What is Art Tokenization?

Karolina

22 Aug 2023
What is Art Tokenization?

Understanding Art Tokenization

The concept of art tokenization involves transforming tangible art pieces or exclusive digital artworks into a digital token present on a blockchain. This process allows the division of ownership rights of an artwork and facilitates their trade on digital platforms. Acting as evidence of authenticity and ownership, these tokens digitalize the artwork's value. They denote a fraction of the ownership, enabling multiple people to have stakes in a single art piece. This approach not only introduces liquidity to the traditionally illiquid art market but also democratizes it by making art investment accessible to a wider audience.

Art tokenization primarily aims to connect the conventional art world to contemporary financial technology. Art tokenization enhances accessibility, simplifies transfers, and expands the market for artworks. Moreover, since these tokens reside on a blockchain, they maintain a transparent provenance or history of ownership, aiding in the prevention of forgery and ensuring authenticity.

Defining NFTs

Non-Fungible Tokens (NFTs) are distinct digital tokens authenticated on a blockchain, mainly employed to signify ownership of an exclusive digital item or content. The term "non-fungible" signifies that each token is unique and irreplaceable, as opposed to cryptocurrencies like Bitcoin or Ethereum, which are fungible and exchangeable.

NFTs gained popularity in representing digital arts, collectibles, music, videos, etc. Acquiring an NFT allows the buyer to own a one-of-a-kind piece of digital content. This ownership can be retained, sold, or transferred similarly to physical assets.

A vital feature of NFTs is their role as a digital certificate of authenticity. Utilizing blockchain technology, each NFT establishes the originality and ownership of a digital object and makes it tamper-resistant. This characteristic makes NFTs particularly attractive in the realm of art, where an artwork's value greatly depends on its authenticity and provenance.

Tokenized vs Non-tokenized Art

In the evolving landscape of art and technology, a distinct divide between tokenized and non-tokenized art has emerged. Tokenized art, represented as digital tokens on a blockchain, offers a modern approach to verifying authenticity, fractional ownership, and providing an easily transferable record of provenance. This allows for a broader audience to invest in and own portions of artworks, potentially democratizing the often exclusive world of art ownership.

On the other hand, non-tokenized art remains rooted in traditional forms of ownership and trading, relying on physical possession, conventional galleries, and expertise for its valuation and authenticity. While this traditional form provides a tangible, often deeply personal connection between the artwork and its owner, it can also be encumbered by challenges of liquidity, accessibility, and the occasional ambiguity in provenance. Both realms, though different in their operations, underscore the profound value and significance of art in human culture, each catering to varied audiences and preferences.

Steps to Tokenize Art

1. Platform Selection. Choose a preferred blockchain platform, such as Ethereum, Flow, or Binance Smart Chain.

2. Digital Depiction. Produce a top-quality digital version of the artwork (high-resolution JPG, PNG, or 3D model).

3. Smart Contract Creation. Employ a smart contract development tool like OpenZeppelin or Remix to write the contract underpinning the NFT, which establishes rules for metadata, rarity, and other aspects.

4. Contract Deployment. Launch the smart contract on the blockchain using tools like MetaMask or Truffle and possibly incurring gas fees.

5. NFT Minting. Generate the unique NFT token by invoking a smart contract function and connecting it to the digital representation of the artwork; it will be stored in a digital wallet.

6. Marketplace Listing. Offer the tokenized art for sale or auction on NFT marketplaces such as OpenSea, Rarible, or Foundation.

7. Royalty Set-up. Many platforms allow royalty establishment so that every NFT resale earns the original artist a percentage as ongoing compensation.

8. Legal Consequences. Investigate possible legal ramifications associated with copyright and intellectual property rights before tokenizing.

9. Art Promotion. Leverage social media networks, artist communities, and other forums to publicize tokenized artwork and entice buyers.

By adhering to this process, artists can capitalize on blockchain technology to diversify revenue sources, expand their global reach, and secure authentication and provenance for their pieces.

