All-Art Protocol Litepaper v1.0

Introduction

The world of art has always been a unique and exciting place. Intangible values are incorporated in the core of market dynamics, making emotional engagement part of the value proposition for each art piece.

The art market is also known for one more feature - extreme illiquidity. An art piece, once bought, cannot be easily resold. A handful of auction houses dominate a large portion of the secondary market. At the same time, art dealers cover the rest of the secondary market, closing private, non-transparent deals where the buyers’ and sellers’ identities are hidden.

Recently, the emergence of blockchain technology has brought a solution for price secrecy, unreliable provenance and forgery, and too few participants in the art market. Non-fungible tokens (NFTs) were, at first, deemed the magical solution for selling an art piece on the blockchain. However, they appeared a bit too early. The art market was still apprehensive of digital technologies and worshipping art fairs and live events.

And then it happened.

Due to the COVID-19 crisis and the closing of galleries, art fairs, real-life auctions, and art events, market participants were stuck at home, in front of their computer screens, with few options available to fulfill their passion for collecting. The market turned to the digital space, where we saw a surge in demand for online viewing rooms, digital auctions and virtual exhibitions. Market participants went through a crash course on digital tech, rushing to try all options to keep their business running.

Then, the time of NFTs came.

Even though the traditional art market was hesitant in the beginning, the money was not. Increasing numbers of new collectors emerged from the crypto space. Powered by the enormous gains from the current bull run, they started investing in NFTs as crypto-native digital assets. The value of crypto art registered as NFTs exploded, and it was not long before others followed. “Old sharks” of the traditional art market started paying attention, looking for their way in. And they found it. Christie's auction of Beeple’s NFT gave birth to the new norm in the art market -- the Digital can be art. Art can be NFT. Art can be sold for crypto.

After the auction dust settled, NFT prices plummeted, and a new challenge emerged -- how to handle the art market's transition to a new paradigm efficiently.

The problem

It is no secret that the current NFT market is unsustainable and has no room to grow. Ethereum smart contracts, the cornerstone of NFTs, are incapable of handling the demand.

The cost of a single transaction on the Ethereum blockchain makes minting and trading inefficient and tremendously expensive. Transaction times are slow, while congestion of the network limits the number of market participants. The energy consumption required for minting and transferring a single NFT is suspected to have a negative impact on the environment, clouding the promise of a new, blockchain-powered art market[1].

The environmental concerns make us inquire about the very nature of NFTs. What is actually sold? A hash value, metadata, or a work of art itself. Copyright and other associated rights were never a design feature of NFTs. An emerging number of cases started challenging the concept, making it harder for the market to adopt a new tech stack as a full-time solution for a longstanding problem.

When we look at the art market as a whole, there is one crucial aspect to consider. Most of the art in the world is hidden behind closed doors. In the Art & Finance Report 2019 by Deloitte and ArtTactic, it is estimated that the wealth associated with art and collectibles is worth over US$1.5 trillion, but most of that art is stored away in freeports[2].

While blue-chip art is inaccessible to small collectors, there is also a significant barrier to entry for new collectors within the blockchain space due to the inoperability of current platforms. The DeFi movement crafted a new playground for innovative projects but still fails to include the NFT concept into its ecosystem due to the tokens’ non-fungible characteristics.

A lot of stakeholders are waiting for a proper solution to transform the market.

The solution

The new infrastructure must be substantially better to transform the status quo and move the art market forward.

Art must become a liquid asset class. Transaction fees must be cheap. Transactions must happen almost instantaneously. Energy consumption must be minimal. Registered art on the blockchain must be compatible with established regulations and copyright law. Collectors must be able to benefit from purchased art beyond speculatory trading. Art on the blockchain must follow international standards for provenance documentation and verification.

When the proper protocols are in place, we have a base for unlocking almost US$2 trillion in art value stored behind closed doors. For this to happen, collectors must have confidence in the underlying technology, and there must be a proven track record and widespread institutional adoption.

Once transaction fees are lowered, a proper solution for license rights is introduced. There are immediate benefits to collecting and utilizing those rights, incentivizing more people to enter the NFT space. This mechanism will create a positive adoption loop, where more and more galleries and artists will realize the benefits of bringing art to the blockchain. In a way, this process is already taking place.

