Virtual Masterpieces: The Dawn of Digital Art
29 September 2021
Technology is providing a lifeline to many during the coronavirus pandemic, and the art business is no exception. Artists such as painters, architects, sculptors, literati, songwriters, performers and filmmakers are streaming more than ever to offer hope and keep their stuck-at-home audiences and collectors connected during the global health crisis that keeps people apart. Their partners, including art galleries, cultural institutions, brokers and auctioneers, have turned to creative ways to keep business up and running during the worldwide crisis.
Like many other sectors, the art market is fast ramping up its digital readiness. By enabling digital representations of physical assets, instead of going to framers, transporters, restorers, printers, exhibition architects, photographers and gallery owners, many artists, traders, auctioneers and collectors have shifted their focus to pursuing new art sales platforms and mechanisms. The art world is increasingly making sense of unfamiliar terms such as blockchain, cryptocurrency, decentralised finance (DeFi) and non-fungible tokens (NFT).
Digital art can be broadly defined as any artistic work or practice that utilises digital technology as part of its creative or presentation process. Nowadays, thanks to improvements in digital technology, artwork so created can also be bought, sold, stored and traded using NFTs or blockchain-based  digital assets, which hold value as a form of cryptocurrency and as a form of art or culture. Each NFT is unique and cannot be duplicated, meaning that while others might have an image of a piece of art you purchased as an NFT, they are not the owner or owners of the original.
A growing number of artists, galleries and collectors are now accepting Bitcoin, Ethereum and other types of cryptocurrencies or decentralised applications (dapps ) for artwork transactions, including works by Mike Winkelmann, a legendary graphic designer who goes by the name Beeple and his famous collage containing 5,000 mostly digital illustrations released every day from 1 May 2007.
According to the data acquired by DappRadar – the world’s leading portal for dapp discovery, tracking, analysis and distribution – the all-time trading volume of the 10 leading NFT marketplaces topped US$2.8 billion, boasting a pool of more than 1.4 million traders as of 15 July 2021.
OpenSea attained the highest trading volume at US$770 million, followed by NBA Top Shot’s US$632 million. The two marketplaces accounted for nearly half of the trading volume. AtomicMarket had the most significant number of traders among the top 10 marketplaces at 567,771, while NBA Top Shot ranked second with 414,877. Traders on these two platforms represented about 70% of the 1.4 million across the top 10 marketplaces.
To understand why cryptocurrencies and blockchain technology are fast infiltrating every corner of the global art market and how Hong Kong, as a strong blockchain hub, is ready to play a pivotal role in the future of digital art, Louis Chan, Principal Economist (Global Research) of the HKTDC, interviewed Robert Sleigh, Managing Director, Business Operations, Sotheby’s Asia. The interview explored the views of the world’s oldest and largest internationally-recognised firm of fine art auctioneers on how technology, especially blockchain and cryptocurrency, is set to revolutionise the global art market and open a new window to artists, established or up-and-coming, all around the world to profit from their work by making an otherwise public good into private property.
Chan: What is digital art, crypto art or new media art? How popular is it in the market for artists, collectors and investors? How mature is it in terms of valuation, appreciation, storage, delivery, promotion, auctioning and collection? How is Sotheby’s involved in the crypto art ecosystem? How is Sotheby’s working with popular crypto art marketplaces and artists? Do you see it as a good vehicle for high-net-worth individuals (HNWIs) to diversify their investments, especially when crypto art reportedly has a history of appreciating in value by about 7% on average per annum?
Sleigh: This latest evolution of decentralised applications in digital art is often dubbed crypto art. Though not completely new, it has never been created in a sustainable or verifiable way online than in its current form. The sale of digital art in the form of NFTs has allowed digital artists to create artworks in a way that enables many benefits, including verifiable ownership and provenance authentication, provable scarcity, direct relationship between creators and collectors, and permissionless trading on secondary markets.
