Digital Art Business Model

Even defining “Digital Art” is a difficult task, let alone trying to determine where the industry is going.

Getting a glimpse into the Business Model Vision surrounding Digital Art requires a deep look at both the technology and the underlying dynamics of the art market that determine how artists get paid and how much they get paid.

A Renaissance 2.0 may just be in the cards as this all plays out.

Digital Art Business Model

Thumb: KaboomPics

A lot of what separates ‘Art’ from ‘Photography,’ for example, is the idea of “preservation of value” versus simply a determination of value. When looking at the Business Model Vision surrounding Photography, we framed the question around how you know how much a photo is worth?

Can a picture be worth a thousand words? How much more?

BM Vision – Photography

That’s because really anyone can produce a photo nowadays. The nuance that determines the value of a photograph is shaped by the context of where the photo was taken (ie. a wedding or major sports event), who the end buyer is (ie. a family vs. a brand), and the execution of the photograph. Photography is linked to art but it is inherently a different value proposition for society at large.

Traditional Art - Value Chain

Art is something we collectively believe to be fundamentally

  • a) rare and
  • b) valuable

If it is not both of those two things, it is not art. In an era of various technological innovations that enable easy replication, art also has to be c) original. As explained in the NFT Tech piece, having the ability to preserve authenticity is the key to the art market in both the physical and digital worlds.

If something is a) demonstrably rare b) perceived to be valuable c) certifiably original, then the sky is the limit on what the price(s) for those items can be fetched in the open market. How else can you explain a seemingly random painting or drawing that sells for $1 Million?

The blockchain and NFT subsequent boom (and then bust) laid the groundwork for these qualities to be verifiable in the digital world. Where ‘Digital Art’ would have once been a seemingly set of random pixels that could be cut and paste from one website to another, now the original can be verified, sold, tracked, resold, and made immutable in digital history.

Therefore the business model possibilities are compelling for one of the most unique markets in the world.

Business Model - Digital Art

The Business Model of Digital Art

What makes the art market so hard to define is the idea of a ‘collection’ not only retaining a certain value, but also appreciating (or depreciating) significantly in value over time. That makes art an asset.

Digital Art is different because it is so new. The value of the NFT market, for example, is expected to be about $150B by 2026. That from a market that was basically $0 several years ago, at least in the way that we think about Digital Art relative to blockchain technology now.

The value exchange on that market will flow from a lot of new ‘Digital Artists‘ who go through the minting process of some form of artistic creation in .png or jpeg form, video or graphic type of art, music, or collectible.

The creator first needs to ‘mint’ or publish their digital asset to a blockchain of their choosing – typically, it would be on Ethereum or other NFT-friendly chains

New Tech – NFTs
5 Step Process to Minting a NFT

If a piece of Digital Art is not sold on the blockchain than it cannot be verified 100% nor can it be tracked and traced back as the original. Being 100% verifiable and traceable helps to preserve the authenticity of any one piece of Digital Art versus another; this in turn helps create trust in the market and fuel activity on primary and secondary exchanges.

By preserving authenticity, the value chain can operate smoothly and create markets for various types of digital art, music, collectibles, and other NFT-based goods.

New Tech – NFTs

The definition of what constitutes Digital Art extends across media, photography, music, collectibles, and other creative industries.

Media, Photos, Music, and More

Going back through several of the Business Model Vision posts on Digital Music, Photography, Media, etc. we must remember that the incentives for creators to create are awful in the current environment:

  • the average artist will make ~$5.00 per 1,000 Streams on streaming platforms like Spotify
  • the average photographer will need to have indexed several thousand photos on stock marketplaces in order to earn even several hundred dollars in revenue per month
  • the average creator on media platforms – old and new – will have to gain hundreds of thousands of followers and subscribers across numerous channels to earn a living

The ‘creator economy’ is meant to help creators monetize their work more efficiently, so they can try to earn a living as an artist would want. But it has not been happening, and if anything seems to be going in the opposite direction of what we want at the current moment.

