The Role of Smart Contracts in Art Transactions: Ensuring Authenticity and Fair Compensation

The Role of Smart Contracts in Art Transactions: Ensuring Authenticity and Fair Compensation

Smart contracts could revolutionize the art world by ensuring authenticity and democratizing other parts of the industry.

Nearly $70 billion is spent on artwork each year around the world, according to The Art Market 2023, creating opportunities for artists, galleries, and even forgers. Unfortunately, many artists suffer from a combination of lost income potential from forgeries and an industry where galleries and other gatekeepers extract a lot of the value for themselves.

This article will examine the rise in forgery, why artist compensation remains low, and how smart contracts could help revolutionize the industry on these fronts and beyond.

Art Industry Challenges

The phrase “starving artist” is more than an old cliché – it’s an unfortunate reality. In the U.S., three-quarters of artists make less than $10,000 annually, and nearly half make no more than $5,000 annually. Meanwhile, artists with enough brand recognition to reach mainstream customers often pay commissions of 40% to 60% to galleries when selling their works.

Forgery also siphons billions of dollars away from artists and into criminal hands. In addition to fake fine art in museums (up to half may be fakes!), advances in photomechanical reproduction have empowered forgers to sell unauthorized prints. This form of forgery is a big concern because prints are where most artists make money – it’s easy to sell limited edition reproductions.

Finally, the art world continues to struggle with diversity and inclusion. Only 11% of acquisitions at 31 U.S. museums between 2008 and 2020 were work by female-identifying artists, and just 2.2% were work by Black American artists. That’s despite a population where 50.5% are women and 13.6% are Black Americans, according to the U.S. census.

Guaranteed Authenticity & Provenance

Many art collectors look for a certificate of authenticity to verify the provenance of a piece of artwork. But, of course, an experienced hand can easily forge these certificates. As a result, it can be difficult or impossible to verify authenticity without shelling out money for a reputable art historian or dealer to assess the work with an expert’s eye for detail.

Using smart contracts, artists could issue a digital certificate tied to a smart contract for each original or print. The smart contract could then automatically record the artwork’s ownership history and trace its path through different owners, galleries, or auctions. And the digital data is on a blockchain; it’s nearly impossible to alter, making it a trustworthy source.

These technologies are even more essential in the digital art world. Since anyone can download an image, smart contracts are an indispensable way to verify who actually owns the image and potentially enforce the rights to use the image. As we’ll see below, these same technologies open the door to new potential income streams for artists.

Ensuring Fair Compensation & Equitability

Artists may produce a large volume of work early in their career that doesn’t become valuable until later – or even after they die. Claude Monet, Vincent Van Gogh, and countless other famous artists never fully realized the value of their works that now sell for millions of dollars. At the same time, many lesser-known artists barely make enough to survive.

By selling artwork via smart contracts, today’s artists can collect a royalty on secondary market sales, enabling them to benefit from the appreciation of their works. For example, an artist who sold early works for nearly nothing could still benefit later in life if their works became worth thousands or tens of thousands of dollars, creating a regular source of income.

Smart contracts could also help democratize the art world. Rather than selling in galleries, artists could generate income from microtransactions (e.g., each time a piece of art is viewed or shared) and cut out intermediaries by selling the rights to the artwork online. By automating gatekeeping, they could also make it easier for underrepresented artists to enter the market.

At the same time, smart contracts can facilitate the fractional ownership of artwork, making it easier for a broader range of people to invest in and appreciate high-value art pieces. In other words, they can help democratize the art world from the demand side in addition to the supply side by enabling more people to participate in the market.

Unlocking Entirely New Business Models

Smart contracts could help unlock entirely new business models in the art world – particularly when it comes to digital art. For example, Pak – known for creating some of the most expensive NFT art to date – launched his Lost Poets collection and AI-created strategy game leveraging smart contracts, generating an initial sales volume of $70 million.

Unlocking Entirely New Business Models
Pak’s Merge became one of the highest-priced NFTs in the world when nearly 30,000 collectors spent over $90 million to purchase over 300,000 units of “mass.” Source: Gemini

Some of the most exciting possibilities include:

  • Algorithmic Artwork – Smart contracts can generate unique artwork on demand based on a specific artistic algorithm. As a result, artists can generate recurring income without spending time creating each piece of art.
  • Collector Engagement – Smart contracts enable fractional art ownership and unique user experiences. For example, artists could provide fractional owners with first rights to future art sales or even access to games or competitions.
  • New Licensing Models – Artists could encode licensing into smart contracts to define exactly how people can use their artwork. If someone wants to use it, they could acquire the rights via the smart contract for a seamless licensing experience for publishers.

Of course, these are just a handful of potential capabilities – there’s no limit to the possibilities with smart contracts. As other artistic tools and mediums unfold, such as metaverses or artificial intelligence, smart contracts could play a central role in harnessing these technologies and unlocking innovative consumer experiences.

Painting a Picture of the Future

Smart contracts could revolutionize the art world over the coming decades.

Imagine a digital artist creating a dynamic artwork that evolves. With the help of smart contracts, algorithmic art evolves based on real-world data. For example, the trees in the image may shed leaves as air pollution levels rise, or the ocean may change colors based on ocean acidification levels. Meanwhile, fractional owners could vote on new real-world data sources influencing the artwork, transforming it into a collaborative experience.

Or imagine a piece of artwork that changes each time someone sells it. Each transaction unlocks a part of the artwork’s visual narrative, making it more complete. The smart contract ensures that the artwork can only be resold through the blockchain, while minimum increases could be built-in to avoid token transactions. As a result, the artist can generate more income and share an iterative journey with consumers.

The Bottom Line

Smart contracts could revolutionize the art world by eliminating forgery and enabling artists to unlock value in exciting new ways. In the future, artists could generate more recurring revenue from their activities while better expressing their creativity and engaging with their audiences. That could pave the way for a more dynamic and equitable art scene.

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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.