Since art has existed as an asset class, major auction houses have acted as the de facto gatekeepers of the art market.
Auction houses like Sotheby’s and Christie’s have always been influential in the art world, making or breaking works of art and their creators, and, in return, receive a handsome fee for their services from creators. Blockchain-based NFTs are hailed by their proponents as disruptors to the traditional art industry because they provide easier access to most of the auction house’s services.
In addition, the fragmentation and other innovative ownership models possessed by NFTs have further shaken the incumbents in the art market. But can the art world and NFTs coexist?
The influence of auction houses on the art market
As we all know, art auction houses have a huge influence on the art market. Sotheby’s, Christie’s and other auction houses all charge commissions to ensure the works they sell fetch high prices, apparently out of a vested interest.
Of course, artists can also participate in the auction of their own works at the auction site. In order to sell their works at a good price, they will not hesitate to use some improper tactics.
A New York Times article exploring auction house behavior said many auction prices were pre-determined. Sellers will receive a guaranteed price behind the scenes to ensure a large number of works sell at a high price and maximize the hype. The sellers who hold the most sought-after and most expensive works are often reluctant to auction the work easily because they don’t yet know the price. But if a satisfactory minimum price has been negotiated, buyers are more likely to abandon the masterpiece for a lower-priced piece.
With works by Van Gogh or Picasso selling for eight figures, the industry buzz affects not just works by the same artist, but works auctioned alongside them.
Thus, the composition of auction items determines trends in the art world as a whole. Additionally, auctions have a coffee shop-like conversational effect on the market. Many attendees may not plan to buy anything featured, but will still be in attendance to discuss topics related to popular artists. This also guides the direction of the industry.
Will NFTs Fake Transactions at Auction Houses?
Blockchain-based NFTs are strictly digitized and exist on immutable and decentralized digital ledgers, which have characteristics not found in the traditional art world.
Most notably, the auction of NFTs does not require an auction house. While internet and telephone bidding enable auction houses to facilitate buying and selling from far-flung corners of the world, actually completing a physical auction is another matter. Completing the transfer of ownership documents, transporting precious physical objects, and arranging payments are all troubles that blockchain-based NFTs do not have to face. When buying an NFT, settlement simply adds more time to the blockchain to record the time of the transaction.
At the same time, payments happen in real-time on the same network, and smart contracts handle all the logistics, whereas a real-world sale might require an expensive team of legal experts. The cost of services is also reduced. Auction houses like Christie’s or Sotheby’s may charge 15% to 25% of the final price of an item, but the top NFT auction houses charge only 2.5%. The digital nature of NTF also opens up new possibilities for artists and collectors. Brick-and-mortar artists cannot enforce royalties each time a collector buys or sells their art.
With NFTs, they can program fixed royalties at the smart contract level, aligning returns between artists and collectors, with both parties benefiting financially from accepting the market.
NFT and traditional art are mutually beneficial
Many people believe that art and NFTs are competing relationships. However, as new industries develop, we see that they can be mutually beneficial.
For example, in 2021, Christie’s and Sotheby’s will play a major role in driving NFTs to mainstream attention. On March 11, Christie’s became the first large auction house to launch digital artworks represented by blockchain NFTs. The London-based institution has since auctioned off its iconic BAYC collection, even announcing the launch of its own NFT marketplace in September.
The impact of the support of large auction houses on the NFT market is impossible to quantify. The monthly NFT trading volume in January 2022 hit an all-time high of $4.7 billion, a figure that is several times higher than the entire NFT trading volume for the whole of 2020.
Autonomy and Fragmentation
Innovations like fragmentation further support the argument that NFTs and traditional art auctions can coexist. Christie’s and Sotheby’s featuring NFTs brought them from the physical art market to collectors, and the fragmented nature could expose traditional art to a huge new global market.
The laws of physics do not allow the canvas to be divided into many different pieces. However, NFTs can be divided into many decimal places through blockchain tokenization. For example, an NFT can be subdivided so that many owners of the entire product can own it. Investors can buy and sell fragments of much larger and more expensive artworks.
This way of investing in art will not only expand to a wider market, but it will also bring greater liquidity to the art market, which already reaches $1.7 trillion a year. At the same time, some NFT projects try to build museums of the physical world to display their collected items, and the unique characteristics of blockchain technology may enable a smooth and orderly circular economy. Museum visitor revenue can be distributed among NFT holders through tokens to incentivize and accelerate adoption of the project. It also allows collectors of art to become royalty recipients and enables them to keep a percentage of any future sales.
Will this symbiotic relationship continue?
NFTs are still in very early stages. We’ve just witnessed the first boom, and while it may seem like a threat to established art institutions, we’re actually seeing the two supporting and symbiotically coexisting. While some critics like to see NFTs and traditional art as competitors, this ignores the basic fact that digital art and real-world art are completely different media. Putting them in the same comparative context is as absurd as saying that the sculpture market will eat up the oil painting market.
Many see Christie’s and Sotheby’s fervor for NFTs as legitimizing an abstract art medium, and last year’s sales figures attest to that. Likewise, innovations such as NFT fragmentation will expand the market for these long-established and respected auction houses.
