The next big thing: secondary markets

In February 2021, Moises Sanabria’s genesis NFT Beyond Money #1 was collected on Foundation for 1 ETH. Four months later, the work was re-listed on the secondary market. A bidding war ensued, and the NFT was collected again—this time for 4.7 ETH. In that instant, Moises earned his first royalty, which was automatically deposited to his wallet. 

In Moises’s decade-long career, the artist had never earned profits from a resale before. Most artists—even those whose work sells for exorbitant prices, with well-established secondary markets—never see a penny when their work is resold. This isn’t just strange, it’s objectively unjust. When the value of an artist’s work rises and someone cashes in on their market, the artist should see a cut of that. But up until now, a reliable mechanism to make that happen has never existed.

NFTs change that. In fact, the technology they’re built on perfectly positions them to solve the problem of how artists can capture value from their secondary markets, and already, secondary NFT sales are putting royalty earnings directly into the pockets of artists all over the world.

What exactly are secondary markets, and how have they worked thus far?

While the “primary market” refers to the first sale of an artwork, the “secondary market” encompasses all subsequent resales of the work. 

Until recently, secondary markets have been quite difficult to track. While some laws do exist to protect artists' resale rights, enforcing these can be a convoluted and expensive process, requiring lengthy amounts of legal paperwork. To make matters more complicated, the inherent confidentiality of art world transactions has further obscured resale figures, leaving most artists in the dark when their work changes hands. Because of all this, negotiations concerning secondary markets have only been available to established artists with massive institutional support (as one example, Jeff Koons’ Rabbit resold for $91 million at Christie’s, setting a new secondary market record for a work of art sold by a living artist).

How are NFTs revolutionizing secondary markets?

With NFTs, an artist’s right to secondary-sale royalties is automatically guaranteed thanks to a few simple lines of code, with no extra legal work required. This enables artists to instantly get a cut of any and all future sales of their work, in perpetuity.

Collectors can harness the powerful potential behind secondary markets, too. As one example, Path, also known as Cryptopathic, has a keen understanding of the resale opportunities that NFTs present. As he puts it, “Compared to traditional collecting, NFT secondary markets provide a frictionless experience with guaranteed authenticity.” 

Right now, we’ve only touched the surface of what’s possible with secondary markets. Over time, as the technology develops and as exponentially more NFTs are minted, sold, and resold, the secondary market will continue to grow—with positive impacts compounding for both artists and collectors. The unfolding of this process will bring monumental changes to industries far beyond the art market, and will be especially meaningful to those that rely on royalties to fuel their creator economies, such as publishing and music. As we look forward to these evolutions, below we’re sharing a few of the ways that we see secondary markets changing how creative work is collected, valued, and sold.

#1 Royalties will be for everyone, forever

NFTs make it equally simple for both emerging and experienced artists to earn royalties, regardless of whether they have gallery representation, an established sales record, or a contract with a major label. As the technology develops, we think this will be especially important for creative mediums that have been historically difficult to capture value from, like poetry, dance, or performance. For artists of all types, passive royalties will become a key piece to shaping and sustaining a career over time.

#2 Resales will open up a new form of patronage 

The power of the Ethereum blockchain lies in its transparency, and once a creator and collector are tied to an NFT, their relationship is on the record. Because of that, both parties are now connected in their desire to champion the value of the artist’s work. As collector and artist Gabrielle Micheletti notes, “The benefit is that collectors have the privilege to be involved in a relationship of mutual support… and with secondary markets specifically, that network of support can continue to expand.”

#3 Communities will collectively determine secondary market value

While primary markets indicate a baseline value for an artwork, secondary markets develop over time based on a community’s interest in and engagement with a work, giving creators and collectors a sense of a work’s true potential. As collector Brendan Tadler puts it, “When the community collectively agrees on the value of a specific work or artist, it forms a decentralized and trusted third-party valuation. This is the actual worth of an artist's work.”

#4 Artists will finally be able to cash in on the true value of their practice

With traditional art markets, most work becomes more valuable as it appreciates over time. This means that when it's initially sold in a primary sale—often the only time an artist is written into the deal—it’s sold for a fraction of its eventual worth. While galleries and auction houses have been able to cash in on that appreciation, artists have typically lost out on most of that revenue. But with royalties baked into the smart contracts for NFTs, artists will finally be guaranteed profits from the full scope of their practice. 

#5 Every sale will add to the rich history of an NFT as it travels throughout the metaverse

With NFTs, provenance is permanently recorded on the blockchain, establishing a public ledger for who created it, who collected it, when each transaction happened, and for how much a work sold for. In practice, this can create a shared sense of community around individual works, collections, and artists—adding new ways for future generations to understand a work’s history. As a work of art traverses the metaverse, the provenance that it builds as it is continually exhibited, shared, seen, and understood will add to its value over time.

So, what’s next?

We are at the beginning of a widespread, global reinvention of the art market. The possibility of seeing thriving, continued profits from the secondary market is finally within reach for artists and creators all over the world. Collectors are seeing value in collecting a work, and setting it free on the secondary market—which can be a generous act in itself. As Brendan Tadler put it, “It's important for artists to understand that collectors don't have to just ‘collect’ in order to be a patron to your work. Collectors should exhibit, sell, fractionalize, and hold as desired, to strategically balance the ecosystem of your movement, since it’s beneficial to both parties. Decentralization allows for the sea to rise together, and secondary sales will allow both artists and collectors to prosper more than ever before.”