NFTs and the Death of Copyright - jcnwkjcnewjcw

or: Future Tokenomics of Copyright Licensing in Web3 and the Metaverse

Combined with emerging information markets, crypto anarchy will create a liquid market for [any] material which can be put into words and pictures. And just as a seemingly minor invention like barbed wire made possible the fencing-off of vast ranches and farms, thus altering forever the concepts of land and property rights in the frontier West, so too will the seemingly minor discovery out of an arcane branch of mathematics come to be the wire clippers which dismantle the barbed wire around intellectual property.

Arise, you have nothing to lose but your barbed wire fences!

Timothy C. May, The Crypto Anarchist Manifesto, 1988.

I. Repurposing Copyrighted Material to Make Headlines in the Crypto Industry

Timothy May predicted crypto’s global takeover, and decentralization remains a key tenet of modern crypto-anarchism, with several modern examples in the cryptosphere, or web3 at large. But does web3 diverge wholly from Web 2.0? Has web3 evolved beyond Congress’s enactment of Section 230(c) of the Communications Decency Act which allowed the unbridled growth of Internet giants and behemoths like Alphabet, Meta, and Amazon?

Within the first few weeks of 2022, some of the newsworthy items in the crypto and blockchain industry read: “Flipped Bored Ape Copycats Are Starting to Pop Up Online…And Bring in Big Bucks…A parody of the highly popular Bored Ape Yacht Club NFTs, the PHAYC collection already brought in $1.8 million in sales.” “2 Mirrored, Copycat Bored Ape NFT Projects Cause Copyright Infringement Controversy.” “Is PAYC a Cheap Derivative or a Solid Investment: Here’s the Scoop.” “OpenSea Bans Two Bored Ape Rip-off NFT Collections.” “Two NFT Copycats are Fighting over which is the Real Fake Bored Ape Yacht Club and Dodging NFT Marketplace Bans while doing it.” “NFT Project Bored Ape Yacht Club Spawns ‘Left-Facing’ Copycats. The parody projects expose the absurdity of NFT communities and intellectual property concerns surrounding digital images.”

These headlines refer to PHAYCs and PAYCs, two distinct but nearly identical NFT projects that flagrantly infringed the copyrights of a wildly popular NFT collection called the Bored Ape Yacht Club, or BAYC. I form part of a team that produced the more successful of the two mints, PHAYC pronounced “fake.” PHAYCs are not to be confused with the less successful Phunky Ape Yacht Club, or PAYCs, which is an NFT collection that follows a different production timeline, or roadmap, and which is produced by another, unrelated team.

Similar between the two teams is the desire to remain anonymous because both operate in a legal gray area. So, we operate pseudonymously from the perspective of the public, remaining anonymous even to our market. Yet the fact remains: both the PHAYC and PAYC NFT production teams tried to completely sell out an artificially scarce supply of digital representations of artwork based upon copyrighted material that does not belong to them, and in the shortest amount of time. It was each competing teams’ unspoken goal to beat each other to the punch; the loser would lose legitimacy measured in clout to observers and to their customers alike.

This is the key point: consumer goodwill in both projects lies entirely in clout, or respect within peer-to-peer spheres of influence. The PHAYC team made sales of $1.8 million within four hours, collecting royalties of 4% on each subsequent trade downstream. PAYCs’ market flounders, months later.

I. A. What Are NFTS?

Last year, after nearly a year of deliberating and avoiding buying any NFTs, I remained largely suspicious about the NFT market. I had heard nightmares about the stress NFTs put on our environment and the huge energy costs that heightened living costs for communities not just in America but around the world. I was skeptical of cryptocurrency as well, but this has changed. I remain skeptical of the way NFTs are being used; a predominant paradigm I call “NFT++IP.” An “NFT++IP,” per my interpretation of the current NFT market, consists of the NFT itself plus some form of digital content attached, which may convey intellectual property (IP) rights to the owner of that NFT including instructions for how the digital content attached to an NFT can be used by the owner/holder of the NFT.

To be frank, an NFT consists of

the digital ledger entry,
the digital resource, or artwork, and
the rights, if any, granted in the digital resource; these are private rights, and most commonly, a base level of the right to display is given by the seller to the buyer as well as secondary buyers thereafter.

