For about as long as fine art has existed as an asset class, major auction houses have acted as the market’s de facto gatekeepers. The likes of Sotheby’s and Christie’s have always wielded the clout in the art world to make or break creators and, of course, they pick up a tidy paycheck for their services.

Blockchain-based non fungible tokens — or NFTs — have been touted as art industry disruptors by their proponents, given that they facilitate much of what auction houses offer. Innovative ownership models like fractionalization only look to further shake up the fine art market’s incumbents. But can the art world and NFTs coexist going forward?

The auction houses’ influence on the art market

It’s no secret that art auction houses exert a massive influence on the art market. Sotheby’s, Christie’s and others work on commission and have a clear vested interest in ensuring the pieces they put under the hammer sell well. Naturally, those selling pieces can get on board with that mission, even if some of the tactics used might be a little underhand.

A New York Times article exploring auction houses’ practices claims that many sale prices are predetermined. A seller will receive a guaranteed price behind the scenes to ensure a lot sells and an event generates the maximum possible hype.

Sellers holding the most sought-after — and expensive — works are often reluctant to auction a painting when the price they’ll receive is unclear. With a minimum satisfactory figure already agreed upon, collectors are much more likely to let go of a masterpiece.

The buzz around the industry that an eight-figure sale of a Van Gogh or Picasso generates not only has an impact on pieces by the same artist but also those auctioned alongside it. Therefore, the composition of an auction’s lots sets trends that ripple through the art world.

Additionally, auctions have a sort of coffee-shop-conversational effect on the market. Many attendees might not intend to buy anything featured but will still show up to discuss trending artists and movements. This, too, steers the industry’s direction.

NFTs: Pulling the rug from under auction houses?

Strictly digital and existing on immutable and decentralized digital ledgers, blockchain-based tokens possess characteristics alien to the traditional art world. The most striking is that their sale does not require an auction house.

While the internet and phone bidding enable auction houses to facilitate sales from distant corners of the world, actually settling a physical sale is a different matter. Completing the transfer of ownership documents, transporting a precious physical object and arranging payment each presents challenges that don’t exist with blockchain-based NFTs.

With an NFT, settlement takes the length of time for a few more blocks to be added to the blockchain — minutes. Meanwhile, payment occurs in real time over the same network. Smart contracts handle all the logistics that would require a team of expensive legal experts in the real world.

The cost of these services adds up, too. While an auction house like Christy’s or Sotheby’s might charge between 15 and 25% of a lot’s eventual price, the most expensive of their NFT counterparts charge just 2.5%.

NTFs’ digital nature also opens up new possibilities for artists and collectors. A physical artist cannot enforce a royalty payment every time a collector buys or sells their art. With an NFT, they can program a fixed royalty at the smart contract level, aligning incentives among artists and collectors — both parties benefit economically from a receptive market.

Mutual benefit

Many observers frame fine art and NFTs as competing with one another. However, as the newer sector has evolved, we’re increasingly seeing they can be complementary.

For example, in 2021, Christie’s and Sotheby’s played a significant role in fueling the mania that brought NFTs to mainstream attention. On March 11, Christie’s became the first major auction house to feature digital artwork represented by a blockchain-based token. The London-based institution later auctioned lots from the iconic NFT avatar collection Bored Ape Yacht Club and even announced its own NFT marketplace this September.

It’s impossible to quantify the impact that support from major auction houses has had on the NFT market. However, the all-time high monthly NFT trading volume was $4.7 billion in January 2022 — a figure that is multiples greater than the entire NFT trading volume for the whole of 2020.

Democratization and fractionalization

Innovations like fractionalization further support the thesis that NFT and traditional art auctions are symbiotic. While Christie’s and Sotheby’s featuring NFTs brought the medium in front of collectors from the physical art market, fractionalization can expose traditional artworks to a massive new global market.

The laws of physics do not allow a canvas to be split into many different pieces. Yet, blockchain tokens can be divided into many decimal places. For example, a single nonfungible token can be fractionalized, enabling many owners of the entire piece.

One startup hoping to democratize the fine art market via fractionalization is Artfi. Working on the Polygon network, the Dubai-based company collects physical artwork and creates blockchain tokens representing ownership.

Investors can buy and sell smaller pieces of much larger, more expensive art. Not only does this open fine art investing up to a far wider market, but its adoption will also bring significantly greater liquidity to the already $1.7 trillion annual art market.

Aiding Artfi in its mission to bring fine art to the masses is the Artfi Foundation. The non-profit is building a real-world museum to display the pieces it collects. While details are scarce at the moment, the unique properties of blockchain technology may enable a neat circular economy. Museum visitor revenue could be distributed among NFT holders via the project’s native Polygon-based ARTFI token, incentivizing and hastening the model’s adoption.

Along with fractionalization, the startup is already experimenting with ways to attract new interest. For example, it makes collectors who already hold desirable works of art into royalty recipients and enables them to retain a percentage of any future sale. Additionally, those minting primary sale NFTs from a new piece in the Artfi collection will benefit from lifetime royalty payments.

Will the symbiosis continue?

NFT technology is still in its very early stages. We’ve just witnessed the first boom in adoption and, despite appearing as a threat to the existing art establishment, we’re actually seeing both sectors support one another.

While some commentators like to frame NFT and traditional art enthusiasts as rivals, that misses the fundamental fact that digital art and real-world art are entirely different mediums. Putting the two side by side in a comparative context is almost as nonsensical as saying that the sculpture market will eat the oil painting market.

Indeed, many have seen the enthusiasm from Christie’s and Sotheby’s as a legitimization of an abstract artistic medium — and last year’s sales figures prove it. Similarly, innovations like fractionalization look set to expand the market that these historic and respected auction houses continue to serve.