The Advantages of Tokenizing Art

1. Enhanced Accessibility. By democratizing art ownership, tokenization of art enables broader access to investments in art pieces, regardless of a person's geographic location.

2. Economic Empowerment. Artists have the opportunity to tokenize their work and sell it directly to the public, facilitating higher profits by potentially bypassing intermediaries.

3. Authenticity & Provenance. Tokenized art allows for a secure and transparent record of ownership on the blockchain, ensuring the genuineness of the artwork and its complete ownership history.

4. Liquidity. Traditional art assets are often illiquid and time-consuming to sell, whereas digital tokenized art can be easily traded on platforms, resulting in increased liquidity.

5. Fractional Ownership. Dividing ownership of tokenized art into smaller shares enables multiple investors to own a portion of a single artwork, allowing average investors access to high-value pieces.

6. Worldwide Market. Tokenizing art permits artists to reach a global audience, which expands access for diverse investors and collectors.

7. Safe Transfers. Transferring ownership becomes more secure, transparent, and direct through the use of blockchain technology.

8. New Art Forms & Innovation. Artists are able to incorporate interactive components, augmented reality, and other inventive elements within their tokenized works, fostering the development of unique art genres and experiences.

The Profitability of Art Tokenization in 2023

Based on the rapid expansion of NFTs and significant interest in tokenized art, it appears that art tokenization is profitable in 2023. The following reasons contribute to its success:

  • Expanding Market. Leading up to 2023, there has been a noticeable surge in digital artists, collectors, and investors entering the NFT space—fueling market growth.
  • High-Value Sales. Numerous tokenized artworks and NFTs have sold for millions, garnering substantial media attention and reinforcing the value and potential of this sector.
  • Widespread Acceptance. Mainstream entities, galleries, and celebrities have begun to support art tokenization, bolstering demand and endorsing its importance.
  • Extended Collector Base. The digital nature of tokenized art, coupled with growth in online platforms, broadens the global collector base—artists are no longer limited to local or regional markets.
  • Technological Progress. As blockchain technology and NFT platforms evolve, creating and trading tokenized art becomes more streamlined and efficient—lowering barriers to entry.

Conclusion

Art tokenization, an elegant fusion of time-honored tradition and cutting-edge innovation, is undeniably revolutionizing the realm of art ownership, exchange, and admiration. With the art world poised at the intersection of technology and ingenuity, blockchain's capacity to democratize, fortify, and invigorate the art sector cannot be overlooked.

It is crucial to proceed with caution as the potential is truly enticing. As with any budding industry, challenges will arise, spanning from regulatory barriers to market oversaturation. But, the perpetual essence of art – its capacity to break barriers, motivate generations, and encapsulate human experiences – guarantees its importance whether it's in a physical gallery or on the blockchain.

Navigating the complexities and possibilities ushered in by art tokenization serves as a reminder that art, in every form, stands as a tribute to our shared culture and advancement. The merger of art and technology not only presents financial prospects but also lays the groundwork for a more inclusive, varied, and global artistic community.

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Aethir Tokenomics – Case Study

Kajetan Olas

22 Nov 2024
Aethir Tokenomics – Case Study

Authors of the contents are not affiliated to the reviewed project in any way and none of the information presented should be taken as financial advice.

In this article we analyze tokenomics of Aethir - a project providing on-demand cloud compute resources for the AI, Gaming, and virtualized compute sectors.
Aethir aims to aggregate enterprise-grade GPUs from multiple providers into a DePIN (Decentralized Physical Infrastructure Network). Its competitive edge comes from utlizing the GPUs for very specific use-cases, such as low-latency rendering for online games.
Due to decentralized nature of its infrastructure Aethir can meet the demands of online-gaming in any region. This is especially important for some gamer-abundant regions in Asia with underdeveloped cloud infrastructure that causes high latency ("lags").
We will analyze Aethir's tokenomics, give our opinion on what was done well, and provide specific recommendations on how to improve it.