The instructions for handling IP in NFT++IP collections are established via smart contracts, which are computer programs that live on various blockchains that support such NFT-hosting protocols. The digital content of an NFT seldom lives on-chain and is in fact usually stored on a different server system than the NFT itself, for cost-saving.

Many Web 3.0 participants find it difficult to let go of conventional copyright paradigms, namely, relying upon federal protections of works of authorship. This residual conservatism enables such participants to feel like they “own” something and within the context of NFT++IP, which often means the token holders get to own the most valuable sticks in the bundle, namely, exclusionary copyrights.

But this is hardly the case, as seen thus far across the metaverse including successful blue-chip PFP projects. The NFT and the digital content an NFT points to are separate - and so is Web 3.0 participants’ ownership of the NFT as opposed to the digital content’s exclusionary copyright.

Crucially, an NFT is no more than an entry on a digital ledger, also known as a blockchain, much in the way a certificate of authenticity is an entry on a conceptual artist’s catalogue raisonne.

A conceptual artist’s IP rights (IPR) including copyrights lies in the work itself, not within the certificate of authenticity. For example, a Sol LeWitt conceptual artwork certificate of authenticity describes the work as well as the IPR associated with the work when a buyer purchases it. Because of the nature of conceptual art, and much of Sol LeWitt’s oeuvre, the value of the work lies entirely within that certificate of authenticity. While conceptual art might not necessarily be fixed in a tangible medium, paintings, sculptures, and digital artworks are works fixed in a tangible medium and are thus inherently, constitutionally copyrightable, assuming they are sufficiently original.

Under the Copyright Act, the copyrightable aspects of an authored creative work vests in the author or authors of that work if it is fixed in a tangible medium. The digital image, video, or music file that an NFT points to is governed by federal and state intellectual property law, unlike the entry on the ledger, the NFT. There are many ways to handle the IP in an NFT++IP collection. For example, digital content could vary according to an NFT creator’s preferences, including perhaps

What type of media is attached, be it digital with a potential physical counterpart, vice e versa, or simply one or the other,
How an NFT creator/seller establishes royalties for downstream sales, which is not an IP right but a contractual right,
How a percentage of funds can be allocated for the pool of buyers within a particular collection, or even to a charity or public interest cause chosen either by the seller or the buyers through a voting system, which is not IP-related and is in fact more closely related to securities law, i.e., federal securities regulations, and
What intellectual property rights (IPR) the seller wishes to give the buyer, perhaps distinguishing whether a seller would like to give IPR to primary and secondary buyers.

The above handling of IP falls under the conservative / traditional copyright approach. The options for how copyright is managed through NFTs can vary, and thus far, only a small sampling of the true possibilities of NFTs++IP have been broadly used in so-called blue-chip NFT collections, which are the most Veblenesque NFT++IP examples on the market. From an uncopyright, perhaps more accurately “copyleft,” or the new perspective, consumers and sellers of NFTs trade in something that might now be far more tangible than ever before in history: clout and consumer goodwill, spheres of influence and respect. Copyright is rarely if ever managed through NFT smart contracts. It is possible however to link IPR like copyright to the digital resource or artwork associated with an NFT++IP as a ledger entry through the smart contract code.

I. B. Technical Definitions of NFTs

It is key to cover some ground on the technological aspects of NFTs to establish a fundamental understanding of why I distinguish NFT++IP as merely one, and not the only application, of NFT tech. Mass-market adoption of NFTs has yet to be utilized in ways other than NFT++IP; the use-cases of NFTs are largely untapped and cannot be covered within the scope of the present writing. This writing focuses on the application of NFTs that pertains to artworks, digital resources, and transactions in IPR. Most NFT trading volume occurs on OpenSea, a centralized marketplace that sells NFTs on the Ethereum blockchain.

Other blockchains such as Flow, Solana and Cardano also support NFT++IP listings and therefore NFT++IP trading as well. Keep in mind that these blockchains do not host the digital resources associated with NFTs and fail to provide additional information about IP rights that may be transacted that are not originally included by the NFT sellers in their smart contract code. These blockchains simply facilitate the transactions of the NFT++IP ledger entries. Some NFT++IP collections opt-out of a centralized marketplace and instead rely upon their own marketplaces. These types of online marketplaces facilitate peer-to-peer (P2P) trading and do not charge per transaction like OpenSea does.

