For almost as long as fine art has existed as an asset class, major auction houses have served as the market’s de facto gatekeepers. The likes of Sotheby’s and Christie’s have always had influence in the art world to make or break creators and of course, they receive a tidy pay check for their services.
Blockchain-based non-fungible tokens – or NFTs – have been touted by their proponents as industry disruptors, given that they leverage much of what auction houses offer. Innovative ownership models such as fractional ones only further shake up fine art market responsibilities. But can the industrial world and NFTs coexist going forward?
Effect of auction house on art market
It’s no secret that art auction houses have a huge impact on the art market. Sotheby’s, Christie’s and others work on commission and have a clear interest in ensuring that pieces put under the hammer sell well. Naturally, those who are selling can join that mission, even if some of the tactics used may be a little underhanded.
A New York Times article exploring auction house practices claims that many sale prices are predetermined. A seller will get a guaranteed price behind the scenes to make a lot of sales and generate the most possible hype for an event.
Sellers of the most sought-after – and expensive – works are often reluctant to auction a painting when the price they will receive is unclear. With a minimum satisfactory figure already agreed upon, collectors are far more likely to give up a masterpiece.
The buzz around art that a Van Gogh or a Picasso makes eight-figure sales affects not only pieces by the same artist but also those auctioned with them. Therefore, the composition of an auction lot sets trends that ripple through the art world.
Additionally, the auction market has a sort of coffee-shop-conversational effect. Many attendees may not intend to buy anything featured, but the trend will be to discuss artists and movements. It also drives industry direction.
NFTs: Pulling the rug from under the auction house?
Strictly digital and immutable and existing on a decentralized digital ledger, blockchain-based tokens possess characteristics alien to the traditional art world. Most interesting is that they do not require an auction house to sell.
While Internet and phone bidding enable auction houses to facilitate sales from remote corners of the world, actually settling a physical sale is a different matter. Completing the transfer of ownership documents, transporting a valuable physical object, and arranging payment each present challenges that do not exist with blockchain-based NFTs.
With NFTs, adding a few more blocks to the blockchain takes settlement time — minutes. Meanwhile, payments happen in real time on the same network. Smart contracts handle all the logistics that require a team of expensive legal experts in the real world.
The cost of these services also adds up. While an auction house like Christie’s or Sotheby’s can charge between 15 and 25% of the final price for many, the most expensive of their NFT counterparts charge only 2.5%.
The digital nature of NTF also opens up new possibilities for artists and collectors. A physical artist cannot apply a royalty payment every time a collector buys or sells their art. With NFTs, they can program a fixed royalty at the smart contract level, aligning incentives between artists and collectors — both parties benefit economically from a receptive market.
Many observers see fine art and NFTs as competing with each other. However, as new sectors develop, we increasingly see that they can be complementary.
For example, in 2021, Christie’s and Sotheby’s were instrumental in fueling the mania that brought NFTs to mainstream attention. On March 11, Christie’s became the first major auction house to feature digital artwork represented by a blockchain-based token. The London-based firm later auctioned off the iconic NFT avatar collection Bored Ape Yacht Club and even announced its own NFT marketplace this September.
It is impossible to quantify the impact that the support of large auction houses has had on the NFT market. However, the all-time high monthly NFT trading volume in January 2022 was $4.7 billion – a figure that is many times higher than the entire NFT trading volume for the whole of 2020.
Democratization and Fractionalization
Innovations like fractionalization further support the thesis that NFTs and traditional art auctions are symbiotic. While NFTs featured at Christie’s and Sotheby’s brought the medium out of the physical art market to collectors, fractionalization could open up traditional artworks to a vast new global market.
The laws of physics do not allow a canvas to be divided into different parts. Nevertheless, blockchain tokens can be divided into many decimal places. For example, a single nonfungible token can be fractionalized, enabling multiple owners of whole portions.
One startup that hopes to democratize the fine art market through fractionalization is Artfi. Working on the Polygon Network, the Dubai-based company collects physical artwork and creates blockchain tokens representing ownership.
Investors can buy and sell smaller pieces of much larger, more expensive industries. Not only does this open niche industry invest in a far broader market, but adopting it will bring significantly more liquidity to an already $1.7 trillion annual industry market.
Helping Artfi with its mission of bringing fine art to the public is the Artfi Foundation. The nonprofit is building a real-world museum to display the pieces it collects While details are lacking at this point, the unique features of blockchain technology could enable a neat circular economy. Museum visitor revenue can be distributed among NFT holders via the project’s local polygon-based ARTFI token, stimulating and accelerating the adoption of the model.
Along with fractionalization, the startup is already experimenting with ways to attract new interest. For example, it enables collectors who already own desirable works of art to be royalty recipients and retain a percentage of their future sales. Additionally, those minting initial sales NFTs from a new portion of the Artfi Collection will benefit from lifetime royalty payments.
What will Symbiosis do?
NFT technology is still in its very early stages. We have just witnessed the first boom in adoption and despite appearing as a threat to the existing industry establishment, we are actually seeing both sectors supporting each other.
While some commentators like to frame NFT and traditional art enthusiasts as rivals, this misses the fundamental truth that digital art and real-world art are completely different mediums. Putting the two side by side in a comparative context is almost absurd to say that the sculpture market will eat up the oil painting market.
Indeed, many saw the enthusiasm of Christie’s and Sotheby’s as a validation of an abstract artistic medium – and last year’s sales figures bear this out. Likewise, innovations like fractions are set to expand the market that these historic and respected auction houses continue to serve.