Horizon Line

Sell shovels in a goldrush, so the saying goes. An art market goldrush is happening with non-fungible token (NFT) mania. Although too nascent and volatile to accurately predict, it’s estimated that around $4 billion of NFTs were sold last year, with some claiming that sales of the digital works already account for 16% of the total art market. It’s the shovels and not the gold, however, that’s most exciting. NFTs digital architecture – the blockchain – has applications far beyond its current use.

NFTs are inherently divisive. Either you think they’re an expression of the separation between price and value in the art market: the cultural vomit of crypto hype-men. Or you believe in their utopian potential, allowing individuals to own folkloric internet culture.
Whatever you think, one thing is clear: the way NFTs are bought and sold will – or should – revolutionise art trading well beyond the circles swapping CryptoPunks and Bored Apes.

THE BLOCKCHAIN

The vast majority of NFTs are bought and sold using the Ethereum blockchain. A blockchain is an append-only data structure, ie a ledger to which only new information can be added, and no existing data can be edited. It’s a literal term in that the data is stored in chains of blocks, which are linked together by cryptographic hashes.

Ethereum is a type of cryptocurrency, but it’s Ethereum’s own blockchain that makes the trading of NFTs possible. For cryptocurrencies, the blockchain acts as a ledger which securely records all transactions taking place. This is broadly the same for NFTs, but they contain additional data and each one is unique and non-divisible, ie non-fungible. Unlike cryptocurrency therefore, this requires “minting” to take place – the process that converts a digital file into a digital asset stored on the blockchain.

The attraction of using blockchains as ledgers are their security, transparency and decentralisation. Their security comes from their immutability, the transparency from their open-source nature and decentralisation as a result of existing across multiple networks; all participants within a network can have their own identical copy of the ledger, which is updated in real time.

THE USE CASE

When people buy art they have two main concerns: that the work of art is genuine, and that the seller holds the appropriate title – ie they’re entitled to sell. The more aggressive estimates put the number of fakes in the art market close to 50%. In terms of individuals selling works they don’t own, the recent fraud carried out by the disgraced dealer Inigo Philbrick shows how easy it can be to appear legitimate, and just how high up the problem goes.

Using the Ethereum blockchains as a ledger – in a similar manner to NFTs – would solve many of these problems: both for “born-digital” works selling for the first time, and older physical works which have already been traded. The opaqueness of the market, issuing from the lack of a central, open-source database, is undoubtedly causing the current proliferation of fakes and frauds.

Despite being renowned for its lack of innovation, the art market has responded well to NFTs and trading using blockchains: partly in response to the shock success in 2020 of Beeple’s $69m sale of his Everydays NFT – then making him the third most valuable living artist in terms of auction prices. This momentum should be carried on into the trading of all works of art.

THE PROPOSAL

Practically, a blockchain art market work could take many forms: the hardest problem is how to incorporate the record for physical works onto the blockchain. For digital works, there is no issue. Each digital work could simply be minted as an NFT when it is sold, and this means the work and the record of all related transactions are centrally recorded with no necessary intervention.

For physical works, it is less simple. Say you are buying an old master painting from a gallery and want to record it on the blockchain. First, you authenticate the work and check the owner has the legal title, and then you buy it. One idea would be to mint a corresponding NFT of the painting – its digital avatar – and then tie this to the physical work’s value: no Fiat currency would change hands when transacting, and the price could be paid in cryptocurrency on the Ethereum blockchain for the NFT. However, there is then a split between the NFT and the physical item itself: there is nothing to stop the new owner replacing it with a fake and selling the original, without updating the blockchain record. In addition, NFTs are expensive to mint and cryptocurrency is volatile, meaning many would be unlikely to transact in non-Fiat currency.

The solution could therefore be to keep transacting in Fiat currency and simply mint a JPEG image of the work of art as its corresponding record and list it for a token value of £1. What would appear on the blockchain would be an archival bundle consisting of the Fiat price, title deeds and provenance records. which would be all coded into the ledger. When the painting was sold from one person to another, the parties would transfer the JPEG and the ledger would show the transfer from one crypto wallet address to another.

The solution to the security issues would depend on the owner’s intention for the physical work; if the work was to be treated as an asset, it could be placed in custody with a trusted custodian – say a freeport – with the custodian’s legal obligations outlined in the archival bundle. If the owner wanted to enjoy the work by hanging it, this is trickier. One possible solution would be to create a digital tagging system between the archival bundle on the blockchain and the work itself. One suggestion from a 2018 report co-authored by Oxford University and The Alan Turing Institute would be to use RFID tags, a tracking system which became widely adopted in food supply chains following the horsemeat scandal. This is far from perfect, of course, but the status of the tag could be checked with reference to data in the archival bundle, so at the very least the physical whereabouts of the work could be instantly ascertained.

A blockchain-enabled art market would benefit all involved parties. For living artists, NFTs allow for royalty obligations to be inbuilt, through a smart contract, in the sale of any work, and therefore automatically paid out and collected upon sale.

For buyers and sellers, the NFT (or JPEG and RFID tag) would assure them the work of art is what it purports to be, and digital ownership records stored as part of the archival bundle would prove the right to sell.

There are undoubtedly issues with this proposal for a blockchain art market, ranging from the environmental cost of blockchains to privacy issues around open-source databases, as well as the practical issue of every party having to have a crypto wallet.

Equally, this transparent model would remove much of the informational power currently held by the biggest players, meaning they may block its progress. This, however, is the best argument for its implementation.

Thanks to Georgia Merchant, a curator at LiveArt X, an NFT Art Marketplace, for her industry insight and assistance.

Max Lunn is a journalist based in London