Will non-fungible tokens (NFTs) revolutionize the art market or repeat its greatest failures?
The growth of blockchain technology and the idea of NFTs bring the opportunity for a market revolution in many industries. The greatest hopes are in the field of art trading. We explain, therefore, what are the advantages of NFTs over today's reality in the art market.
How to explain NFTs
When you take a brief look at current trends in blockchain technology you're sure to see NFTs there. Many people have high hopes for them and more and more are choosing to build new applications that use them. You’ll see why. The easiest way to explain NFTs is to think about them as unique collectibles that can be easily tradable (in both the coding and investing senses of “assets”) and their authenticity, identity, ownership history, and sales prices are all tracked and secured on a blockchain (technology owned by users, not a centralized entity). Trading them is similar to trading cryptocurrencies, with the difference that they can be both tangible and digital works of art.
NFTs are like other physical art and collectibles - unique or produced in limited editions. The “non-fungible” aspect comes from the fact that each NFT has its own value independent of all others, including different editions of the same work, kind of like fine-art photographs or prints. Token should be considered as a unique alphanumeric entry into a register on the blockchain which can easily locate or confirm the actual asset originality. The entry can’t be changed or erased without consent from the owner.
What advantages blockchain brings to the art market
As we mentioned, blockchain is a specific database maintained by a distributed network of computers rather than a central authority such as a corporation or a government. This prevents the situation like in the modern media world, when the network owner (company or government) can disable users accounts for whatever reasons it likes. Let’s now analyze several differences between old, legacy system and new one, that blockchain and NFTs can potentially create in the near future.
Democratized market access
Modern economies and institutions have created very exclusive, centralized systems with some “gates” for new members. As you probably imagine this creates enormous influence over who gets to participate in a fundamentally hierarchical system.
The NFT difference:
New, decentralized marketplaces can welcome artists and buyers independent of the art establishment’s approval. The decisions are more decentralized and democratized. This new architecture cuts off all middleman fees and privileges. An artist, owner do not have to sign long contracts or transfer % of his rights to some well established agents.
The values of collectors
There is no doubt that today's inner-circle of established gatekeepers like agencies and advisors is so powerful that it can dictate the prices to potential buyers. Scarcity creates a situation with limited access to wide audiences.
The NFT difference:
So far, many, if not most, NFT buyers hail from outside traditional art industry circles, and tend to have little interest in established dealers’, advisors’, and collectors’ opinions on what is worth acquiring—and at what price.
Redistribution of profits
Many artists in western countries complain about the value they receive from their artwork. Even the most fortunate artists generally only receive, at best, a meager resale royalty. For example the UK caps resale royalty for its residents at €12,500 (about $17,300), no matter how much money a work generates when it returns to market; the US offers no resale royalty at all.
The NFT difference:
Artists could have the potential to benefit more fairly, proportionally and perpetually as their works are consumed, copied, and redistributed through the marketplace over time. All of the percentage-based resale royalties can be predefined into the terms of every NFT sale and tracked and confirmed on blockchain.
Due to the nature of Smart Contracts, all the redistribution processes can be easily & entirely automated (Automated Market Makers - AMMs). No human intervention is required once objectively verifiable conditions are met.
So what is the difference in profits? Well it can be very high. NFTs provide you with a mass audience, great. trackable redistribution model and low fees. Blockchain makes the game more fair for the owners and consumers.
Ownership and copyrights
The ownership of (and copyright to) artworks such as installation, performance, and video are often considered as complex, bureaucratic and unclear. Dealers and artists must generate a lot of costly documents to secure the rights properly.
The NFT difference:
The blockchain contains the work’s complete provenance and copyright details, with the potential to add a wide range of surrounding information that could benefit all parties of the agreement. Standard contracts like ERC-721 are available for wide use by artists unsettled by the prospect of drafting their own agreements.
NFTs as a part of blockchain technology have enormous potential to grow. It can fix everything wrong in current, legacy markets. But there are also some concerns. The main challenge of any new trend, idea, concept is of course adoption. Blockchain and NFT platforms are still new, young. It requires time to convince early adopters and the majority of the community to leave current media relations to try something new. However, according to Moore's Law adoption is also a process that is subjected to accelerated growth. Google, Facebook and Amazon have dominated the markets in 10-20 years. Can we expect a significant blockchain revolution to take somewhere between 5-10 years? - Yes, it's a very possible scenario.
The other challenge is human nature. We all talk about decentralization and fair redistribution. Some NFT platforms follow this path, some do not. High fees, centralized tokenomics can make NTSs market another iteration of the old legacy system.