What we saw during the NFT Boom in 2021 was thousands of artists attempting to monetize their work as art. Here is what happened in a quick synopsis:

  • the market boomed as speculators bid big on anything appearing unique or rare across many different medium of Digital Art
  • the market crashed as volume dried-up and a lot of the would-be originality in the digital seemed incomparable to art in the physical world from a value perspective
  • in line with a lot of the events of 2022 in the cryptocurrency space, many details about the inner workings of the market have been revealed; and while the market is down, enthusiasm remains high on the margins from those who are most invested into it

What is perhaps so striking is that the incentives in the creator economy point to another future boom in the Digital Art market in years ahead.

The Incentives to Digitize Art

To most it is inconceivable that any piece of Digital Art could ever hold a candle to a piece of real, genuine physical art. And there is probably a lot of truth in that.

But let’s go back to a simple question – what is a starving artist to do?

If it is between working some menial job to pay the bills and shooting photos at night to feed that passion, imagine why you would not want to try to create a NFT.

The incentives are not only aligned to try and create a NFT, but also to create something that would be great in the eyes of the market because:

  • Minting costs money, sometimes several $hundred depending on the specific NFT Marketplace

On average, the cost of minting a standard NFT can fall anywhere between $1 to $1,000. You can find popular NFT wallets charge between $70 and $120 to open an account.

Just Creative
  • Then there is the cost in either time or money to market the specific pieces of Digital Art to potential buyers, collectors, etc.
  • When the combined costs are added-up in terms of time, money, and energy, the creator/artists needs to put together pieces that can sell for multiples of what they paid, which means a portfolio of art that can sell for thousand of dollars

Keep in mind that almost all Digital Art transactions occur in digital currencies, as the specific dynamics of NFTs are such that the minting process requires a wallet to be hooked-up in order to pay the minting fees themselves.

Minting a NFT - Step 1 - Setup a Digital Wallet

If you mint something on a NFT Marketplace and are unable to sell it, you are at a loss. That is the big risk. The incentives here in the Digital Art market are quite a bit different from the physical world – higher risks, and higher rewards in many ways.

Ownership Rights and Royalties in Digital Art

The debacle around the first published NFT on the NameCoin blockchain in 2014 – titled Quantum – was discussed in the New Tech post on NFTs. Following the record-breaking sale of the NFT in 2021 at Sotheby’s for $1.47 Million USD, there was some controversy about the minting process and ownership rights for Quantum, pictured below.

Quantum - first NFT

In theory, the blockchain is an immutable, technological layer that validates and tracks ownership in perpetuity. Naturally, having a historic auction house like Sotheby’s handle the sale gave confidence to all who participated in the buying process; yet, there is also a digital signature of sorts to demonstrate ownership in perpetuity relative to the minting.

We can see the metadata relative to the blockchain minting process for Quantum published below from the Sotheby’s website.

Source: Sotheby’s

Through any sort of block explorer program for Ethereum (ERC-721 is a NFT protocol for the Ethereum blockchain), anyone could validate these details. As long as Ethereum exists as a public blockchain, this remains the case.

The ownership was thus transferred from the original artist’s wallet to the buyer’s wallet for $1.47 Million USD. In this case, the transaction could have very well been conducted in fiat since an auction house was involved, but many others happen in ETH (Ethereum token).

Digital wallets are secured by public-private keys (ie. encryption), meaning that whoever holds the wallet’s private keys doesn’t even technically (in the online world) link their name to any respective asset.

They hold the asset in a digital wallet, and that is enough to retain ownership. Only a future transaction or a complete collapse of the Ethereum blockchain would change that ownership record.

Royalties can also be paid out for any NFT/Digital Art, a process governed by a mix between a smart contract and the blockchain. Say a famous music album was sold as a NFT, for example, and there were royalties attached to the contract.

Each time the album was sold, a % of those sales would accrue automatically to the owner of the ‘digital rights’ as set out in the details of the smart contract.

Thus these types of digital assets can also produce cashflow just like a business in the real world.

Digital Art Business Model – Permutations & Combinations

As the highly fragmented and complex market surrounding Digital Art is difficult to frame concisely, it is sometimes easier to use real-world analogs to imagine where this market goes in the future.

The IRL art markets are primarily driven by four major players:

  • the artists
  • the art/auctions houses
  • the art dealers
  • the collectors

Art will typically move from the artist to the collector in some way shape or form, with the art/auction houses and art dealers earning a significant commission in between.

