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Cryptopunks, Art Tokens, and Digital Art

What we've learned since we launched the Cryptopunks about the digital art market.

It’s been just about 18 months since we launched Cryptopunks, the first Ethereum Art Tokens, also called Non-Fungible Tokens, or NFTs. A lot has happened since the launch, and we’ve summarized those events in this post [LINK TBD]. Along the way, we’ve met and talked to many interesting and thoughtful people. They included artists, blockchain developers, gallerists, venture capitalists, museum curators, and many others, all interested in the digital art space. So we want to distill here the perspective we’ve gained from all of of those experiences and conversations.

Why Art Tokens?

Cryptopunks began as an experiment. It wasn’t at all obvious that people would accept the model of ownership that it provided. After all, anybody can download the entire set of Cryptopunks and store them indefinitely. Or, they can visit the website and view them at any time. So why bother owning them, when “owning” only refers to a record on the blockchain?

Even we as the creators of Cryptopunks couldn’t really answer that question at launch. But since then we’ve learned a lot about digital art and the challenges it faces in the art market. And it turns out that art tokens could be the exact solution that the digital art market needs.

Digital art has been around since at least the 1950s, and there is little dispute that it is very important and culturally relevant. Major institutions feature digital art all the time, and there are even entire museums dedicated to it. However, there are some fundamental problems in the digital art market, especially for pure digital art that exists simply as data. This is a very large category of art that includes video, audio, pixel images, games, and interactive experiences. The problem is, how does one buy such a piece of art? It is simply data, and an unlimited amount of perfect copies could exist, or be created in the future.

There are two ways galleries try to resolve this problem. The first is try to physically enforce the rarity of the art. This involves storing a limited number of copies of the art on media in a secure place in the gallery, then attempting to prevent any leak of this data to the outside world. Often even the owner of the art doesn’t hold an actual copy, they entrust the gallery to safeguard it for them. Of course, nobody can be completely sure that more copies don’t exist, or that the artist won’t accidentally leak a copy at a later date, etc.

The other approach is for the gallery to issue a certificate to the buyer, asserting that the buyer now owns the “original” of the work, regardless of what copies are out in the world. It’s not hard to see what could go wrong with this model. What happens if the gallery goes out business (which they often do)? How would a subsequent buyer of the art determine the veracity of the certificate in that case?

With the first approach, the galleries are fighting against the very nature of pure digital art, which is that its natural state is to be ubiquitous. And this should not be seen as a downside, but as a strength. A great deal of the world’s most treasured art is locked away in the houses (or storage units) of wealthy people, and almost nobody can experience it. Digital art can be accessible to everybody, without necessarily requiring even a visit to a museum. The second approach rightly accepts the inevitability of ubiquity, but the solution they offer is simply too weak for the art market to accept. The plea that often accompanies this approach is for collectors to “support digital artists”, and that is noble. But let’s be realistic: collectors want to buy something that can be sold again later, often decades later. It is, to many, an asset class first and foremost.

So, let’s now consider what the art token can do for digital art. Rather than a gallery issuing certificates that promise the provenance and uniqueness of the asset, the artist herself can create the ownership mechanism on Ethereum, using a standard NFT smart contract. The registration is time-stamped and universally available for all to review. It also links the token to the art itself, via a cryptographic hash. So, anyone can confirm that the token refers to the content in question, and that there is no earlier record for that content. Most importantly, this record is incorruptible and will last as long as the Ethereum blockchain continues to exist, and there are many billions of reasons why it should continue to exist.

Buying and selling an art token can happen between any two people in the world for just a few cents in transaction fees. In such a transaction, there is no chance that the buyer doesn’t receive the token, or that the seller does not receive their money. No insurance, transportation costs, or expensive provenance research is necessary, and settlement takes just minutes.

What it does require however, is a cognitive leap to a different model of ownership than traditional “possession” ownership. But, as we’ll see, the leap required is not as great as you might think.