Sotheby’s has taken an active role in the NFT ecosystem, serving as a curator of sorts to help bring more nuance and audience variety to the NFT art market. We believe the NFTs of today are just the beginning of the immense creativity available to crypto artists, and find value both in older NFTs and in newer, highly-innovative NFTs as demonstrated by the June 2021 Natively Digital sale co-curated with London-based crypto/NFT art pioneer Robert Alice. As our first NFT group show, the NFTs in this sale present our view of the most historically important crypto artworks produced to date alongside a diverse selection of artists working and emerging in the crypto spheres.
The historic three-day sale of works by the anonymous digital artist Pak in April 2021 was not only Sotheby’s first NFT sale, but also marked a milestone in our relationship with NFTs and relevant stakeholders. The collection, known as “The Fungible”, marked some of the most valuable digital artworks ever auctioned.
Without doubt, NFTs, crypto arts or blockchain-based digital (art) assets are among the most groundbreaking artistic breakthroughs of the century. They have risen to prominence since first entering the global stage late last year, moving from a burgeoning creative community to artistic and media mainstream in a matter of months. And day by day, as people in general are becoming more open to digital technology and online life under Covid-19, NFTs will continue to redefine the very nature of both art and the artist’s place in the world.
The adoption of digital technology in the auction market continues to grow, with NFTs as the clear standout. But, we have also seen a growing adoption of cryptocurrency across a variety of auctions, from NFTs to our recent record set in the adoption of cryptocurrencies concerning the sales of the second-largest pear-shaped diamond ever to appear on the public market – a 101.38-carat pear-shaped D Flawless diamond or “The Key 10138” – for HK$95.1 million (US$12.3 million) to an anonymous collector has demonstrated how blockchain technology, including cryptocurrency and NFTs, can be a fresh interest in art as an asset class for HNWIs and collectors to diversify their investments. We see few barriers going forward, and are ready to explore all the possibilities in this sphere.
Chan: Original ownership, scarcity, and uniqueness were somewhat hard to determine in the digital realm until the emergence of the increasingly popular blockchain technologies, which can potentially reduce the cost and complexity of verifying the authenticity, originality, uniqueness and ownership of particular digital assets. How exactly can a digital artist make use of the technology to establish and maintain monetised creative businesses? Do they need to create artwork using blockchain technologies, or practise so-called crypto-arting? Or does it only concern the trading part (or minting for the purpose of provenance verification) of the value chain, working more or less like a fine art expert for physical art? When should a digital artist mint, tokenise or “drop” their art piece – before or after selling it – as it entails a fee called a gas fee, which can vary and change at any moment based on computing demand?
Sleigh: Blockchain technology, at the end of the day, is a database technology. NFTs, especially in their current forms, can be created in any media or content. That content may be the artwork itself, representing an entirely “crypto native” asset, or the content might be the verifiable ownership and provenance of a physical work of art. In other words, the NFTs might serve as a deed.
For collectors, part of the value of NFTs is being able to verify scarcity (did the artist create 2 of these works or 2,000), provenance (did this NFT really originate from the artist’s wallet? Did someone famous previously own it?) and resilience (is this NFT programmed to change over time?). Verifying these facts without having to believe the artist or the seller at face-value requires the asset to be on-chain and available for investigation.
To begin buying or creating NFTs for sale, one needs a digital wallet from which bids, gas fees to process the listing of digital artworks and proceeds in the form of cryptocurrency can be handled in connection with NFT or cryptocurrency exchange platforms. We’ve seen the majority of artists mint their artworks before selling them. In some cases, if artists are selling NFTs on permissionless platforms like OpenSea, they must have their artwork minted before selling.
Chan: The record for the highest selling NFTs to date involves a transaction worth more than US$69 million Ethereum tokens or Ether (ETH or 1Ξ). How are these transactions done? Do buyers, investors or collectors need to set up a crypto wallet via MetaMask or Fortmatic first and buy the cryptocurrencies such as Ethereum platforms at exchanges such as eToro, Gemini or Coinbase, before bidding at auction? If cryptocurrency only, would the buying and selling of crypto art become exceptionally speculative, as the price of the underlying cryptocurrency can change minute by minute, as shown by Bitcoin whose value has been historically quite volatile?
