My recent interview for the ArtLaw.

Last week I gave an interview for the ArtLaw.club. Perhaps some of the issues raised here will be of interest to you.

- First stage of CoArt includes the introduction of a marketplace. Which options does it imply?

DS: Thanks to the ongoing NFT revolution, digital art has acquired the monetization mechanisms that it lacked so much. Over the past years, we, at CoArt, have been building a mechanism for creating crypto-certificates for traditional — physical art objects. What I call a “crypto-certificate” is the NFT, around which there is so much discussion right now. Their use can significantly simplify relations between participants in the Art market.

Thus, our Marketplace is a platform for the simultaneous display of physical art objects and Crypto Art, based on the capabilities of the CoArt blockchain platform. To put a physical art asset for sale, the owner just needs to select the “create CoArt-NFT” function in the control panel. The crypto-certificate of the selected object will be created automatically displayed in the “my art-assets” section. Nobody offers such a service yet. All the hype is now associated with digital art crypto-certification, but we are sure that traditional artists can benefit from this as well.

- What do you think about the environmental aspect of using NFT? Are you worried about that?

DS: We see the existence of this problem. Indeed, the process of creating many NFTs, especially those produced in large series — editions — is associated with high carbon emissions due to the very mechanism of the Proof of Work protocol. BUT, this only applies to NFTs created on the Ethereum PoW-based network.
We use a more modern blockchain protocol DPoS, which does not have mining as such, which means it is environmentally neutral. One NFT creates fewer emissions than a household coffee maker if it is ok to compare this way.

- How will the pool of dealers/connoisseurs/appraisers be formed? What are the basic criteria applicable to them?

DS: To ensure that all posted works can receive preliminary attribution and meet certain basic quality requirements, we have developed a special module for decentralized art consulting (DAC). It is used for algorithmic processing of the opinions of a group of art experts for the purpose of pre-moderation of art objects placed by users on the windows of their showrooms.

At the heart of DAC is the concept of Collective intelligence, which means that the art experts of the group act impersonally and asynchronously in a decentralized environment.
To improve the quality of the assessment, a motivation system is provided that affects the rating and the amount of remuneration for each member of the expert group.
As a result, only those art objects that have received a positive Ci-examination certification can be displayed on showroom windows. We were faced with the fact that it is important for artists and dealers who can be next to them — in the neighboring windows of the marketplace, and, satisfying their wishes, we created such a decentralized system.

As the basis for the DAC, we use the Ci algorithmic platform developed by Dr. Saulius Norvaishas, ex-dean of the Faculty of Social Informatics at MRU (Vilnius, Lithuania) and one of the CoArt co-founders.

- Will the artists be able to choose those experts whose opinion they want to receive?

DS: It seems to me that artists wanting to get the conclusions of specific experts can do so right now already. They do not need additional technological solutions for that, they can simply contact the desired expert directly. The point of decentralized consulting is that the result is an aggregated conclusion of a group consisting of at least nine specialists who do not confer with each other during the work of the group.
We use Ci algorithms to analyze the artistic value and determine the objective value of new art objects, as well as to predict the possible dynamics of changes in the price of an art asset for 5 years ahead.

In addition to attribution, this will provide collectors with the information for decision-making, for which they are now forced to overpay chains of intermediaries, artificially limiting the growth of the market.

- What might be the optimal number of such experts or does it depend uniquely on the desire of the artist?

DS: The size of the group depends on how much information the algorithms need to process the input data with the best end results. We now believe that the group should consist of at least nine specialists. If there are 15 of them, then the result may be even more detailed, but nine is also enough.

- Will the potential buyer be able to request separate expert opinion and bargain with the seller based on such expertise on the Marketplace?

DS: The conclusions of the decentralized examination are available to everyone — they are displayed on the page of a specific art object to which they relate, and can be viewed both online and downloaded to the visitor’s device in PDF format.

- What is the main purpose and main benefit of crypto certificates? What happens if the work is sold without blockchain registration? If the buyer gets to know that the third seller in a backward row had a blockchain certificate — how will it be possible to …recover the status quo and register the last buyer and/or all the missing transactions?

DS: Marketplace provides NFT certifications primarily to provide a place to store the metadata necessary for the accurate identification of works, as well as for the transparent recording of transactions and the transfer of ownership.

