Landscape

Art & Collectibles Market

Despite COVID-19’s impact on galleries, auction houses and retailers, the global art market saw more than $50 billion in art transactions. In contrast, other collectibles such as coins and trading cards saw record sales. However, this market is still primarily driven by auction houses which act as gatekeepers of the industry.

We believe the art market’s lack of transparency/accessibility has held back this industry from its true potential. For example, while the HNI wealth doubled in a time frame of 10 years after the 2008 crash, the art market grew only by 8% in cumulative.

Brief History of Art Loans

Evidence suggests that the first art loan dates back to at least the 16th century when the sister of Salaì (a pupil of Leonardo da Vinci) took out a loan of 26 scudi using nine paintings as collateral.

Even in the 18th century, collectors were able to benefit from leverage in a rising art market. For example, in 1721, Cosimo Antonio dal Pazzo borrowed 6,000 scudi from a distant cousin secured by a Poussin painting. Although three additional works by Poussin had to be pledged by 1730 as collateral (due to an inability to satisfy the original debt obligation), Cosimo ultimately repaid in 1732, after the Poussins had appreciated and become worth more than the total sum of the outstanding debt.

The Impressionist market boom in the 1980s, closely linked to the Japanese “bubble economy,” marked the beginning of the modern-day art lending market. Encouraged by rising prices, collectors and speculators borrowed against works of art to finance new purchases and other investments, while dealers used Art Loans to grow their inventory.

NFTs- The next iteration of art

Non-fungible token (NFT) is a term used to describe a unique digital asset whose ownership is tracked on a blockchain, such as Ethereum. Assets represented as NFTs range from digital goods, such as items that exist within virtual worlds, to claims on physical assets such as clothing items or real estate. In the coming years, we will see NFTs used to unlock entirely new use cases that are only made possible by crypto.

An NFT is created or “minted” from digital objects that represent tangible and intangible items, including Art, GIFs, Videos, Collectibles, Virtual avatars and video game skins, Designer sneakers, Music etc.

The market for non-fungible tokens (NFTs) surged to new highs in the second quarter, with $2.5 billion in sales so far this year, up from just $13.7 million in the first half of 2020

Some NFT enthusiasts see them as collectibles with intrinsic value because of their cultural significance, while others treat them as an investment, speculating on rising prices. .

In March 2021, a digital image sold for a record $69.3 million at Christie’s as an NFT. The second most expensive NFT sale was a “CryptoPunk” that fetched $11.8 million at Sotheby’s.

The U.S. National Basketball Association Top Shot marketplace, which allows fans to buy and trade NFTs in the form of video highlights, has seen volumes and buyers fluctuate to 246,000 in June from 403,000 in March.

Collateralization in DeFi

In decentralized finance, collateralized loans are the backbone of open lending protocols. Given that DeFi empowers open, pseudo-anonymous finance, no one has a credit score or any sort of formal identity associated with the loan they are taking out. Therefore, similar to mortgages, most DeFi lending applications will require borrowers to collateralize their loan as an incentive to hold them accountable for repaying the debt. However, the critical difference between traditional collateralization and DeFi collateralization (as it stands today) is that collateralizing a loan on DeFi platforms will require the borrower to over-collateralize the loan.

In DeFi, there are few borrower protections associated with lending. Unlike in traditional finance, where both borrowers and lenders have protections, such as loan insurance, DeFi currently lacks protection on both ends. In general, the primary protection mechanism associated with DeFi lending is the game theory and incentives behind over-collateralized loans.