Blockchain technology enables the trading of digitalized assets. It can include non-bankable assets such as real estate or paintings. To verify the uniqueness and authenticity of works of art, credible provenance can be assigned by adding a unique and indelible signature called "tokenization" or "imprint".
Blockchain is a technology in which artists and consumers can connect with each other directly via tokens. It is the end of centralised patrons. It can be done without middlemen: without galleries, without art dealers and without auction houses. This is the promise of Blockchain: a technology based on trust - decentralised and transparent. Artists and Art Collectors can expect more control and independence from this technology.
Blockchain, also known as Distributed Ledger Technology (DLT), is arguably one of the greatest economic innovations in recent history, and the art world hast begun to experiment with the new technology.
Digital account books have existed since the establishment of online banking, digital database systems even longer. What is the revolutionary potential of the Blockchain technology?
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At first glance, a block chain is nothing more than a digital account book or, better, a database. This is not necessarily new or special. However, there’s a lot of excitement similar to the excitement of the advent of e-commerce in 1999. It is certainly a technology that is here to stay.
For the art world, any new technological invention on this scale plays a highly significant role, especially when this new innovation has such an impact in the financial world as well. It is safe to say today that people who are interested in buying and selling art are also interested in finance.
When the crypto wealth, that has not yet arrived in the traditional art world begins to invest in art, there will be a never before experienced purchase boom and a rise in value of art. The possibility of buying art with digital money opens up a huge and financially potent group of buyers, who at first glance would not be interested in many of today's art movements.
The mere possibility of buying only a share of a painting or work of art, and thus becoming a shareholder in an asset, opens up infinite possibilities for financing artists and art. In theory, this would always have been possible, but with the Blockchain Technology it is now possible to do this technically and above all transparent and safe on a global level.
But it goes far beyond paying for art with a digital currency. More and more art is treated as an asset. The perfect application of block chain is asset control. The new technology can be used to reinforce old systems and to create new systems. One possibility how block chains can be used in art is in the declaration of provenance. This can help for example, to verify the authenticity of an artwork or work of an old master.
For artists and their works, who are no longer alive, this requires the utmost attention and probably the support of organisations such as Interpol to ensure that no false data is recorded and published for infinity. One should be aware that falsifications and false statements are omnipresent in the art market. The opportunity to prove that a work of art is genuine and that you are authorised to sell it will help the art market to become more reliable and transparent.
Another important factor, which is also related to authentication and provenance, is the possibility of a better controll of editions, as fraud of unauthorised reproductions can be traced and prevented. When selling multiples, the certificate of work is extremely important. Cryptographic signatures that correspond to the transfer of the data set give the buyer assurance that there are no further prints outside the declared edition. This kind of security has not existed until now and buyers had to rely on the artist or art dealer not to violate their given promise. Therefore, Blockchain technology is most useful when works of art are launched for the first time.
The new technology will play an important role in the storage and preservation of works of art. It is a common practice nowadays to buy art, but not to store and protect it personally.
Block chaining goes far beyond financing models or crowdfunding. When so-called tokenisation becomes established, artists will be able to finance, market and sell their works independently in exciting new ways. Nevertheless the know-how of experts will continue to be worth a lot in the future.
The use of Blockchain technology in the art world will improve provenance, transparency, copyright, ownership, valuation and authenticity, but that’s just the start. The possibilities to improve the handlings of the art market are endless. Taking in consideration the current state of the world, these innovations will have an unforeseen positive impact on artists, collectors and art.
To understand the technology, it is useful to take a brief look at the development history of Bitcoin. The crypto currency Bitcoin and the block chain technology are closely related. The emergence of block chain technology in scientific discourse goes back to a time when the Internet, as it exists today, did not yet exist.
A starting point can be set in 1979, when Ralph Merkle came across the Merkle Tree Principle. Another event can be dated to the year 1983. In that year David Chaum published the first white paper describing an electronic currency. A decade later, W. Scott Stornetta and Stuart Haber described the basics of a cryptographically secured concatenation of individual digital hash blocks, which today make up the individual components of a block chain.
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In 1997, Adam Back proposed the basis of Bitcoin's proof-of-work algorithm to implement the concept of a digital currency. The proof-of-work concept was originally used against denial-of-service attacks and e-mail spam. The development steps described above are part of a scientific discourse. This discourse paved the way for the crypto currency Bitcoin. This digital currency was described in a white paper by Satoshi Nakamoto in 2008. The block chain technology is an essential component of Bitcoin. Merkle tree, hash blocks, proof-of-work algorithm, crypto currency, what does it all mean?
The block chain is a new technology that makes it possible to store, process, share and manage any kind of information in a publicly accessible database. In a continuous list of data records (called blocks) these are chained by means of cryptography. The beginning of any block chain is the creation block or better the genesis block.