The new market dynamics could stimulate prominent collectors to reveal their holdings and bring valuable art into the open. An abundance of priceless art with significant historical value is hidden away and only accessible to a few people, but if those artworks and artifacts were shared with a wider audience, it would create an unprecedented cultural shift that would benefit the global civilization.

Introducing the All-Art protocol running on Solana

The core of the All-Art protocol is the first decentralized NFT exchange (DNEX) running on Solana.

The All-Art protocol brings constant liquidity for NFTs by introducing a novel liquidity pool protocol called cAMMs (Capped Automated Market Maker) infrastructure, powering the new art market evolution.

In order to achieve this, we are launching a new NFT standard which solves the major shortcoming of the current concept by including license rights logic embedded into the NFT fractional ownership. We call this standard NFT-PRO. We call these fractions - LORTs - License Ownership Right Tokens.

Glue that connects all NFT-PRO liquidity pools together is a new token - the ArtCoin, that is used as a liquidity provider in NFT-PRO pools. All-Art DNEX is where all NFT-PRO pools are created and balanced with the same token - Art Coin. This enables easy swapping of NFT-PRO LORTs between pools, effectively creating an omnipool of all NFT-PROs.

All-Art protocol runs on a new superior blockchain - Solana, bringing four key benefits compared to Etherum or similar clones:

  • Blazing fast and cheap transaction running on L1

  • Scalability

  • Low energy consumption

  • Upgradable smart-contracts

NFT-PRO and LORTs

Before the All-Art Protocol, AMMs were focused on token swaps, rather than NFT trading, because there was no way to represent a non-fungible item in a swappable pool. Making NFT fractionalized just for the sake of speculative trading introduces a huge number of regulatory concerns and generally should be avoided. Even if the NFT is fractionalized and placed in the AMM pool, there is an unsolvable case on how an artist can benefitbe recouped after investors buy art fractions.

To solve this puzzle, we need to redefine what NFT is.

A Non-Fungible Token (NFT) is a digital registration of a unique item, thus indivisible by its nature. But, a work of art is a much more than a binary relationship between an individual and the work. Each piece has multiple levels of legal rights, even if they are registered as NFT, and buyers should be aware of all these legal obligations once they engage into the purchasing process.

We solve this problem by introduction of LORTs - License Ownership Right Tokens. Each NFT is split into tokenized license rights, representing all available licensing options as a certain percentage of tokens. We call such a construct - NFT-PRO. Creator of NFT-PRO defines which percentage of ownership (number of tokens) corresponds to what license right(s) and how many of them are embedded into a piece.

Now, buyers are not buying a piece without a clear understanding of what they actually own, but a clearly defined license right for each part of NFT-PRO they buy. These LORTs are now placed in cAMMs, and available for trading, while having automated constant automated liquidity.

Capped Automated Market Maker (cAMM)

To enable on-chain liquid art trading, All-Art Protocol introduces a novel approach called a Capped Automated Market Maker (cAMM). All-Art Protocol’s cAMM uses the same x*y=k constant product formula as Uniswap. On one side of each cAMM is NFTPRO’s LORTs, while on the other side is collateral in Art Coins. Cap is placed on how many LORTs can exist in the pool.

Why is capping essential?

For artists to be able to monetize their work they hold LORTs outside of a fully capped pool. They have them in their wallet, but cannot monetize as the pool is capped and full. To recoup they must wait until a real sale of LORTs happens and the pool is freed for them to sell their tokens. This solves the biggest problem of placing NFT in the pool, and how an artist is compensated for theirhis work.

How are pools created?

Each piece that is minted on All-Art protocol mints Art Coins in the value set by the artist. These minted Art Coins are placed in cAMM together with created LORT tokens for that piece. Artist is given additional LORTs that are placed in the artist's wallet, representing his initial ownership of the piece. Once a buyer gets LORTs from the pool, the artist can perform the swap and get Art Coins in exchange for his LORTs, but not more than what is placed in the pool from the buyer(s).

Who owns the pool?