Other online marketplaces like LooksRare, Nifty Gateway, and SuperRare have different business models to earn money in the facilitation of NFT transactions. Since January, other market places have popped up including gem.xyz and the Phaycs’ own marketplace, ThePhirateBay. The NFT++IP project that my team and I repurposed for our PHAYCs collection was originally created by the web3 company Yuga Labs, who wrote in their Terms and Conditions (T&C) on the BAYC website that the holders of the ten thousand total BAYC NFTs are the owners of some, but not certainly not all, IPR of the digital content associated with their token(s). In fact, in the past week Yuga has announced they will clarify the rights conveyed to their NFT holders, amid the ongoing lawsuit they have filed against another fake/bayc market entrant, Ryder Ripps, who has flagrantly infringed both the copyright and trademark of their flagship NFT collection, bored ape yacht club (bayc).

These NFTs and their limited copyrights are traded mostly on the OpenSea marketplace, but P2P trading between sellers and prospective buyers, as well as trading on other marketplaces like LooksRare exist. BAYC tokens are based upon the ERC-721 NFT protocol, which allows similar NFTs to exist via smart contract programs that comply with this token standard. The ERC-721 is comparatively more robust than the ERC-20 token protocol that another blue-chip NFT collection adheres to, CryptoPunks (CP). Indeed, BAYC and CryptoPunks are the quintessential blue-chip NFT profile picture (PFP) collections, and conveniently represent two very different paradigms for how IP was handled by different (blue-chip) NFT++IP project creators.

Blockchains consist of blocks chained together from the time the genesis, or first, block of a particular chain is minted, hence the term “blockchain.” Each block has an associated identification or ID number. ERC-721 NFTs, including BAYC tokens, track the ID numbers of each block on the blockchain where an NFT lies, using a base uniform resource identifier (URI) and a token URI. The base and token URIs work together to discern who is the owner of a particular identified NFT block. “ownerOf” is a specified parameter in ERC-721 smart contract programs that specifies who is the owner of a given NFT. ownerOf is metadata, or systemic context data that describes the application content data of a given smart contract program.

As specified earlier, because of the computational complexity of transacting on growing blockchain networks, energy costs to perform these transactions are rising and must be accounted for. Thus, to alleviate these concerns, many NFT++IP projects maintain the digital resources associated with a particular NFT “off-chain,” and on a separate server hosting system, such as the Interplanetary File System, or IPFS.

Metadata parameters “ownerOf” may exist in JSON files, a key filetype that contains metadata properties and, if specified by the creator or seller of an NFT++IP project, key legal language about the digital resource associated with the NFT, namely considerations about how to handle IPR.

II. Intellectual Property Considerations

PHAYCs stirred up controversy but have yet to encounter any form of strongarming by BAYC IP owners under federal copyright law. My team and I took intellectual property that currently belongs to Bored Ape Yacht Club (BAYC) NFT token holders, flipped the images on their horizontal axis, randomized the numbering of each BAYC token from one to ten thousand, and sold new tokens using flipped BAYC digital resources as PHAYCs for a fraction of the current market price of BAYC NFTs. This conduct raises several questions, for which I provide short answers under each question.

If someone mints NFTs, and a copyright claim exists, how easily is the copyright owner determinable? Usually, as in the old way of asserting copyright, the copyright or IP owner will usually start the process of an infringement claim. This means that if they are vigilant, copyright owners will always be determinable. Control over clout; this is the old, conservative way.
Under what circumstances does flipping a jpeg image or other digital artwork, such as a gif or short video clip, on its horizontal axis constitute copyright infringement within the NFT++IP digital landscape? What about “horizontally” shifting an mp3 music file, so that it plays from back to front, and thereafter minting NFTs ascribing ownership of such an altered work to a third-party buyer? Would such transformative use be considered a valid fair use case within the context of NFT++IP? Here, flipping images will almost always result in infringement, unless the flipped digital resource or artwork constitutes a parody use. In the case of flipping a music file, it may be even easier to prove noninfringement as the flipped audio will be unrecognizable from the original and would not undercut the market for the original.
Does the minting of an NFT attached to an artwork implicate copyright infringement of the artwork, and are both the minting party, i.e., the first buyer and the party who wrote the original smart contract code, i.e., the creator or seller that enabled infringement jointly and severally liable for infringement, supposing the creator of such an NFT is not a copyright holder? Here, an NFT itself never implicates copyright, it is merely a digital ledger entry. This means that if an allegedly infringing party mints NFTs without reproducing the digital resource or artwork associated with an original NFT++IP project or a physical copyrightable work, it is likely that the minter will not have infringed upon the original work. They may yet make sales in an environment where clout, not control of IP, reigns supreme.
What if an NFT is attached to an artwork that incorporates original elements of a copyrighted work but also contains its own original elements; would this raise the possibility of an infringement claim? NFTs have nothing to do with this analysis. The usual mechanisms of conservative copyright control take hold.
Does the persistence of a webpage documenting the existence of an NFT that represents ownership of a unique copy of that work implicate copyright infringement, even if the NFT has been burned? NFTs do not represent ownership of a unique copy if the market determines it so. Indeed, the infringement of the copyright owner’s exclusive right e.g., reproducing the digital resource without the owner’s permission triggers traditional copyright law, NFT or not.
Under what circumstances exactly does the creation and sale of NFTs attached to copyrighted works implicate copyright? Perhaps within the context of conservative copyright law, control will take precedence over clout. But is this necessary?

