Cryptoeuphoria and Art Market #3

The latest material finished with August, 2017, when the US Securities and Exchange Commission officially notified blockchain startups that the issued tokens in the crypto world were equated to securities in the physical world. Being under the burden of previously spent money, art blockchain projects were divided into two types: the first continued to focus on the speculative component of digital transactions (surrounding themselves with lawyers, the cost of whose services instantly rocketed many times), the second made a sharp turn towards maximum transparency of operations held in the art world.

Thus, four types of blockchain art companies definitely emerged in the fall of 2017. We would offer our own terminology to systematize them:

• Art Greenpeace. Companies pursuing humanistic goals: transparency of transactions and property, registration of provenance, copyright and resale rights, open distribution of commission on sales between all participants in art deals, etc. As history shows, they are either temporarily funded by crowdfunding and die (temporarily — because the shadow art market does not really need transparency, and whoever needs it, quickly gets carried away with new projects, such as the influence of locusts on the Amazon forests, and discontinues to send donations), or they are eventually bought out by art strategists, such as Sotheby's and Christie's, and quit humanitarianism.

• Crypto sharks. As a rule, their founders come from the world of finance. They have previously been a success in launching currency exchanges, venture funds, or sweepstakes and decided to try their hand at art. All such companies, almost without exception, establish fractional ownership platforms — a digital version of mutual funds — that tokenize art by issuing digital derivatives. Today, their actions are limited by the legislative norms of most countries where investors reside. Therefore, their full-fledged work awaits the beginning of the 4th technological revolution, which Elon Musk and Bill Gates are arguing about from the screens.

• Screwdrivers. These startups can be described with the phrase "whatever + blockchain". Blockchain auction houses, blockchain galleries, blockchain art fairs — all attempts to hold art and technology together can be accompanied by one question: why? Practically, only 2 out of 10 young companies can answer this question. In the first case, we would hear: "For we do not want to be left on the sidelines when the process is fully launched," in the second — "This way we expect to get more money from the investor." Both answers are, in fact, correct.

• Standard bearers. Hypocritical companies that, prior to their launch (collecting the first investment), raise art to the banner and thus proudly enter a crowdfunding campaign under the slogan: "Make the world of art cleaner". Having got money, they update the site — and regenerate into a crypto exchange or a rental service on the blockchain. There is no desire to write about the above in more detail.

What can blockchain technology really give to the art market? There are four main advantages of blockchain: information storage system, decentralization, absence of intermediaries in transactions, and transborder payments. Now let us consider the advantages, but one by one:

• Storage system or database
Benefits: Constantly updated documents related to the collection and the way the team manages it.

This is the registration of provenance (the history of existence), technological and art expertise, evaluation, insurance, restoration, property rights and change of owners. These are price indicators: the cost of buying and selling, market indices, registration of similar sales and the capitalization of the collection as a whole and for each piece of art. In order to help the owner and manager of the collection, the blockchain can also record indicators of CAGR (compound annual growth rate), ROI (return on investment), etc., as well as all actions of the managerial team - showing the collector exactly which decisions led to an increase or decrease in the cost of a work.

• Decentralization of data
Benefit: reliability of information storage.

User data in the blockchain are packaged across all computers of the network and cannot be deleted or changed. It is valuable that a collector has the ability to independently regulate the publicity of his/her data: what can be seen by everyone, and what remains only for him/her to be seen (we may add that such an approach initially ran counter the anarchic ideology of the blockchain, which assumed open and free access; later on, and with the financial support of large corporations, there appeared a division into "open" and "closed" blockchain). However, the undoubtedly positive feature of decentralization is the impossibility to lose data: it is quickly and automatically restored by the community.

• Absence of intermediaries
Benefits: minimizing the number of participants in art deals and the amount of additional commissions when working through the system.

It was not by chance that we started the first part of the article with an explanation of the principles of barter: the blockchain helps people to make P2P sales (Peer to Peer, a direct transaction between two market participants). For instance, establishing a virtual network uniting collectors, where the seller and the buyer could see each other and trust the works in the collections, would allow transactions to be carried out without intermediaries. What is preventing it now, without blockchain? Actually nothing, but nowadays months of work are spent on finding and establishing contacts, checking the consistency, document circulation, and removing intermediaries, clinging to both parties during this period, like mussels at the pier forgotten by ships.

• Transborder payments
Benefits: Saving money and time for cosmopolitan collectors.

An additional condition is introduced here: the use of cryptocurrencies. Combined with blockchain, they allow payments between clients around the world without restrictions. In addition to transborder nature, blockchain implies the speed of payments (we may recall that transactions at large auction houses are carried out in a period of 30 to 180 days, and during this time the currencies of some countries can significantly fluctuate), as well as the absence of a deposit or the freezing of funds until the completion of the transaction. This is made possible by the concept of Smart Contract — another innovation that works at the blockchain. Smart contract is an algorithm recording the actions of all participants of the transaction and the options initiating the actions, e.g., "party A would sell painting C to party B at price D if it snows in region E". There can be an unlimited number of options, but the execution of the contract is to be automatic, it cannot be canceled (by the way, this is the future of jurisprudence). In particular, a smart contract can monitor price indices at the art market, the availability of funds at the buyer's account and the completeness of provenance in the seller's blockchain. This is knowledge-based trust.

The continuation of the material deals with the most common delusions associated with the use of blockchain in art.