NFT is a way to automate processes, which is beneficial to the parties to transactions by default. It makes no sense to enter information about any manipulations with an art asset performed outside the network (off-chain). Wherever you sell your art asset, you must transfer to the buyer its crypto-certificate in the system. Those are the movements of crypto-certificates that are recorded in the blockchain and not the fact that the buyer paid you in cash or paid in cryptocurrency or you simply gifted him / her your art object.

NFT is a blockchain record that gives access to a repository with metadata associated with an object, as well as fixes changes in ownership — provenance. Of course, it is possible to assume that the work can be sold without transferring the crypto certificate related to the art asset. But this is the same as supposing that a painting, for example, will be sold without any accompanying documents, just for cash. Is this possible? Yes, it is possible. But why would the buyer need it? Indeed, with the subsequent sale of an art asset, he will have problems associated with the lack of confirmation of the rights to work.

- It seems that now the cost of creating an NFT is already approaching the value of the art assets themselves, what do you think about that?

DS: Yes, in some cases, the creation price reaches several hundred dollars per NFT, and this value fluctuates greatly throughout the day. But again, this applies only to the creation of NFTs on the Ethereum network, where there is mining, and, accordingly, GAS fees — payment of miners for their work on confirming transactions. In the new generation blockchains, transaction costs are ten times lower, again due to the absence of mining.

- Who is allowed to access data on the particular work or person, registered on the blockchain? (e.g., parties to the current transaction, parties to the previous transaction, potentially interested parties, law enforcement agencies, etc.)

DS: Transactions recorded in a specialized blockchain, which we call a distributed Provenance ledger, are available to everyone at all times. This is the meaning of the blockchain. But what exactly can be seen there? That user A with the display name “Adam” transferred to user B with the display name “Eve” a certain amount of money in a certain equivalent (fiat or crypto) and received in return the ownership of a certain art object. At the same time, although the parties to the transaction went through the KYC / AML procedure during registration, they do not have to call themselves in the system by their real names, thereby disclosing personal information. And the object itself transferred in this way can be displayed online in the showroom of the new owner, be exhibited in an offline museum, or be hidden for viewing at the request of the owner.

- Taking into account that works of art are subject to AML regulations, will there be any differences between processing information on the physical-only transactions and blockchain-based transactions?

DS: We still live in the same physical world, which, although badly battered by the pandemic, has not yet become fully digital. The priority in the execution of purchase and sale transactions belongs to what you call “physical medium”. But what is this carrier? Is it still a paper document with a blue ink stamp? No, these are already files sealed with electronic signatures of those lawyers who traditionally certify the transfer of property rights from hand to hand. It’s just that when we deal with NFT certificates, their electronic signatures are added to the metadata attached to the NFT. Crypto certificates cannot be changed “retroactively”, but supplemented any time. Therefore, there are no problems with the legitimacy of transactions related to NFT.

- Crypto certificate provides an opportunity for partial ownership. For blue-chip artworks, it seems to be justified by large (sometimes, impracticable) purchase prices. Why might it be interesting for emerging artists trying to sell their artworks for comparatively moderate prices?

DS: This, unfortunately, has not yet received legal support. It is not questioned that a group of owners can jointly own an art object. For this, such a group does not need a blockchain — ordinary “paper” fractional ownership agreements are enough. However, there is no secondary market for free circulation of such “shares” — “shares” of high-value art objects.

Nevertheless, many are interested in this form of co-investment and co-ownership. HNWI collector investors — traditional clients of mega-dealers — also need new players to enter the market who can jointly buy high-value art assets.

Deloitte[1] directly points to new types of collective investment instruments as a clear trend that is gaining popularity.

- What are the next stages planned to be open by CoArt and how art market participants might benefit from them?

DS: The CoArt Metaverse is our closest, next target. We are building the Metaverse as a convenient and accessible 24/7 exhibition VR space for tokenized art objects, which will also be a place for direct communication between all market participants.

Having enough VR space, you can exhibit any number of art objects, invite those to whom you want to present it at any convenient time, and complete a sale and purchase transaction without leaving the VR space, thanks to operations with NFT certificates of art objects.

And the second main goal is the secondary market for a new type of derivatives backed by the value of physical and digital art assets. We want to create it as quickly as possible. There are all prerequisites for this. This is what markets, investors, and retail traders are waiting for.
Therefore, already at the stage of the first iterations, we lay the possibility of crushing new art objects into crypto certificates for the possibility of fractional ownership of them later. This opportunity will be required as soon as the legal basis for the circulation of such assets appears. Who knows how many new Basquiat artists are among the artists starting their careers today and living next to us?

Founder at CoArt blockchain platform.