Background
In the first place, it must be noted that the peak of the NFT market was reached in January, 2022. All this, of course, is in retrospect. Thus when the initial discussions about an NFT marketplace for the gallery were taking place in March, 2022, the NFT market was already on the way down. It would lose about 95% of its value by September, 2022.
Nevertheless, there was assumed to be another sector of the NFT market which appeared more stable. This sector dealt with NFTs based on objects, documents, images, etc. of wider significance that jpegs or images created by AI. A good example was the NFTs of important news events created and marketed by CNN.
While the collapse of the jpeg-based NFT market caused speculators to lose money rapidly, it was assumed that NFTs based on a more foundation would maintain more of their value. Unfortunately, the CNN NFT site was terminated without adequate notice in early October, 2022. Since this was unexpected and was reported in the mainstream news, it is not possible at present to use this idea as a selling point. The future is a little uncertain and new ideas are needed to revive the market.
Approach to art administrators
It is probably advisable to downplay the NFT market and emphasise the fact that the gallery’s business is structured to exploit the potential of blockchains directly.
The suggested strategy, to be explained to deans of art schools, is therefore
- All transactions will be tokenized and will be conducted through the gallery’s marketplace. The gallery will have to provide some assurance that it will not pull the site at short notice as CNN has done.
- The currencies accepted by the gallery’s marketplace will be Ethers (or related), Bitcoin (or related) as well as dollars, euros or sterling (or any stable currency).
- The advantages of dealing in cryptos must be clearly emphasised because it will make the art available to the widest range of collectors. Trades in dollars will always have the potential to attract the scrutiny of the US authorities.
- The barriers to collecting must be identified. These are the quality of the artist, the purchasing power of the collector as well as a little extra to motivate both sets of participants.
- The quality of artist is to be assured by signing up (in the first instance) artists who graduates of art schools. These artists must be able to articulate their ideas and come across as interesting people with whom collectors will want to associate.
- The collector’s purchasing power will be multiplied by offering high priced art but the sale will be through long-dated options contracts.
- The extra frisson of interest to both artist and collector will be that the options contracts will be tradeable on the gallery’s site. Thus will provide the motivation to both artist and collector to promote the art.
Approach to collectors
The stamp of approval on the art produced by graduates of art schools should be emphasised. This should be used to justify charging the full price for a piece of art.
In order to ease the initial financial burden to the collector, the premium for the options contract should be set low enough (say, 25%) by agreement with the artist. The gallery will have to be the custodian of the art when sold in this way.
The collector should be encouraged to trade the contract, hold social gatherings (preferably at the galley) to show off his or her options and the artists should be present to add force to the creative atmosphere.
One good way to increase the value of art is to find a collector who is influential within a certain circle, say, a financial trader. It is often the case that if one financial trader stand out in a particular direction, his or her competitors (usually his or her friends) will inevitable want to follow suit or risk bring diminished. It will be in the interest of the gallery to cultivate these competitive collecting communities.
The fact that the options contracts are tradeable will be an added incentive to collectors. If they feel that the artist they’ve patronised has not live up to expectations then they can simply allow the options contact to expire. Otherwise, they will exercise the option and take possession of the art.
It should be open to the collector to sell his or her collection using the same technique, that is, by tokenizing an options or futures contract.
Maintaining value
The innovative approach adopted by the gallery will have to be publicised on social media in the first instance. In order to reach the established art collectors and to grab a share of the Mayfair market, it might be necessary to get the attention of the press.
In order to attract the attention of the FT, for instance, it would be necessary to get the cooperation of the art school themselves. If they feel that their graduates have a clear part to meaningful professional careers then they could be persuaded to issue press releases through their respective schools. Such press releases will carry more weight with the mainstream media than social media on its own.
If the heavyweight art critics can be persuaded to attend showings at the gallery where the most promising work is on display then the credibility gained will allow the gallery to maintain and augment its status. This should then be monetised to maintain the gallery’s brand and value.
Proposed plan of immediate action
It might be better to follow the current path and develop the business model progressively. So the first step would be to get the website up with provisional structure. If it doesn’t cost too much, Raymond could then be asked to improve the user-experience. Otherwise, it might be better to wait until the ground work of speaking to selected artists and collectors is complete.
So a possible plan is
- Treat the website as a prop for the time being because it provides a visible presence for the physical gallery. It’ll only take a day or two to do this.
- Record a few videos using a smartphone for distribution to artists. These videos will centre on the idea of selling the artists and the gallery’s blockchain philosophy. The advantages of blockchains and how they’re likely to displace corporations or the traditional Mayfair model could also be included.
- A different type of video should be recorded for collectors. Perhaps this could emphasise three aspects of collecting: its civilising effect, its role as a store of value and its investment potential.
- These videos could be posted on YouTube, Instagram and on the website. Further, other blog posts could be included on the website.
- Once the plans have firmed up after contact with artist and collector, the website can be finalised and launched.
Most of the above could be accomplished in two sessions, say lasting four hours once the scripts have been agreed upon.
Thereafter, letters to art schools should be sent with links to these videos. It will be necessary to use the email accounts connected to the gallery and not gmail accounts.
Graduation shows at art schools will be in the summer but it’ll be advisable not to wait till then because talent scouts from galleries, buyers and agents will be competing to sign up the most promising artists.
Approaching potential collectors will be more difficult and may depend on a more hands-on approach. It looks like it would be necessary to talk to as many people as possible to see the lie of the land. Promising candidates could be offered a drink to lubricate the approach.
Another possibility is to make a pitch through a professional firm like an investment firm, a firm of solicitors or of accountants. All these may cost some money and would be a bit of a shot in the dark.
Main selling point
The main selling point of the gallery should be the innovative use of blockchains to grab a share of the Mayfair market.
At present, the technical limitations of the current design of blockchain require the following steps:
- An options contract is drawn up,
- This contract is identified by a QR code, for instance, and the code is registered on the blockchain (tokenized).
- A smart contract corresponding to the contract is also deployed on the blockchain.
- This contract could be programed to debit the buyers crypto-account at the expiration of the contract but this might prove unpopular.
- Alternatively, the contract may be programed to expire and the buyer notifies the gallery of his or her intention to exercise the option. Then the completion of the sale is accomplished via another smart contract.
- It is possible to deploy a more sophisticated smart contract which will automate the transaction but it would require someone with a FCA/CFA licence to approve it.
Longer term plan
A prospectus or business plan should be drawn up to assess the chances of raising capital to construct a blockchain suited to the needs of derivative trades (physical futures and options).
Several different models are possible. The safest route would be to replicate the current options or futures market on the blockchain. There will be security implications and these will have to be evaluated carefully.
The smart contract for the gallery’s options contract might be too cumbersome for the physical futures market. A streamlined version is necessary. The typical minting time on a proof-of-stake blockchain is about 12 seconds and this is quite a long lag. It might not matter in the art market or for non-financial futures.
The chief advantage of using a blockchain is the fact that the transactions are denominated in cryptos and the participation is truly worldwide. This openness may also attract the attention of the financial authorities.
The estimated development cost is £400K and would require about 18 months to put together and test. The might be regulatory implications which would require extra resources.
Once the software has been finalised, it has to be distributed widely to create the actual blockchain. There might be initial advertising costs as well as costs incurred in providing take-up incentives.
So the overall cost may be in the region of £450K.
On the whole, it might prove profitable to go into partnership with a brokerage firm in the City.