II. A. CryptoPunks, the NFT License, and Centralized Intellectual Property

In the beginning, or at least as far back as I am willing to go in this nascent market, there were CryptoPunks, ten thousand images consisting of 600 pixels each that were produced by Larva Labs and initially offered for free on their website, not including the eleven cent gas fees at the time.

Fast forward four years and the ten thousand CryptoPunks NFTs have achieved nearly two billion dollars in total sales volume. Nowadays, the cheapest CryptoPunk that money can buy costs over two hundred thousand dollars. What happened? The profile picture, or PFP, movement is an ongoing phenomenon in the crypto space where projects like CryptoPunks hold a dominant share of the total sales occurring every day in the NFT market.

Others include BAYC and the many derivative NFT++IP projects that BAYC’s liberal, and seemingly ever-changing, terms and conditions have inspired. But what bundle of intellectual property rights is imparted to the original minter, aka the first buyer, and to downstream buyers after the initial sale?

When CryptoPunks were first made available to the public in what has since been described as a “buggy rollout,” Larva Labs, CryptoPunks’ centralized figurehead and creator, failed to provide a content license or permissible terms ascertaining how the buyers could use the characters, and more generally the artwork, that they now “owned.”

The use of CryptoPunks as PFPs was quickly established as one way to make use of one’s new investment in a CryptoPunk NFT; the right to display Larva Labs’ proprietary IP, for which the tokens are now owned by a pool of mostly anonymous buyers. Contrasting with how Larva Labs handled the CryptoPunks’ IP was their decision to include a detailed set of Terms and Conditions for another NFT collection they are selling, the Meebits. The Meebits content license allows buyers of these 3Desque CryptoPunks

“a limited, worldwide, non-exclusive, non-transferable license to use, copy, and display the Art for your Purchased Meebit for the purpose of commercializing your own physical merchandise that includes, contains, or consists of the Art for your Purchased Meebit (‘Commercial Use’), provided that such Commercial Use does not (a) include any form of collaboration or involvement of any brand or other third party, or (b) result in you earning more than USD$100,000 in gross revenue each year.”

Even now, Larva Labs has yet to fully describe the permissible uses of CryptoPunks that their corresponding NFT owners can engage in. Supposedly, when CryptoPunks were first released as NFTs, Larva Labs considered co-ownership of the IP underlying the NFT++IP tokens, meaning each CryptoPunk owner would also be the copyright owner, entitled to a share of the profits resulting from future monetization of the CryptoPunk or CryptoPunks owned by a particular owner, including in films, pulp fiction, and other tangible media like comics.

In the early days of the CryptoPunks rollout when nobody was buying them and the first few CryptoPunks were given away to Larva Labs’ inner circle, granting copyright co-ownership to minters and other downstream buyers could have been a way to encourage decentralized collaboration between the CryptoPunks brand and the booming market for these zany NFT++IP PFP characters. In 2021, the United Talent Agency signed an exclusive deal with Larva Labs to represent the CryptoPunks in film and television productions, music publishing, and written publication deals moving forward. Presumably, this contractual relationship continued as Larva Labs sold their key IP to Yuga earlier this Spring 2022.

