Blockchain and Art: Divide, Distribute, Immortalize
Innovating in blockchain is extremely exciting and a tad dizzying — the vistas are wide open. It is tempting to think about blockchain as just a narrow IT sector but its applications extend further and further from the source. For instance, let’s take a look at fine arts market.
The Mona Lisa, Divvied Up
On the one hand, this looks like a paradox: By their very nature fine arts are rather conservative, and it seems that the road from Renaissance to blockchain is a circuitous one. On the other hand, if the relevance of the new, “crypto-stable” economy could be proven using traditional values backed by monetary considerations, it will likely help sway the public opinion towards converting to blockchain faster than a more cautious scenario. A whole range of products could be developed to convert pieces of art into tokens, all of them to a certain degree fantastical, which would demonstrate varying degrees of economic and ethical forward-thinking.
The simplest and most accessible way to enter blockchain world for newbies is to take part in converting a piece of art into the blockchain dimension. For example, let’s take the Mona Lisa by Leonardo Da Vinci (let’s imagine that we somehow convinced the Louvre to sell it), divide it into 10 thousand “pixels” and sell them through a token launch. Someone will get a corner of her right eye, someone — her right pinky, etc. In reality, of course, each token holder only gets an miniscule abstract share in the masterpiece.
A token certifying this ownership can be recorded on a thumb drive or a scratch card. To illustrate, a copy of the painting can be printed on the card. Wouldn’t that be a lovely birthday present?
One more benefit of such collective ownership is that it is practically free. Yes, even now there are structures that offer similar functionality without the use of blockchain — such as mutual funds. But they are not very flexible, and getting into the business can get quite expensive. In the mutual fund realm, the shareholders’ rights to use the painting would look similar to timeshare: the painting would rotate between the owners — which is not realistic where the owners count in thousands or even millions.
On blockchain, the Mona Lisa can stay in the Louvre from which it originally came. Occasionally, it could be exhibited in other museums, which could, if it is so programmed in the smart contract, bring the shareholders a modest profit.
Speaking of profit. Unless the product is equipped with buyback feature, it cannot bee resold: its shareholder will not get rich. The project is just for fun, a way to meet blockchain in real life for buyers and to safely raise funds for the museum.
It is possible that after a few of these first art token launches the price of underlying masterpieces will rise because of speculation, especially if initially they were less known and costly than the Mona Lisa. But because of the lack of buyback option this interest could not be turned into vast profits.
Smart on Smart
It is also possible to get smart contracts to generate a profit from such “pixel tokens,” and here’s how. Let’s say someone starts buying masterpieces — Picasso, Goya, Chagall, etc. — one after another and launch their tokens. Then our dealer tries to resell them for as much as possible. Once the painting is sold, its token holders receive the difference between the original purchase price and the resale price.
In this model, private micro investors have two options. The first is to buy a “pixel token” of a specific Van Gogh’s landscape and wait until it sells. The second is to buy a so-called index token which represents a share in all underlying paintings in the pool. In other words, index token is a smart contract which runs on intellectual algorithms, taking into account expert opinions and market situation to buy tokens of other paintings. It is a smart contract for smart contract: a distributed art dealer.
When any painting in the pool sells, index token holders receive dividends — perhaps not too high. If a Van Gogh painting sells, each of its direct “pixel holders” receives their own share –most likely much more substantial. But some paintings can spend years waiting for their buyers. Despite that, index token holders will continue to receive small dividends, just because of the regularity of transactions.
To illustrate. Let’s say that the ICO of Van Gogh’s The Starry Night was based on the estimate of $100 million, while the actual painting fetched cool $150 million. Its “direct pixel holders” receive 50% profit. But the index token holders will receive much smaller amounts because the profit is divided by the number of tokens in circulation. But if over the course of a year 10–12 paintings from the pool are sold, the smart contract for the entire collection may bring as much as the “pixel token” in one deal.
The profitability of this product is not speculative in its nature: the business is conducted on the open market and is absolutely transparent. But the excitement is very likely to rev up the sales of tokenized art.
Blockchain Crowdfunding
In addition to education, speculation and honest dividends from the transactions it is possible to create tokens which pursue humanitarian goals, such as repatriation of art and antiquities by buying them out of private collections and donating to public museums.
A good example of this is China. In 2015, the People’s Republic of China’s share of the global art auctions was 28%. According to Artprice report, In 2016 it took the lead in the art sales market, with $4.8 billion in turnover. This is not surprising: In the course of the Cultural Revolution of 1966–1976 a great number of the country’s masterpieces was destroyed, and Western collections preserved far more pieces of Chinese antiquities than could be found in China.
So these days many Chinese businessmen, having made their fortune, buy and bring back valuable pieces of Chinese art out of sense of national pride. Stories abound of whole villages taking up a collection to fund the repatriation of certain particularly precious works of art.