Sleigh: There are many ways to buy and sell NFTs. All Sotheby’s auctions, whether a physical auction or online sale for digital or physical goods, are held in fiat currency, most commonly US dollars or the local currency where the sale takes place. Buyers in sales where the seller accepts cryptocurrency also have the option to pay in crypto. If a buyer wishes to pay in cryptocurrency, they must pay the equivalent of the fiat commitment in full.
For example: In our recent auctions Natively Digital, This Changed Everything, and Heir to the Throne, we operated those sales similarly to our non-NFT online auctions. Bidders placed their bids in US dollars, but the winning bidder was given the opportunity to pay in crypto should they wish. We’re using Coinbase Commerce, for example, to accept crypto should the buyer wish.
Regardless of cryptocurrency fluctuation throughout the course of an auction, the winning bidder must pay the equivalent of the fiat commitment in full. In that sense, accepting cryptocurrency is not much different than accepting other foreign currencies.
A good example occurred recently with the sale of the “The Key 10138” diamond, which was purchased by an anonymous buyer who chose to pay in cryptocurrency. The 101-carat diamond was sold for US$12.3 million, and we consider this an important industry milestone in the adoption of cryptocurrencies, even for a physical object.
Chan: Apart from provenance advantage, what are the benefits of making and selling crypto art? Do you think it is an ultimate stop for plagiarism, royalty disputes and IPR infringement? Do you think NFTs can facilitate online-to-offline (O2O) crossovers between digital and physical art, like what Mike Winkelmann has been doing – selling pieces that include both a physical token and an NFT on the blockchain? While unbiased, which types of assets do you see are fast gaining a following for NFTs?
Sleigh: One of the primary advantages of NFTs is that they create an opportunity for artists to monetise their artworks in more direct ways. NFTs create digital scarcity, unlocking a new way for digital art to retain value while at the same time being accessible and promoting new channels for artists to sell their work.
In various use cases outside of fine art, we are seeing NFTs used to represent proof of ownership of physical goods. NFTs as digital extensions or digital counterparts of physical artwork is an interesting concept more artists are exploring. There are also particularly interesting use cases for NFTs in the luxury world, as well as in sports memorabilia, where high-profile sport teams and organisations have been rolling out digital collectibles as a new means of fan engagement, which is a market that is increasingly adapting to NFTs.
We are also seeing NFTs represent participation or inclusion in a unique moment in time – for example, Sotheby’s gifted unique NFTs to all of the participating artists of Natively Digital, our first curated NFT sale. So not only can NFTs be used for digital art and represent digital extension of physical artworks, but they can also represent physical or lived experiences, which is another really fascinating use case for NFTs that we think will be explored more across industries.
Chan: Blockchain technology takes a massive amount of calculations that require huge amounts of energy, and the current model is pretty harmful to the environment. Is there any work being done to get it to a more sustainable path? How about Ethereum 2.0? How is Sotheby’s working with other stakeholders in the value chain sustainability?
Sleigh: For the Natively Digital sale, the first NFT sale we hosted through Sothebys.com, we committed to engaging in a carbon offset study with Regen Network, a blockchain-based carbon offset platform, to accurately offset the minting and transaction costs of the sale.
Before Natively Digital, we have hosted “The Fungible Collection” with the artist Pak through a partnership with Nifty Gateway, which at the time had just announced plans to go carbon negative through carbon offsets.
So, it is an issue that the entire NFT community is taking seriously, and we are actively working with partners to explore sustainability options.
[According to the Ethereum Foundation (EF), an open source governing body of the Ethereum network, NFTs are not directly increasing the energy consumption or the carbon footprint of Ethereum. Minting 1 NFT or 1 million NFTs is hardly a different energy usage, because the overwhelming majority of energy used by Ethereum today is for mining, but it does not really matter what happens within each mined block, including an NFT or a decentralised financial transaction or a legal document.