Copyright co-owners do not need permission from each other to make commercial use of their copyrighted work but must share in the revenues garnered from such usage. As of March 11th, 2022, Yuga Labs has acquired the IP for CryptoPunks, and another prominent Larva Labs franchise, the Meebits, giving all commercial rights without restraint to the community of token holders of these NFTs. What does anyone think these images will generate in terms of licensing revenue?

Ultimately, I am convinced the commercial rights to IP owned by Yuga Labs is ultimately a zero-sum game; while certain enterprising token holders may create short-term valuable franchises based off their image of an ape, or now, punk, the fact that there are ten thousand generally indistinguishable images, means that ten thousand such franchises spreading across entertainment, publishing, clothing, or even food industries, means that such franchises lack meaning without the effective stewardship of Yuga Labs behind that IP, who are ultimately the determiners of the value of their decentralized commercial rights. Clinging to copyright may inevitably prove pointless.

Clout, however, remains at large an untouched power offered by NFT++IP to the token holders of such projects. Backtracking in time, had Larva Labs chosen to share copyrights, and not just the commercial rights, with the minters of the CryptoPunk NFTs in 2017 and the downstream buyers thereafter, it would have presented a logistical nightmare to account for thousands of unidentified CryptoPunks NFT owners, most of whom are merely known by a pseudonymous alias online.

It is likely however that such anonymous owners would have an economic incentive to break character and reveal themselves to share in the profits accumulated by Larva Labs, which is nothing short of a juggernaut in the contemporaneous NFT space that is currently dominated by NFT++IP and PFP offerings from creators like Larva Labs and Yuga Labs, who once again recently acquired Larva Labs’ most prominent IP. Easier would have been for Larva Labs to license their work using a CC0 creative commons license for token holders to do what they will with their attached NFT++IP artwork if you can call CryptoPunks that. From the production or publishing companies’ perspective, sharing thousands of co-owners of CryptoPunks copyrights would present a roadblock in the ability to move forward with downstream licensing deals, because copyright co-ownership under the Copyright Act necessitates a written agreement signed by co-owners of IP.

Previously, before Yuga Labs’ acquisition and through the United Talent Agency, Larva Labs’ crypto native IP, which includes CryptoPunks, Meebits, and Autoglyphs, could easily enter the mainstream consciousness through mainstream content deals with movie producers and publishing companies for example. This forthcoming success is ultimately due to the crucial decision Larva Labs made early on to avoid co-ownership of their IP with their NFT buyers, who in the beginning consisted of mostly anonymous blockchain minters and downstream buyers who to this day maintain a proclivity toward anonymity.

Keep in mind that the problem remains with copyright owners asserting their exclusionary rights, rather than the use of the images, which is and will remain rampant a la the “right-click-save” meme that oversteps the bounds of fair use. But is Yuga Labs’ magnanimity in giving commercial rights to token holders disparate from Larva Labs’ approach, and does this magnanimity amount to a capital sum gain for those token holders, or is it simply veiled kindness, i.e., giving away nothing for free?

Previously, Larva Labs hinted at but ultimately did not adopt the so-called “NFT License,” which was originally penned by the makers of the CryptoKitties NFTs, i.e. Dapper Labs and governs the permissible uses of the intellectual property associated with NFT++IP that adhere to this rather controversial licensing scheme. The NFT license allows the owners of CryptoPunk NFTs, and other NFT++IP that adhere to its standard, limited commercial usage of the associated art, including the ability to “use, copy, and display the Art for [the] purchased NFTs for the purpose of commercializing [the owner’s] own merchandise,” capped at one hundred thousand dollars per annum.

It is important to note that the NFT license does not permit either first or secondary buyers to create derivative works other than within the context of commercializing their own merchandise as permitted by Clause 3(b) of the NFT License, and in fact contains several further limitations on the future owner’s or owners’ commercial usage of the artwork that is associated with NFTs adhering to the “NFT license.” Before I describe the nuances of the NFT license, I would like to stress that it is rather arbitrary in its approach. The limitations it expresses are effectively meaningless, for example, the revenue generated limitation cannot be measured by simple means and there is no expert per se that is tasked with measuring revenue as generated by different token holders’ commercial usage of Larva or Yuga Labs’ IP.

The NFT license effectively reflects a reflexive assumption that one needs to control the use of the artwork associated with an NFT++IP that they own to attribute value to it. This once again is heavily reliant upon the old model, the conservative paradigm of federal copyright protection.