All-Art protocol is the sole creator of cAMMs and LORTs for each NFT-PRO and programmatically owns the pool. There is no possibility of putting additional liquidity in the pool, or liquidating the pool itself.

Who gets the trading fees?

Out of every transaction, cAMM charges a flat 0.5% trading fee that is distributed to all LORTs holders proportionally. This mechanics incentivises collecting as it brings passive revenue for every collector, or for the artist if they strategically keep the portion of the tokens for themselves.

Art Coins

The Art Coin token is All-Art Protocol’s native utility token that is used as a collateral in cAMMs. It’s main purpose is to provide necessary liquidity in cAMM pools. Art coins are minted every time a new NFT-PRO is created and placed inside cAMM. As the pools are capped, there is no way to extract minted art coins from the pools and to compromise the basic economy of the protocol.

When a collector wants to purchase an NFT-PRO, they must buy Art Coins on an open market and exchange them for LORTs in NFT-PRO pools, creating a natural market pressure.

As Art Coins are used in all NFT-PRO pools, this creates a unified standard for valuing works of art in what can be considered an omnipool of NFT-PROs collateralized in Art Coins. Such a solution opens the possibility for easy swapping of LORTs as they are all collateralized in the same value of exchange.

Market Integration

All-Art protocol will be natively integrated into VR-All-Art platform.

VR-All-Art is a platform and a marketplace for artists, galleries, museums and the general public to exhibit, explore and acquire art in virtual exhibitions. VR-All-Art is a virtual space, a metaverse of galleries and exhibition spaces with no physical boundaries. It is revolutionizing art exhibitions and art spaces by giving new power to artists as they are no longer constrained to the limitations of real world space and time.

With the rapidly expanding VR/XR ecosystem we can expect that the art market will adopt new ways of presenting, buying and selling art. We have witnessed successful online art auctions during the pandemic, running by the biggest auction houses in the world. While this is just the beginning of a transformation, we can foresee art auctions in VR, where collectors meet as avatars participating from their homes anonymously.

While VR is witnessing explosive growth powered also by the pandemic and rapid decrease in prices of VR equipment, we still believe there is a need for standard web based marketplaces.

True power of art comes from curated and contextualised presentation of artists and their work. The missing link in showing NFTs is creation of curated exhibitions where the true message of the artist can be communicated. VR-All-Art enables creation of such exhibitions both on the web as well as in virtual reality.

Secondary market - web marketplace and DEX

While virtual reality is an attractive new frontier, we cannot forget all market participants that still don’t own VR equipment. VR-All-Art features a web interface where collectors can manage their collections and participate in the marketplace from their computers.

Swaps

As All-Art protocol features pools collateralized with Art Coins, swap interface will enable direct NFT-PRO swapping from one pool to another.

Utilizing license rights embedded in each NFT-PRO, owners will be empowered to handle their digital collections and create private and public exhibitions, showcasing their acquired works.

Governance and the All-Art Fund

With the introduction of Art Coins, a native token of the All-Art protocol, governance of the protocol is distributed to the community, with voting rights based on their share of token holdings. The All-Art Fund is created out of funds from a yearly inflation, which will be distributed to projects that have applied for financial backing. The community will vote on who gets the funding.

Funding cycles and staking mechanics

Funding will be organized in cycles. Staking of Art Coins is necessary to participate in voting, and these coins remain locked until the funding cycle ends. Stake is unlocked after the new funding cycle starts, which means previous stake cannot be used in a new funding cycle.

Delegated voting

To ensure professional opinions are considered on important topics, voting can be delegated to the art market experts.

Support for the art community

The All-Art Fund is envisioned as a way to help the art community all around the world by powering a new funding mechanism, while promoting the protocol usage.

Regulatory compliance

To ensure full regulatory compliance in all jurisdictions, the All-Art fund will fund activities in bringing stakeholders closer together and creating a positive climate for adopting blockchain based solutions into art market regulatives.

Digitization efforts

The All-Art fund will promote and finance digitization projects that will bring more real-life art pieces into the digital realm.

Voting on changes of the protocol

Art Coin holders have the power to propose changes and vote on upgrades to the All-Art protocol, thus ensuring full decentralization.