The original concept of the block chain is described in the Bitcoin White Paper. The person or group behind the pseudonym "Satoshi Nakamoto" describes serious problems in dealing with monetary values. Central institutions, such as banks, insurance companies or governments, are accused of abuse of trust in dealing with monetary values.
For example, banks use the money entrusted to them to conduct inefficient and cost-intensive business themselves. A conceivable example of this is the bursting of the real estate bubble in the USA in 2008, which had a worldwide negative impact on the global economic system and caused thousands of people to face existential hardship. This new technology was developed to prevent the abuse of trust and the associated misuse of data on a systemic level. Misappropriation of funds, abuse of trust or simply fraud is made more difficult by this new technology.
The starting point of block chain technology is the shift in control of monetary values or information. The control over monetary values and information is, so to speak, decentralised. This means that the information that a bank has at its disposal is made publicly available to everyone.
First and foremost, this sounds insane, because in this way everyone could see the data of the other. If "Person A" runs an account at the savings bank, "Person B" can see how "Person A's" finances are. But at the same time "Person A" can also see "Person B's" account data. This data could be misused by anyone.
For this reason, the accounts within a block chain are made anonymous. Each account has its own address, which consists of a sequence of numbers and letters. In this way everyone can look at each account and see how much money is transferred to the account, how much money is transferred from this account and what the current account balance looks like, but the account cannot be assigned to a real person. The use of a block chain is usually anonymous.
The anonymity of the users of the block chain is removed if the public address (comparable to an IBAN) can be assigned to a name. If this is the case, all further transactions of the person can be viewed from the public address and the anonymity gives way to an attenuated form - the pseudonymity.
Furthermore, information on individual accounts is no longer stored centrally. The account information of "Person A" and "Person B", for example, is no longer stored on a single Bank server. The block chain, considered as an account book, is stored within a decentralised computer network. This means that many different computers around the world are connected via the Internet. Each of these computers has stored the entire account book.
If "Person C" enters on his computer within the block chain that there is a million euros in his account, although he does not own it, the fraud can be automatically detected by "Person A" and "Person B". Because they can look on their computers in the account book to see if Person C really had a million euros in his account. They can then see that "Person C" wants to cheat and exclude him from the shared network.
In this way, fraudsters are quickly located. Via the decentralised network, fraudsters can be identified and excluded from the network by comparing the respective block chain versions. In the same way, the customers of a bank could recognise if their own money is being used by their banker for the wrong purposes. This creates security. Anonymity, decentralisation and security are three important features of block chain technology.
The functionality of a block chain can be described by the Bitcoin block chain. Bitcoin describes a digital unit that functions as a value carrier. Bitcoins are generated by the so-called proof-of-work algorithm. This algorithm is integrated into software that can be downloaded and operated by individual computers within the Bitcoin network. The algorithm is used to offset transactions (transfers) made from one account to another account with other transactions in such a way that the entire data set can be integrated into the block chain in an encrypted form. This calculation process is generally called mining.
When "Person A" transfers a Bitcoin to "Person B", "Person D" transfers a Bitcoin to "Person A" and "Person B" transfers a Bitcoin to "Person E", all transactions are cryptographically encrypted by a hash function and combined in a transaction block. The transactions are offset against each other because this saves time and storage space. For each newly created block, miners, i.e. operators of a computer within the Bitcoin network that hash-codes transaction data, received a reward of currently 12.5 Bitcoin. However, since April 11th 2020 this reward has been halved to 6.25 BTC. The newly generated Bitcoins can then be sold.
The algorithm used to operate Bitcoin Mining is the SHA-256 algorithm. It converts the transaction information into hexadecimal numbers and assigns them to a place within the block chain. The newly generated hash blocks contain information from the previously inserted hash block. Hence the term block chain.
From a technical perspective, the block chain is nothing more than a string of hash blocks. It is similar to a banker receiving 10 € from "Person A" and making a "+" in his own account book where all deposits are registered. The "+" stands for the amount of 10 €. The banker encrypts the amount, because no one but him should know how much "Person A" has deposited in the bank. The banker uses a different symbol for each new deposit, which has a certain similarity to the previous symbol. If "Person B" also deposits 10 €, the banker enters a "-" instead of a "+". In this case, "-" means that "Person B" deposited 10 €.
The more transactions are made within the Bitcoin network, the more blocks have to be created by mining. Likewise, the more blocks are integrated into the block chain, the larger it becomes and the more Bitcoins are generated. Finally, the more Bitcoins created, the more transactions can be made. Each transaction, each newly created block, is updated on each computer on which the Bitcoin block chain is stored.
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