According to the NFT license, first and secondary buyers of a seller/creator’s NFTs that adhere to this rather problematic licensing scheme are considered “licensees,” and as such are forbidden to

“do any of the foregoing without [the] Creator’s express prior written consent in each case[:]

(i) modify the Art for your Purchased NFT in any way, including, without limitation, the shapes, designs, drawings, attributes, or color schemes (your use of Extensions will not constitute a prohibited modification hereunder);

(ii) use the Art for your Purchased NFTs to advertise, market, or sell any third party product or service;

(iii) use the Art for your Purchased NFTs in connection with images, videos, or other forms of media that depict hatred, intolerance, violence, cruelty, or anything else that could reasonably be found to constitute hate speech or otherwise infringe upon the rights of others;

(iv) use the Art for your Purchased NFTs in movies, videos, or any other forms of media, except to the limited extent that such use is expressly permitted in Section 3(b) above or solely for your own personal, non-commercial use;

(v) sell, distribute for commercial gain (including, without limitation, giving away in the hopes of eventual commercial gain), or otherwise commercialize merchandise that includes, contains, or consists of the Art for your Purchased NFTs, except as expressly permitted in Section 3(b) above;

(vi) attempt to trademark, copyright, or otherwise acquire additional intellectual property rights in or to the Art for your Purchased NFTs; or otherwise utilize the Art for your Purchased NFTs for your or any third party’s commercial benefit.”

Analyzing these clauses provides interesting fruit for thought. Subclause (i) prevents licensees of CryptoPunks NFTs -- and other NFT++IP tokens that adhere to the NFT license -- from creating derivative works based on the copyrighted artwork attached to their NFT.

Subclause (ii) prohibits licensees from using their NFT++IP tokens for third-party advertising and subclause (iii) prohibits licensees from using their NFT++IP tokens for hate speech. Subclause (iv) prohibits licensees from using the seller’s IP contained within their NFT++IP tokens to create films, streamed video content, or other media except for personal non-commercial use or limited to personal brand merchandising that is specified under Clause 3(b); subclause (v) bars licensees from commercial merchandising beyond the one hundred thousand dollars per annum limitation.

Last, subclause (vi) bars licensees from attempting to trademark, copyright, or otherwise procure additional intellectual property rights in the artwork attached to a seller’s NFT++IP sale; and subclause (vii) prohibits licensees from commercializing the seller’s NFT++IP for other, unspecified commercial use of the owned and protected artwork attached.

Indeed, the NFT license utilized by Larva Labs and so many others operating in the NFT space represents only one end of the current spectrum of licensing schemes. The other end of the spectrum was at the time best represented by BAYC and the unlimited commercial use provision in their terms and conditions. At the time, this allowed first buyers and downstream secondary buyers the right to make derivative works with no annual limit on revenue garnered from such usage. This protection does not, however, extend to nonbuyers of BAYC tokens. The two extrema of the NFT-licensing spectrum continue to raise questions from supporters of each paradigm against the other. Especially now, after Yuga acquired a bucket of Larva’s key IP. Today, CryptoPunks NFT owners still own their NFTs, but their IPR is continuing to evolve as prescribed by their IP stewards, Yuga.

For example, in June 2021, conceptual artist and provocateur Ryder Ripps uploaded to Foundation a slightly higher resolution copy of CryptoPunk #3100. Ripps’ intentions were outlined clearly: “[by] engaging their so-called art with the Ethereum network, [Larva Labs] should be believers in the self-governing ideals of cryptocurrency. I question Larva Labs' motives, understanding of art, understanding of ‘punk’ and understanding of cryptocurrency/NFT[s],” he said in an email to Coindesk. Ripps’ statements insinuate that any attempt by Larva Labs to protect their IP would illustrate a rejection of an ethos of decentralization, which is a core tenet of crypto-anarchism.

Foundation practiced its right to discretionarily publish material on its online platform-cum-marketplace under Section 230(c)(2)(A) of the Communications Decency Act by removing Ripps’ (re)listing of CryptoPunk #3100. To initiate this process, Larva Labs issued a DMCA takedown notice one day after Ripps sold his copycat CryptoPunk #3100 on the Foundation marketplace. In response to Larva Labs’ DMCA takedown request, Ripps filed a counterclaim alleging fair use and quickly created another NFT++IP to signify the DMCA takedown event, uploading an image of Foundation’s takedown notice in the process, and promoting this piece of conceptual art on Instagram, amongst other, related NFTs that commemorated Larva Labs’ DMCA takedown request. What does this mean in terms of ownership?