In fact, this blockchain product is based on the same idea of crowdfunding: interested Chinese citizens buy tokens. Tokens are then used to buy items of cultural and historical value which are brought back to China and, to avoid the risk of new resale, donated to a museum.
“Crypto art” Mechanics
The beauty of art blockchain lies also in the fact that it is beneficial for everyone. Earlier, we looked at what some of these business models offer to micro investors. Let’s now turn our attention to why these new commercial formats may be of interest to regular, traditional collectors.
Let’s say that a collector safekeeps several of his paintings at Sotheby’s. A blockchain-investor is keen on one of them, and he obtains its expert evaluation. He then arranges with the painting’s owner that for four months prior to its ICO a lower price for the painting is set, on the condition that based upon the results of the ICO the owner will be offered a 25% discount. Why would the owner accept this lower price? Unfortunately, contemporary art market is ruthless and unpredictable: If his painting is put up for auction but fails to sell, its price may not just plummet but nearly evaporate.
By using crowdfunding via blockchain, the owner of the painting publicly sets and confirms the price, which protects him from ruin. If the ICO raised less funds than planned, he will get all of the proceeds AND will keep the tokens for the rest, based on the potential price acceptable to him. In this way, a new, hybrid ownership form is created, where only part of the asset has been tokenized. As a matter of fact, the same arrangement is possible for the pool of masterpieces described in the Smart on Smart section above. Moreover, the seller as the owner of the piece, i.e. a shareholder, is fully entitled to decide to sell just a part of his asset and to approve the blockchain investment into, say, just 15% or 50% of it.
From the legal standpoint, “art blockchain” is reasonably straightforward. Officially, the painting is bought under a purchase and sale agreement by a certain company, which enters it on its books. The company then issues tokens attached to the shares in its capital. In this way, each token holder gains ownership rights to some of its assets, but rather than being expressed in securities this stake is expressed in digital assets of equal value.
In terms of the mechanics of the ICO itself, two options are possible and doable. A token launch may be conducted at fixed price: a finite number of tokens of set value is issued, and micro investors know in advance how big of a stake they are buying. Alternatively, it can take the form of an auction: There is no price cap, and any number of tokens may be issued depending on the market demand. Consequently, the ICO participants’ share in the company is determined by their total share in the raised funds.
It should be noted that the second option is similar to a convertible loan model in traditional investment: micro investors invest their money in ICO at the very start, without any guarantees and with serious risks, and if the ICO later raises a significant amount they get a “ faith” discount.
Beauty, Sacrificed
The potential of blockchain smart contracts is so tremendous that it is hard to predict how it will affect our future. But even its basic form, without the token buyback, offers possibilities which, looking from today, appear intimidating, unthinkable — and posing serious ethical dilemmas. Nevertheless, the logic of our civilization’s development and its technological progress tell us that it is far from impossible.
Let’s go back to our “pixelized and tokenized” Mona Lisa. There could be little doubt that its conversion into the distributed economics dimension will set a precedent. It is important to make it memorable so it could serve as a foundation for new, more complicated projects in the realm of “new economy “ and force people to examine it thoroughly. It is important to make sure that the transformation is paid due attention: Today, the society’s attention to any event is first and foremost expressed through money.
The price of any limited and finite commodity — which the Mona Lisa, with its role in our culture certainly represents — inevitably goes up. How to emphasize that a piece of “blockchain art” cannot be replenished? We can exhibit it in the Metropolitan Museum and surround it with web cameras broadcasting it to the world 24/7, or we can lock it up in the most impenetrable secret safe — it doesn’t matter. What matters here is that the masterpiece is separated from the ownership rights to it. It belongs to thousands of people — and to no one. The previous two options are just half-measures. If the hype is created by scarcity, the most radical solution would be to take the piece of art and destroy it!
It is important to understand that there are certain similarities and great differences between the traditional art market and its blockchain equivalent. In the traditional art market, all decisions about the masterpiece’s future are made by the owner, who invested serious resources into it and is highly unlikely (unless personal revenge is involved!) to be willing to destroy it. In blockchain, the decisions are also made by the owners who bought the tokens through ICO, but there may be thousands or millions of them, and entering the business requires much more modest amounts. Which means that even though the decision to physically destroy the artifact appears absolutely unfathomable, it nevertheless is not beyond the limits of what’s possible.
It is logical that such decisions will be made via smart contracts. What scenarios they will include is impossible to predict from the standpoint of modern ethics or law. How can the consequences be quantified? Who would be willing to weigh the ethics against ownership rights? And should they be measured from the point of view of 2017 or in accordance with the laws of “crypto stable” economy and the way of life of the future? At these answers are out of our reach. We are still in the infancy of this revolution in technology and its ethics. And what our Brave New World will look like is completely unknown.
I know that pessimists will say that the digital version of reality will never compare to the “real” reality. But the optimists, including me, believe that this is not so much a matter of choice. When material objects no longer determine our experience the digital reality will only enrich and make our lives more interesting.
Author: Nick Evdokimov, CEO of Cryptonomos.com