Some Philosophy About Art Value and Ownership

A related philosophical question that comes up is, “What if I could make a perfect molecule-by-molecule reproduction of Van Gogh’s Starry Night, would it be just as valuable as the original?” And, in fact, you can get pretty close to that reality already. However, nearly everybody agrees that the answer is “no”. The reproductions are perhaps worth the labor and supplies used to fabricate them, but not much more. Why? If anybody can have a painting on our living room wall that is indistinguishable from Starry Night, then why is the original still valued?

Well, perhaps some subtle details of the materials used and technique still creeps in and makes it valuable. Let’s consider something contemporary, then. A Jeff Koons balloon dog sold in 2013 for nearly $60M. Now Koons didn’t even personally fabricate the dog. So, is there a huge industry in making exactly clones of the balloon dog for perhaps just tens of thousands of dollars each, then selling them for $60M? The reproductions would be so accurate that even Koons himself would have no idea which was original if they were displayed together without any other context. And again, of course that hasn’t happened. People don’t value reproductions, they want the original. But if the original isn’t actually unique, then why does it matter? The only conclusion can be that people are not buying the physical work, they are buying the idea of owning the work. Starry Night and other impressionist paintings were a bold new approach to painting that represented an artistic and cultural shift in human history. And that’s what makes owning the original Starry Night more valuable than identical clones. It’s the idea of owning a piece of that history, even if the physical item itself could be duplicated. And that notion has been taken to the extreme in contemporary art.

So if we accept the notion that what is being transacted in the contemporary art market is ideas, then the art token is the distillation of that concept to its purest form. Now, nothing physical need be transacted at all, and the market gains all the benefits mentioned above: low transaction fees, perfect provenance information and transaction history, no insurance, transportation or maintenance costs.

Seen through this lens, it seems almost inevitable that some share of the art market will move to this model, since it has so many positive attributes from a market perspective. And since a significant share of art collectors are primarily interested in art as a diversification asset, this should be very attractive to them.

What is Holding Art Tokens Back

There are still some difficulties to be overcome for the Art Token to become a major part of the art market. The most obvious roadblock is for both artists and collectors to be able to use and understand blockchain applications. This is a problem that continues to hold back blockchain adoption in general. We hope that the teams that work on browser- and mobile-based Ethereum clients will begin to really take UX seriously in the coming years. Improved tools for dapp developers are needed as well.

A less straightforward issue is ownership attribution. If somebody owns traditional physical art, they can display it in their home. Not only does it serve as decoration, but they are also showing it off to their peers. Is this an essential element to art ownership, the “bragging rights” factor? If so, then there isn’t a lot art tokens can offer there yet. That said, digital art in general is experienced differently than traditional art. Nobody really expects it to be viewed in digital picture frames in living rooms. Rather, it will continue to live in its natural habitats: mobile phone screens, headphones, television screens, projects, computers, and VR environments. So, could the ownership bragging rights find its way into those media as well? Certainly it could. But nobody has built anything compelling like this yet, and it may be needed to get collectors over the psychological hump of valuing blockchain-based ownership.

Art Tokens Beyond the NFT

In its current, standardized form, the “non-fungible token” has two features: it uniquely references the artwork via a hash or some other identifier, and it allows the token to be owned and transferred between Ethereum addresses. This is enough functionality to allow for provenance of the work to be established, and for it to be transacted in marketplaces. However, additional functionality can be built into the contract if the artist wants to assert some control over how the art is transacted. This is especially relevant in contemporary art, where the making of art and the business of art are often closely intertwined. In fact, because the Cryptopunks was the first Art Token, and therefore no decentralized exchanges yet existed, we built an auction system into the smart contract. It could very well be the first work of art that included its own auction house.

More exotic systems are possible, such as giving the artist a cut on secondary market purchases, requiring that subsequent sales always be at a higher price, or a “hot potato clause”: demand that the art change hands quickly or else it is degraded or destroyed. There are many interesting aspects to explore and, for the first time, the artist is now in a position to have some control over their art in the secondary market.