Evaluation Summary

Aethir Tokenomics Structure

The total supply of ATH tokens is capped at 42 billion ATH. This fixed cap provides a predictable supply environment, and the complete emissions schedule is listed here. As of November 2024 there are approximately 5.2 Billion ATH in circulation. In a year from now (November 2025), the circulating supply will almost triple, and will amount to approximately 15 Billion ATH. By November 2028, today's circulating supply will be diluted by around 86%.

From an investor standpoint the rational decision would be to stake their tokens and hope for rewards that will balance the inflation. Currently the estimated APR for 3-year staking is 195% and for 4-year staking APR is 261%. The rewards are paid out weekly. Furthermore, stakers can expect to get additional rewards from partnered AI projects.

Staking Incentives

Rewards are calculated based on the staking duration and staked amount. These factors are equally important and they linearly influence weekly rewards. This means that someone who stakes 100 ATH for 2 weeks will have the same weekly rewards as someone who stakes 200 ATH for 1 week. This mechanism greatly emphasizes long-term holding. That's because holding a token makes sense only if you go for long-term staking. E.g. a whale staking $200k with 1 week lockup. will have the same weekly rewards as person staking $1k with 4 year lockup. Furthermore the ATH staking rewards are fixed and divided among stakers. Therefore Increase of user base is likely to come with decrease in rewards.
We believe the main weak-point of Aethirs staking is the lack of equivalency between rewards paid out to the users and value generated for the protocol as a result of staking.

Token Distribution

The token distribution of $ATH is well designed and comes with long vesting time-frames. 18-month cliff and 36-moths subsequent linear vesting is applied to team's allocation. This is higher than industry standard and is a sign of long-term commitment.

  • Checkers and Compute Providers: 50%
  • Ecosystem: 15%
  • Team: 12.5%
  • Investors: 11.5%
  • Airdrop: 6%
  • Advisors: 5%

Aethir's airdrop is divided into 3 phases to ensure that only loyal users get rewarded. This mechanism is very-well thought and we rate it highly. It fosters high community engagement within the first months of the project and sets the ground for potentially giving more-control to the DAO.

Governance and Community-Led Development

Aethir’s governance model promotes community-led decision-making in a very practical way. Instead of rushing with creation of a DAO for PR and marketing purposes Aethir is trying to make it the right way. They support projects building on their infrastructure and regularly share updates with their community in the most professional manner.

We believe Aethir would benefit from implementing reputation boosted voting. An example of such system is described here. The core assumption is to abandon the simplistic: 1 token = 1 vote and go towards: Votes = tokens * reputation_based_multiplication_factor.

In the attached example, reputation_based_multiplication_factor rises exponentially with the number of standard deviations above norm, with regard to user's rating. For compute compute providers at Aethir, user's rating could be replaced by provider's uptime.

Perspectives for the future

While it's important to analyze aspects such as supply-side tokenomics, or governance, we must keep in mind that 95% of project's success depends on demand-side. In this regard the outlook for Aethir may be very bright. The project declares $36M annual reccuring revenue. Revenue like this is very rare in the web3 space. Many projects are not able to generate any revenue after succesfull ICO event, due to lack fo product-market-fit.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

Quadratic Voting in Web3

Kajetan Olas

04 Dec 2024
Quadratic Voting in Web3

Decentralized systems are reshaping how we interact, conduct transactions, and govern online communities. As Web3 continues to advance, the necessity for effective and fair voting mechanisms becomes apparent. Traditional voting systems, such as the one-token-one-vote model, often fall short in capturing the intensity of individual preferences, which can result in centralization. Quadratic Voting (QV) addresses this challenge by enabling individuals to express not only their choices but also the strength of their preferences.

