In the crypto-economic sphere, the year 2021 is the year of non-fungible tokens (NFTs). New crypto millionaires invest heavily in works of art that are often more technological than artistic in appeal. Digital artists are not mistaken and are producing NFTs all the time to take advantage of the cryptocurrency windfall falling from the blockchain. Iconic works of crypto art are no exception, as revealed by the recent sale of a bundle of nine CryptoPunks from Larva Labs by Christie’s on May 11, 2021 (for nearly $17 million). These nine NFTs found themselves overnight extracted from the crypto-underground to be propelled into daylight.
The emergence of crypto art
Is there a future for CryptoPunks and other NFT artwork? The future will tell. In any case, the major auction houses have understood for several months that there is a market for crypto art. The extraordinary sale of “Everyday: The First 5,000 Days” of Beeple, organized by Christie’s in March 2021 ($69 million for a mosaic of images from 5,000 days of the artist’s life), marked the exit of NFTs from the crypto-economic world in which they were confined and their sensational entry into the art market. This first sale of NFT by a traditional auction house was followed by several other landmark events, such as the sale of “The Fungible Open Edition Cube” by Pak (23,598 NFTs representing a moving cube sold for $500 each on the first day, $1,000 on the second day, and $1,500 on the third day for a total of nearly $14 million), organized by Sotheby’s in April 2021, and the sale of “Replicator” by Mad Dog Jones (an NFT representing a photocopier generating an uncertain number of new NFTs over a period of one year) sold by Phillips in April 2021 for $4 million.
The auctions on these works of art have generated a lot of media attention and were followed by a large audience of non-crypto natives. For traditional art enthusiasts, who are slowly taking an interest in crypto art, acquiring an NFT artwork is often the first step into the world of blockchain technology. But it must be admitted that some characteristics of NFTs are at the very least confusing for people who discover, through this means, the crypto economy.
NFT: what is it all about?
NFTs are non-fungible digital tokens created using blockchain technology (e.g., Ethereum). They represent an asset, such as a tweet (e.g., an NFT of the first tweet by Twitter founder Jack Dorsey was sold for $2,9 million in March 2021), a video (e.g., the NBA sold “Top Shots”, which are videos of top shot moments in the form of NFTs), a collectible digital card (e.g., Gods Unchained), which has been digitized in the form of a token (“tokenized”). Each NFT is made up of a unique computer code registered on the blockchain which cannot be reproduced, modified, nor destroyed. In the same way as cryptocurrencies (e.g., bitcoin or ether), NFTs are stored in their holder’s wallet (digital wallet on the blockchain). They can be easily transferred from one wallet to another (e.g., following a sale or a swap) using a system that is cryptographically secure and guarantees anonymity. However, unlike cryptocurrencies which are fungible (one bitcoin can be replaced by another bitcoin), NFTs are non-fungible. A particular NFT cannot be replaced by another one: each NFT is unique. Thus, an NFT is a unique digital asset (the token) guaranteeing exclusivity over a digital asset (e.g., image, video, soundtrack, animated GIF, etc.) as well as the rights attached to it.
It is possible to tokenize an artwork into an NFT, whether it is a digital work of art or a material work of art that has been digitized (e.g., a masterpiece). For practical reasons, the artwork itself is usually not integrated into the NFT: only a link pointing to the location of a digital file containing the artwork is stored on the NFT. This can be a potential weakness because the security and immutability properties offered by blockchain technology are not taken advantage of. The holder of an NFT runs the risk that the artwork associated with the NFT is damaged or destroyed (intentionally or inadvertently) or that it simply disappears when the platform where it is stored stops operating. The durability of the digital or digitized artwork associated with an NFT is therefore not guaranteed. In other words, the tokenization of a work of art does not avoid the risk of loss that exists for any other material or digital work of art.
The transfer of an NFT is done via a smart contract. As for the intrinsic characteristics of the NFT, including the rights attached to it (e.g., the right to reproduce the digital asset, the transfer of copyright in the digital asset, the transfer of property rights in the digital asset, etc.), they can be included in the smart contract or defined in a written contract (on this subject, see “Les smart contracts sont-ils des contrats ?”). One of the advantages of a smart contract is that a system of royalties can be programmed so that the creator of the NFT (e.g., the author of an artwork) receives a predefined percentage of the sales price each time the NFT is sold, which is automatically paid into his or her wallet. The smart contract allows for an automatic and almost instantaneous execution of both the payment and the transfer of ownership of the NFT. When an NFT is sold, only the token is transferred to the buyer, which means that the original owner (or author) of the tokenized asset can retain certain rights over the artwork. For example, the author can keep the copyright associated to the artwork and only transfer the ownership of the tokenized artwork (i.e., the token). Of course, the copyright and other rights can also be transferred with the purchase of an NFT.
The tokenization of an artwork into an NFT allows it to be authenticated with certainty. This certificate of authenticity is especially important for digital artwork that can be easily reproduced. The NFT guarantees its owner that he or she owns the original version. Any other version of the artwork can be considered as a mere copy. However, while the use of blockchain technology allows the holder of an NFT to have a certificate of authenticity, this does not necessarily mean that the tokenized artwork is original, nor that the creator of the NFT owns the rights to the original artwork.
The paradox of an NFT artwork: to be unique or not to be unique?
The exclusivity of an NFT can be difficult to conceptualize when the tokenized artwork is originally material. If the NFT guarantees its owner that he or she owns the original and unique version of the artwork, what happens to the material peace? Some crypto enthusiasts, advocating the detachment from material goods, are convinced that a tokenized good no longer has a reason to exist in its material form. An original drawing by Basquiat (“Free Comb with Pagoda”) almost disappeared – in its material form – following its tokenization. The smart contract provided that the purchaser of the NFT had the right to destroy the original drawing in order to be the owner of the only (now digital) version of the artwork. The sale of the NFT could not take place, however, as the seller did not hold the copyright to the drawing.
In early March 2021, an original work by Banksy (“Morons”) could not escape the final phase of tokenization and was burned in public after the NFT was created. The destruction of the material artwork was presented as a necessary step in the process of digitizing the artwork. This operation gave the holder of the NFT the guarantee that he or she owns the one and only original and authentic version of the artwork. In addition, the destruction of the material artwork made it possible to transfer its value to the NFT, since holding the NFT is now the only way to own it. The material artwork is thus entirely taken out of the traditional art market (off-chain) to exclusively integrate the digital art market (on-chain). We can speak of a real dematerialization of the artwork!
The most commercially successful NFTs to date represent artworks created using digital technologies. But digital reproductions of material artworks are increasingly taking advantage of this new artistic medium and are also likely to find amateurs. Let’s not forget that an NFT is a simple representation of the digitized asset in the form of a token. Owning an NFT gives exclusive rights to the token, but not necessarily to the asset that has been digitized. It is not in itself necessary to destroy a material artwork to ensure its digital uniqueness and exclusivity, which is represented by the NFT. A masterpiece can therefore persist after its tokenization without the holder of the NFT being deprived of his or her exclusive rights to the single digitized artwork. Since CryptoPunks have a future, there is no reason why the future of masterpieces is not equally secure.
Author(s) of this blog post
Professor of Private International Law at the University of Neuchâtel | Research focus on legal issues of digitalization (blockchain, platforms, AI, digital integrity) | Founder of the LexTech Institute