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Tokens of Art

Tokens of Art

Recently we have witnessed the emergence of a revolutionary concept in the art industry applying blockchain and crypto tokens. Through tokenization, a method has been developed that made it possible to integrate a real asset into blockchain and obtain various benefits without losing the covering object's real value.

The annual art market sales value amounted $57-68 billion in recent years.  At the same time, value of art assets is estimated at $2 trillion globally and can rise to $3 trillion next ten years.

Investors don't invest much in art, why? There are a number of reasons for that.

  • Lack of transparency. The usual practice of trading in a closed format, which is available only to the "jet set".

  • Difficulty of verifying the object's origin. There are precedents for the sale of a quality counterfeit.

  • Trading restrictions and high fees. Will you be able to sell your asset as quickly and legally as possible? This is possible, but only under special conditions and through intermediaries.

The situation is changing dramatically thanks to blockchain-based tokenization. These digital technologies provide convenient tools for art market participants and create opportunities for potential investors with a small check, lowering the entry threshold by dividing the object into segments (tokens) with monitored financial value.

The key factor for developing business management of blockchain art assets is that these methods also reduce evaluation risk by allowing comparison of investment performance with usage of traditional financial ratios, for instance, common rates of return.

Lybrion. Guide. Tokens of art. Investement efficiency

For example, the accounting rate of return (ARR) can be used as a simple measure for investment efficiency in this case. The indicator is a ratio of the average annual profit to the average annual investment and is calculated using the formula:

ARR = 2 * PN / (I + RI), where

  • PN is the average annual profit (average cash flow minus depreciation charges (that is, net profit) of the investee for the period under review),
  • I is the investment cost, or the value of the investment (capital spent) at the beginning of the period,
  • RI is the terminal (residual) value, or the value of the investment at the end of the period (term).
How does it work?

First, the artwork will be evaluated by a certified curator to determine the number of tokens it will split into.

Then the tokenization process technically begins. Tokens containing intrinsic value and confirming the authenticity of the artwork will be stored on the blockchain.

The token will have a monetary value and represent property. The token issuer can trade digital assets in marketplaces. Token holders will be granted proportionate ownership of the artwork.

There are also other effective ways to tokenize art. For example, by assigning to an art object one unique (non-fungable) token embedded into the blockchain. Or via tokenization of the capital of a gallery that owns art objects directly or through non-fungable tokens. The choice of the tokenization method may depend on which categories of investors it is targeted on.

What are the benefits?

Usually the price of an artist's work is strictly connected with its current ownership. Tokenization may create an alternative ownership model. The blockchain stores information about the identity and ownership history of an object. Thus, the problem of provenance is solved.

In a historical view, tokenization marked the inception of democratizing art process. An ordinary investor gets access to the art market without spending all his savings on one object, which allows him to diversify his portfolio and save on intermediary services.

Finally, it should be noted that the tokenization process allows investors, collectors, museums and galleries to increase transparency, increase liquidity and reduce transaction costs.

// Prepared by Alexey Pogorely, Vasily Kudrin, Directors of Lybrion.


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