other words, casual investors are able to acquire shares of artworks at a considerably lower price. This will encourage greater public participation in the art market.
4. Navigating Liquidity Risks
Although art has the potential to appreciate, it remains a highly illiquid, high-cost-to-carry, long-term asset. An art tokenization platform will facilitate complex transactions including holding, selling, or trading. It undercuts the role of middlemen which is crucial to the current market. The hassles of negotiating with auction houses for are eliminated, and transaction costs greatly reduced.
In broader strokes, a distributed ledger-powered art trading platform presents potentials to open up investment in the art world. It may take art from its own discrete sector into something intimately tied to the global financial engine. The market has long observed a shift from art investment to management of art-related wealth, including art-based lending. Stimulating lending activities will boost liquidity, which in turn unleash the potentials of the art market. For instance, art tokenization is able to provide a platform that allows museums and other institutions to raise money without taking out high-interest loans. Artists can use the investment to crowdfund their projects by pre-selling shares of their upcoming projects.
In short, asset tokenization offers an infrastructure that eases the conflicts of interest that plagues the art market.
The Missing Piece of the Puzzle?
Asset-tokenization platforms have been on the rise in recent years, and a few have dabbled into the art market. One example of such ventures is Maecenas, a startup that champions art tokenization. In September 2018, Maecenas has successfully tokenized a multi-million dollar artwork, a genuine painting by Andy Warhol.
Some other platforms, in contrast, have chosen to tread on the path less traveled and offer a diverse set of assets to be tokenized on their platform instead of focusing on a single asset. These types of platforms may be more suitable for investors looking to have a diversified portfolio.
For instance, Konrad, an upcoming asset tokenization platform, offers asset valuation, asset tokenization and trading services. With the ability to support multiple assets on its platform, ranging from artworks and collectibles, raw material assets, real estate to IP, investors who choose to pile their treasures on Konrad may enjoy a greater diversity of assets compared to conventional platforms, which may be just what they are looking for in their portfolio.
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