Primary and Secondary Markets in Crypto Art

This challenge was inspired by the online art platform DADA. DADA is an online place where people around the world create spontaneous visual conversations together, in spite of language, distance, nationality, or other artificial boundaries. On DADA, art is a means of communication, and its creative and collaborative nature fosters strong bonds between people. It’s a free and liberating experience. Trolling and bullying are organically neutralized. It is a place where strangers make art together without expecting remuneration, motivated not by extrinsic rewards like money or status but by intrinsic rewards such as the joy of making art, and a sense of autonomy, validation, self-development, belonging and a higher purpose.

Currently, DADA is translating into practice the concept of Invisible Economy. The Invisible Economy is the radical separation of art and the market. Blockchain technology allows the economy to be both invisible and transparent. It is invisible because it separates art making, code writing, art collecting, and general contributions from market transactions through different mechanisms. And it is transparent because all the transactions take place on the Ethereum blockchain where everyone can track them.

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

• primary market (sales from original artist to first collector): 15% of fee to the gallery and 85% to the artist;
• secondary market (sales from collector to collector): 10% of royalty to the original artist and 90% to the collector;
• moreover, there is a simple 3% transaction fee for all purchases (primary and secondary), paid by the buyer (collector).

We define:

• 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.

All prices are defined in USD with ETH/USD change rate of the day of the sale.

The data challenge is the following. Use the SuperRare marketplace to analyse how the overall gallery volume splits into its two components (artist volume and collector volume) as of today, in the past and in the future. In particular:

• is the market concentrated or equi-distributed? (use the Lorenz curve and the Gini index)
• how did the Gini index evolved in time?
• what is the share of artist and collector volumes as of today?
• how did the artist and collector volumes change over the life of the gallery?
• when in the future are the artist and collector volumes going to break even?
• explore some “what if” scenarios increasing the royalty percentage for artists

Concentration of volume among sellers and buyers

Gini index typically measures the extent to which the distribution of income among individuals within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative percentage of number of recipients, starting with the richest individual. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality. See the country ranking by Gini index.

The sale volume, that is the sum of all sale prices in USD (excluding fees and royalties), amounts to $4,390,159. Here we applied the Gini index to the share of sale volume received by sellers or spent by buyers.

Artist and collector volumes today

As of today, the total gallery volume on SuperRare (primary and secondary sales) is $3,875,307. Of this:

• 78% ($3,013,276) goes to artists (fee-free primary sales plus royalties on secondary sales)
• 22% ($862,031) goes to collectors (royalty-free secondary sales)
• incidentally, the fees collected by the gallery amount at $646,556; of those 80% are paid by artists (with the 15% fee of primary market sales) and 20% are paid by collectors (with the 3% transaction fee)

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

Moreover:

• the number of sales on the primary market is 9969 with an average price of $344;
• this number on the secondary market is 1660 with an average price of $577

In summary, collectors re-sell at 1.68 times the price they buy; however, they sell far less often than artists (every 100 pieces they buy, they resell only 17 of them).

We hence observe an artist dominance, where the the volume earned by artists is far bigger than that gained by collectors. Substantially, the secondary market is still underdeveloped and collectors buy to hold. Of course, if eventually collectors will have weaker hands and sell more pieces, since the re-sale price is generally higher, these figures might change in favor of collectors.

The temporal evolution of artist dominance

I expect that the situation is the past is even more skewed towards artists, meaning the artists are earning a higher share of the gallery volume and hence the artist dominance is higher. Let’s check!

The artist dominance (red line) was quite stable and above 90% until October 2019, when it started to decline in favor of a rise of the collector share. Assuming that this trend continues, when are the shares earned by artists and collector break even? Let’s fit a linear regression model!

Predicting the artist dominance

The linear regression model has time (number of months) as independent variable and the share of volume earned by collectors as response (dependent) variable. It predicts the following linear model (\(R^2\): 0.88, p-value: \(1.382 \cdot 10^{-6}\)):

\[ \mathrm{collector\ share} = 0.095697 + 0.012497 \cdot \mathrm{month} \]

This means that, according to the fitted model, every month the collector volume increases of 1.25%. Hence we can predict that the collector volume share will be 0.5 and hence equal to the artist volume share in about 32 months from October 2019, or in 19 months (1 year and 7 months) from now, that is June, 2022. Is this scaring?

What if scenarios

When is going to be the break even between artist and collector volumes if we increase the royalty percentage?

• assuming an artist royalty of 10%, the slope of the collector regression line becomes 1.25% and the break even with artists will be in 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 in 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 in 64 months 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 in 352 months (29 years) from now.

Summing up

• the crypto market is extremely concentrated among few artists and even fewer collectors: if crypto art were a country and sales the income of people, it would be much more concentrated than any other country in any time in history!
• as of today, the secondary market (collector volume) is still underdeveloped with of a dominance of the primary market (artist volume) of 78%;
• the artist dominance is due to the fact that, despite secondary market prices are importantly higher than primary market ones, secondary sales are much less frequent than primary sales: of all sales, 85% are primary sales and only 15% are secondary sales;
• the artist dominance was even more neat in the past, above 90% until October 2019. Then it started to drop;
• if the current declining trend continues, we predict that, with the present-day price scheme, in June 2022 collectors are going to earn the same share than artists on the marketplace, unless the artist royalty share is changed soon.

Limitations and discussion

• there exists an overlap of artists and collectors (most artists on SR are also collectors); an artist playing the role of collector is counted as a collector in the experiment;
• “if the market is favorable to collectors over time, maybe even better as all artists have a shot at filling both roles equally, whereas pure collectors only get to play one part.” (Jonathan Perkins, SuperRare)
• “It is well intentioned but naive for us to think artist will be better collectors. The perverse incentives of the market will make artists into traders.” (Bea Ramos, DADA)