In QV, voters are allocated a budget of credits that they can spend to cast votes on various issues. The cost of casting multiple votes on a single issue increases quadratically, meaning that each additional vote costs more than the last. This system allows for a more precise expression of preferences, as individuals can invest more heavily in issues they care deeply about while conserving credits on matters of lesser importance.

Understanding Quadratic Voting

Quadratic Voting (QV) is a voting system designed to capture not only the choices of individuals but also the strength of their preferences. In most DAO voting mechanisms, each person typically has one vote per token, which limits the ability to express how strongly they feel about a particular matter. Furthermore, QV limits the power of whales and founding team who typically have large token allocations. These problems are adressed by making the cost of each additional vote increase quadratically.

In QV, each voter is given a budget of credits or tokens that they can spend to cast votes on various issues. The key principle is that the cost to cast n votes on a single issue is proportional to the square of n. This quadratic cost function ensures that while voters can express stronger preferences, doing so requires a disproportionately higher expenditure of their voting credits. This mechanism discourages voters from concentrating all their influence on a single issue unless they feel very strongly about it. In the context of DAOs, it means that large holders will have a hard-time pushing through with a proposal if they'll try to do it on their own.

Practical Example

Consider a voter who has been allocated 25 voting credits to spend on several proposals. The voter has varying degrees of interest in three proposals: Proposal A, Proposal B, and Proposal C.

  • Proposal A: High interest.
  • Proposal B: Moderate interest.
  • Proposal C: Low interest.

The voter might allocate their credits as follows:

Proposal A:

  • Votes cast: 3
  • Cost: 9 delegated tokens

Proposal B:

  • Votes cast: 2
  • Cost: 4 delegated tokens

Proposal C:

  • Votes cast: 1
  • Cost: 1 delegated token

Total delegated tokens: 14
Remaining tokens: 11

With the remaining tokens, the voter can choose to allocate additional votes to the proposals based on their preferences or save for future proposals. If they feel particularly strong about Proposal A, they might decide to cast one more vote:

Additional vote on Proposal A:

  • New total votes: 4
  • New cost: 16 delegated tokens
  • Additional cost: 16−9 = 7 delegated tokens

Updated total delegated tokens: 14+7 = 21

Updated remaining tokens: 25−21 = 425 - 21 = 4

This additional vote on Proposal A costs 7 credits, significantly more than the previous vote, illustrating how the quadratic cost discourages excessive influence on a single issue without strong conviction.

Benefits of Implementing Quadratic Voting

Key Characteristics of the Quadratic Cost Function

  • Marginal Cost Increases Linearly: The marginal cost of each additional vote increases linearly. The cost difference between casting n and n−1 votes is 2n−1.
  • Total Cost Increases Quadratically: The total cost to cast multiple votes rises steeply, discouraging voters from concentrating too many votes on a single issue without significant reason.
  • Promotes Egalitarian Voting: Small voters are encouraged to participate, because relatively they have a much higher impact.

Advantages Over Traditional Voting Systems

Quadratic Voting offers several benefits compared to traditional one-person-one-vote systems:

  • Captures Preference Intensity: By allowing voters to express how strongly they feel about an issue, QV leads to outcomes that better reflect the collective welfare.
  • Reduces Majority Domination: The quadratic cost makes it costly for majority groups to overpower minority interests on every issue.
  • Encourages Honest Voting: Voters are incentivized to allocate votes in proportion to their true preferences, reducing manipulation.

By understanding the foundation of Quadratic Voting, stakeholders in Web3 communities can appreciate how this system supports more representative governance.

Conclusion

Quadratic voting is a novel voting system that may be used within DAOs to foster decentralization. The key idea is to make the cost of voting on a certain issue increase quadratically. The leading player that makes use of this mechanism is Optimism. If you're pondering about the design of your DAO, we highly recommend taking a look at their research on quadratic funding.

If you're looking to create a robust governance model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure that your DAO will stand out as a beacon of innovation and resilience in the long term.