Traditional Art - Value Chain

The major difference in the digital marketplace is the need to mint the art first. The actual process of minting – and the brand value of being minted on certain exclusive marketplaces – makes it a unique market where the marketplaces function as the hub for all other players in the market. Without NFT Marketplaces there is no market.

Digital Art - Business Model (market players

Another key difference between the physical and digital art worlds, is that in the physical art world, only the artist can create art. But in the digital art world, any player on the map can mint digital art.

There are many examples of ‘fine art houses’ that specialize in selling physical art, but have branched into digital art, as one such example.

Zeno Fine Art - NFTs
Zeno Fine Art – Physical Art & Digital Art Collections

How do the NFT Marketplaces earn money?

There are many NFT Marketplaces in the industry, depending on the niche. Google any of the following terms and you will see a slew of different results:

  • ‘music NFT Marketplaces’
  • ‘art NFT Marketplaces’
  • ”video NFT Marketplaces’

We know, broadly, how NFT Marketplaces earn money. With the added blockchain tokenization dimension, there are too many to name, but the major ways are linked to each level of the value chain:

  • earn fees from artists for minting, account setup, etc.
  • earn commissions on primary sales and secondary sales
  • tokenize incentives with collectors to create ‘exclusive access’ to certain sales

The NFT Marketplaces are not small plays. Many of the top ones have raised hundreds of millions of dollars in VC funding in the boom years. But with the collapse in sales volumes in the NFT market, the gloves have come off in the industry.

The trade volume on the platform has dropped 90% from the January 2022 peak of $4.85 billion.

Digital Music News

How Much Do the Digital Artists Earn?

A recent blog post by one of the top NFT Marketplaces Superare sheds light on this contentious topic. The post centers on a recent decision by a popular platform to rebrand ‘royalties’ as ‘fees.’

After X2Y2 made royalties optional, NFTStatistics found that over the course of one month, the number of collectors who opted in for artist royalties plummeted from about 75% to 18%

Superare Magazine

The short answer to the question above is that we don’t know because the industry is in flux. Volumes collapsing in NFT Land has meant that some of the top platforms now start to look like their fee-heavy counterparts in the traditional industry.

There were certainly many examples of artists who themselves ‘minted’ in the boom years of 2021, especially when Ether was trading at $4,000 (currently low $1,000s) and Bitcoin was trading at $70,000 (currently around $16,000).

It seems that Digital Artists fortunes are tied to the macro market at this moment in history, rather than the quality of their work. It is somewhat hard to correlate this to the traditional industry, as top-tier Digital Art could have been created yesterday whereas the art that moves for $millions in the physical world has probably been around for decades or even centuries.

The Future of Digital Art

In these current challenging economic and social times, art – whether digital or physical – can act as a reflection of culture and help ease various social tensions.

Digital Art is itself a new market with rules that are being written and re-written in real-time. A super boom in 2021 has followed a super bust in 2022. The timelessness of art is hardly reflected in the dynamics of the NFT market; those pieces that are meant to hold value will, it is just a matter of market dynamics to determine timing.

While there are various advantages to holding the physical art, there are some types of digital art that can themselves be advantageous. Just like the debates around physical and digital currencies, it seems that with the trajectory we are headed on sociologically that inevitably there will be an equilibrium between the two in the future.

That equilibrium will generate hundreds of $billions in the process, as Digital Art can literally be generated out of thin air. Long-term, it is likely that the major Marketplaces/Platforms will play a role in shaping the market structure; and right now, it certainly feels like the market wants to start seeing incentive structures titled towards the artists themselves.

A Renaissance 2.0 may just be in the cards as this all plays out. If artists can effectively monetize their work and live their lives, their creativity can spill out into other ventures. Until that happens – and nobody is holding their breath – the Digital Art market will unfortunately probably look like most other platform-centric markets.

Overall, in both the boom and bust times, Digital Art is a fascinating market to try and establish a Business Model Vision around. Inherently complex and fragmented, there are many different players with differing incentives in the value chain. As the market develops, the fragmentation will lead to consolidation and more simplistic models will emerge.

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