The whole NFT ecosystem works because Ethereum is decentralised and secure, meaning that all transactions can be done without granting custody to a third party who can impose their own rules at will, while no one can steal your NFT. Blockchains such as Bitcoin and Ethereum are energy intensive right now because it takes a lot of energy to preserve these qualities.
In the future once Ethereum is upgraded to the more energy-efficient network Eth2, its carbon footprint will be 99.98% better, making it more energy efficient than many existing industries. One can even compare Eth2 – which would cost 17.4kWh of energy – to global services such as Visa, which requires 149kWh of energy to process 100,000 transactions. That’s without considering the many optimisations being worked on in parallel to Eth2. It could cost as little as 0.167kWh of energy for 100,000 transactions.]
Chan: What do you see as Hong Kong’s strengths in the crypto art development and promotion? How is the city ready for the crypto art era?
Sleigh: We consistently see our contemporary art sales in Hong Kong draw a significant percentage of new collectors and a younger demographic with each auction, and see NFTs as a growth of the contemporary art movement with tremendous potential to appeal to this growing collector base who are digital natives and interested in new forms of digital art.
At Sotheby’s, we are thrilled that Max Moore, our contemporary art specialist who is responsible for our first NFT sale with digital creator Pak, will be based out of Hong Kong beginning this summer, and will continue to develop digital art sales and explore new opportunities from here.
Hong Kong as a (Digital) Art Trading Hub
Hong Kong offers a range of advantages for international art businesses, especially for physical assets. Apart from the remarkable tax advantages with regard to import and export of art and collectibles, doing business in Hong Kong is made easier with the city’s adherence to international standards of business law based on the principles of the rule of law and the independence of the judiciary.
It goes without saying that Hong Kong, on the back of its robust ICT infrastructure and status as the world’s premier international financial centre, is fast becoming a strong blockchain hub, with many of the world’s largest crypto exchanges including AAX, CryptoCom, Huobi, OKEX and TideBit, thriving Bitcoin associations, Ethereum communities, software engineering leaders of the blockchain space like Consenys, various over-the-counter or OTC trading desks and Bitcoin/Ethereum ATMs calling the city home.
In tandem with Szabotage, the first local artist offering NFTs in November 2020, Hong Kong is about to host the first physical art fair in Asia – Digital Art Fair Asia (DAFA 2021). With a focus on new media art, NFT crypto art and immersive art technology, Kong Kong’s crypto art space is fast gathering steam among the city’s fast-growing commercial galleries, even amid the lingering global pandemic.
The city’s digital readiness made the return of Art Basel a reality in May 2021. Since landing in Hong Kong in 2013, the show has been held every year and has been well received by members of the public, attracting tens of thousands of visitors to appreciate art works from around the world. The physical exhibition in 2020 was cancelled due to Covid-19, but the organiser is back with Art Basel Live, an ambitious digital offering designed to amplify Art Basel Hong Kong 2021, displaying art pieces from 104 leading galleries from 23 countries and territories.
Other encouraging signs of late include the deal signed between Hong Kong football club Resources Capital FC (RCFC) and Hong Kong Cyberport technology startup OliveX to put up sets of limited-edition collectibles for auction for the launch of the forthcoming football season later in the year, while Hong Kong-based TV production company AMM Global, a spin-off of Hong Kong’s oldest broadcaster Asia Television (ATV), has announced a partnership with UK-based Phoenix Waters Productions and Hong Kong-based asset management firm YG Capital to launch Asia’s first NFT drama series “Crypto Keepers” next year.
As NTFs continue to take centre stage in the cryptocurrency space to enable artists and fans to generate and own unique art collectibles, we have seen the first volume of “Buddha’s Palm”, a famous Hong Kong manga series created by Hong Kong master artist Tong Wong and first published in the 1980s, being sold on a Taipei-based NFT marketplace.
 Blockchain is a ledger of decentralised data that is stored permanently on numerous computers. Transaction records are stored in a sequence of blocks, which form a time-stamped and immutable chain, making it impossible to alter the data.
 Dapps are digital applications or programs that exist and run on a blockchain or P2P network of computers in a public, open source, decentralised environment and are free from control and interference by any single authority.
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