Royalties for all: the Sotheby’s approach to NFT resales

Osinachi, Pool Day II – Portrait of an Artist

Sothebys has expanded its uncomfortably-named Metaverse digital artwork and collectibles platform to include a full peer-to-peer marketplace for secondary sales of fine art NFTs. It’s not exactly open – it will feature a rotating selection of web3 artists “curated by Sotheby’s specialists”.

All transactions will take place on the Ethereum and Polygon networks (described by Sotheby’s as the “networks of choice for NFT creators and collectors”) and collectors will be able to make purchases with ETH or MATIC. Sotheby’s will be charging a 2.5 percent fee on top of artist’s royalties.

“When Sotheby’s Metaverse first launched more than a year ago, our goal was to bring to market a first-of-its-kind platform that would be distinguished by the expertise and vision of our specialists to curate sales of NFTs … Now, we are continuing to advance and evolve our platform to offer new and more seamless ways for the community to discover and collect new forms of digital collectibles, from limited edition NFTs to unique works by the artists redefining perceptions of digital art,” said Sotheby’s Managing Director, EMEA Sebastian Fahey, in a press release.

Sofia Crespo, Embrace 3030 (2020)

The first 13 artists to be included in the platform’s launch are Tyler Hobbs, Claire Silver, XCOPY, Diana Sinclair, IX Shells, Sarah Zucker, Refik Anadol, Sofia Crespo, Sam Spratt, Pindar van Arman, Osinachi, Hackatao, and Sebastião Salgado. Sotheby’s said the selection will change every few months.

The Metaverse platform is a Sotheby’s-standard professional presentation, with a decent profile of the artist and a separate tab containing their NFTs – ranging from just three for Tyler Hobbs to 5,001 for Salgado’s black and white images: glitch specialist XCOPY is more typical with 155 on offer. You get an indication of provenance and trades as well as the floor price: it’s certainly enough to grab the interest. Under each NFT is a ‘make offer’ button (you’ll need an account to actually make an offer).

The hot issue in the secondary market for NFTs is of course the question of artists’ royalties, especially at a time when some platforms are cutting back on royalty commitments as they fight over market share. OpenSea is the prime example; back in February, it confirmed significant changes that included “moving to optional creator earnings (0.5% min) for all collections without on-chain enforcement (old & new)”. In effect this meant it was now up to the buyer whether or not they honoured an artist’s royalty preferences in OpenSea transactions.

It’s widely assumed that OpenSea is trying to make transactions more attractive to buyers because it is starting to get some serious competition, notably from Blur – which effectively incentivises people to pay full royalties on their NFT purchases through token rewards. As such, Blur is pitched at high-volume traders and speculators rather than the veneer of cultural commitment that OpenSea and others would claim.

Sotheby’s by contrast can major on its reputation in the art market to present a limited and curated collection of NFT artworks; crypto volumes and broad-scale, peer-to-peer NFT activity aren’t its primary interest here. So Sotheby’s is happy to say it will honour artist royalties on its secondary platform via marketplace smart contracts and in accordance with artists’ stated on-chain royalty rate. As the press release put it: “Sotheby’s commitment to honouring artist royalties … signals Sotheby’s artist-first ethos as one of the only major NFT marketplaces committed to artist resale royalties”.

Still, it’s an interesting time to get heavily into the NFT artwork market. Prices for even the most sought-after collections have fallen sharply and transaction volumes are right down. A year ago the Non-Fungible market tracker was clocking a thousand or more daily art NFT transactions, with a total value regularly above $1m per day; last week saw fewer than 200 transactions each day, though values in the hundreds of thousands suggests that it’s mostly the high-ticket items that are selling. These are still relatively big numbers, but the shine has definitely come off NFTs.

But if NFTs are to become a serious part of the art market rather than a short-lived bandwagon or just another asset class for speculators, it’s this kind of move that could make the difference. It’s a serious, innovative, artist-friendly approach that provides a much-needed solution to fragmentation in the digital art world.

Sam Spratt, VII Wormfood (2022)

And where are the alternative? Maybe in Switzerland. Last November, Art Basel’s parent MCH Group announced the launched of Arcual, “a new blockchain ecosystem offering smart contract solutions for the art community”.

It’s not exactly a competitor, in fact, and not just because it has been rarely been seen in the wild since its launch. More relevantly, it’s not limited to any curated selection of NFT artists: as you might expect from the Art Basel link, Arcual is being demonstrated to galleries (rather than purchasers) and is presented as an all-purpose option – a digital ledger which offers artists, galleries, institutions, and collectors a standardised way of logging provenance and sales agreements on the blockchain.

Or, as the press release puts it: “Arcual’s blockchain applications will create a trusted space for information, partnerships, and transactions within the art world … Arcual has been purpose-built to address the unique needs of … artists, galleries, institutions, and collectors”.

The provenance issue is interesting. Provenance research can often be difficult, both for contemporary artists – several of whom aren’t great at keeping records: they just want to create – and for old masters, where the chain of ownership is frequently open to abuse to distort value or obscure title.

And while artists’ royalties deservedly attracts the attention, a related issue that gets less coverage outside the circuit is the impact on galleries that take the risk of supporting artists early in their careers. They don’t usually see any benefit from all that work after the artist’s reputation (and the value of their work) booms.

In terms of actual product, Arcual offers smart contracts (that’s an example on the right) which are permanently tied to an individual artwork. Customisable resale royalties can be included as part of the deal along with the usual terms and conditions. Automated payments go to all parties after each sale, and the record provides a verified ownership history.

Arcual also generates a unique digital Certificate of Authenticity for every artwork that is registered on the blockchain, cannot be lost or damaged, and is automatically transferred to the new owner after each sale.

Arcual will make its money from a small fee (“less than five percent”) on all initial transactions, with a larger take of five to 15 percent every time an artwork is resold.

There are other blockchain approaches to digital contracts in the art industry, the likes of Fairchain, Artory, and Verisart. (Some take a flat fee on sales, others take a percentage). But Arcual has a significant USP: when a sale is made, Arcual requires two parties — typical the artist and the gallery — to create the contract and the certificate of authenticity. This gets over the problem of a contract created by a single party, where the buyer has to trust the probity of the contract’s creator (who would typically be a gallery) to ensure that the information in it is authentic.

Arcual might need a couple of years to find its feet and to rack up a significant number of clients. Sotheby’s Metaverse, because it operates at a smaller scale and with more limited ambitions, might well have an edge; there’s currently very little sales activity showing on the site, but it’s early days.

Both approaches do look promising as art-business solutions to the credibility of NFTs while delivering on the promise that NFT artists can benefit from the growth of their own market.

Sarah Zucker, Treasure Cats (2021)

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