The Inconvenient Truth About Secondary Markets, Part II.

Visual conversation at dada.art

Watch the Working Group discussion: The Inconvenient Truth About Secondary Markets part I.

Introduction

For the past 6 months, members of the DADA community have been exploring the relationship between rare digital art and marketplaces on the blockchain.

Background

The blockchain art market has been steadily growing while a handful of art marketplaces founded in 2018 have become well known in the NFT space. That year, a small group of early adopter artists exploring this technology partnered with some of these tech start-ups to tokenize their artworks using smart contracts on the Ethereum blockchain.

Our Thesis

By nurturing a speculative secondary market based on investment and return on investment, in which artists are transferring 90% of their source of wealth to collectors in perpetuity, it is all but inevitable that at some point, collectors as a group will create more wealth, and hold more power than artists as a group.

Data Analysis

In this data analysis we assume a crypto art marketplace with the following price scheme:

  • primary market (sales from the original artist to the first collector): 15% of the fee goes to the gallery and 85% to the artist.
  • secondary market (sales from collector to collector): 10% of royalties to the original artist and 90% to the collector.
  • moreover, there is a simple 3% transaction fee for all primary and secondary purchases, paid by the buyer (collector).
  • the volume earned by artists (artist volume) as the net prices (without fees) of sales on the primary market plus the royalties received by artists on the secondary market;
  • the volume earned by collectors (collector volume) as the net prices (without royalties) of the sales on the secondary market;
  • the overall volume generated by the gallery (gallery volume) as the sum of volumes generated by artists and collectors.
  • is the market concentrated or equidistributed?
  • how did the market concentration evolve over time?
  • what is the share of artist and collector volumes as of today?
  • how did the artist and collector volumes change over time?
  • when in the future are the artist and collector volumes going to break even?
  • what if the royalty percentage for artists would be larger?

Concentration of Volume Among Sellers and Buyers

We will use two well-known econometrics tools to investigate wealth concentration: The Lorenz curve and the Gini index.

Artist and Collector Volumes

“The artists are the ones who make the magic happen, so be respectful to all SuperRare artists even if you are not a fan of their work”. SuperRare Community Guidelines

  • 78% goes to artists (fee-free primary sales plus royalties on secondary sales)
  • 22% goes to collectors (royalty-free secondary sales)
  • 80% of the gallery fees are paid by artists (with the 15% fee of primary market sales) and 20% are paid by collectors (with the 3% transaction fee)
  • of all sales, 85% are primary sales and only 15% are secondary sales (the secondary market is still underdeveloped)
  • out of every 100 artworks bought by collectors only 17 of them are resold (most collectors have strong hands)
  • collectors resell at 1.68 times the price they buy (some collectors are art speculators and buy low to resell high)

Predicting Artists’ Dominance

Let’s fit a linear regression model. The linear regression model has time (number of months) as an independent variable and the share of volume earned by collectors as a response (dependent) variable. It predicts the following linear model with good quality of fit (R-Squared is 0.88):

What If Scenarios

When will the break-even happen between artist and collector volumes if we increase the royalty percentage? Let’s check:

  • assuming an artist royalty of 10%, the slope of the collector regression line becomes 1.25% and the break-even with artists will be 19 months from now.
  • assuming an artist royalty of 20%, the slope of the collector regression line becomes 1.11% and the break-even with artists will be 24 months from now.
  • assuming an artist royalty of 50%, the slope of the collector regression line becomes 0.69% and the break-even with artists will be 64 months (over 5 years) from now.
  • assuming an artist royalty of 90%, the slope of the collector regression line becomes 0.14% and the break-even with artists will be 352 months (29 years) from now.

Conclusion

One of the reasons we posed these questions and wanted to see what the data would tell us is to get a sense of whether the crypto art market is achieving some of the many aims that are often stated as ideals in the space: empowering artists, the democratization of art, and being something truly different from the old, broken art market.

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DADA.art

A collaborative art platform where people worldwide speak through drawings. Building a blockchain token economy for the arts. https://dada.art