Ownership within the NFT market is detailed in Section III below. A lot has changed since July 2021. CryptoPhunks, a derivative NFT project based on CryptoPunks, has had sales jumpstarted by Ripps’ conduct and has been delisted several times from OpenSea, a major NFT marketplace, before being relisted.

According to Ryder Rippes, this relisting of CryptoPhunks represents a win for cc0 (Creative Commons Licensing, a famed copyleft approach) and decentralized IP as envisioned by Timothy May.

While dissent with OpenSea’s Twitter-Esque controls over speech on its platform rises across the Internet, other derivative projects aimed at capturing market entrants unable to invest in CryptoPunks due to sky-high entry-level prices also rise. Indeed, one may argue that CryptoPunks began the PFP movement, with a plethora of derivative pixelated-in-the-manner of CryptoPunks or other similar profile picture projects popping up nearly every day. At the end of the CryptoPhunks saga and their goal to continue to be traded on online major NFT centralized marketplaces was their fair use argument.

By flipping the images horizontally and further providing a color-coded border that circumvents each image to indicate its rarity within the set, CryptoPhunks has, for now, circumnavigated the copyright abuses alleged by Larva Labs. Yet, CryptoPunks have little to no copyrightability. For one, the images are created by an algorithm that allows generative art to be made by combining randomized traits in unique ways throughout the collection set. The Supreme Court recently ruled that the proprietary algorithms and code are copyrightable material, including the code used by Larva Labs that put together the few elements that make up a six-hundred-pixel work of “art.”

However, this algorithm is rather rudimentary and follows a Creative Commons or CC0 license, and Larva Labs did not originally think that CryptoPunks would be worth so much, let alone a mere four years after their conception, to copyright their version of that algorithm. Furthermore and most importantly, the Copyright Office recently ruled that generative art made by algorithms, especially those with de minimus, or the bare minimum, elements including PFPs like CryptoPunks or Weird Wales may in fact be too similar to AI-generated art, which lacks the authorship element necessary to be copyrightable in the first place.

In a rather humorous twist, another PFP project has similarly attained fair use status by taking the CryptoPunks’ faces and reapplying them to the bodies of pixelated slugs. This project, also not affiliated with Larva Labs, is called Larva Lads, and the entry-level price into this market is a whopping eighteen hundred dollars at the time of this writing. Keep in mind that the NFT license, while it once but ambiguously governed the CryptoPunks licensing scheme, still protects the owners of the NFTs as well as the owners of the IP behind them, Larva Labs. This means that DMCA takedown notices may be submitted by either Larva Labs or one of the few thousand owners of a CryptoPunk NFT for unauthorized use. Thus, Larva Labs retains ownership over CryptoPunks IP for the time being and has provided limited IP rights for CryptoPunks NFT token owners. But what exactly is an NFT? And what does ownership mean in the NFT context?

II. B. BAYC ‘s Terms and Conditions: Decentralized Collaboration

Yuga Labs and BAYC are no strangers to controversy. On a fundamental level, Yuga Labs has recently stated that they are not the owners of the IP behind BAYC, but rather, “temporary stewards of IP that is in the process of becoming more and more decentralized.” This captures the ethos of decentralization that is key to many participants in the NFT (nonfungible) and crypto (fungible) marketplaces overall. The idea of decentralization of control is farcical at best; the conventional way of thinking about IP is centered on control, namely, exclusionary control.

However, NFTs offer a new way to excise one’s IP powers, as stated numerous times throughout this writing: clout. The founders of Yuga Labs have notably taken a laissez-faire approach to the BAYC IP by thus far avoiding issuing DMCA takedown notices against several derivative projects that abuse IP that originated with Yuga Labs and now have been decentralized to BAYC NFT holders.

Most if not all of these derivative BAYC-IP rip-off projects fail to adhere to the terms and conditions penned by the Yuga Labs team, which require at a base level ownership (a play on the word ownership, pwnership means one is the steward of certain amount clout, or consumer goodwill). Pwnership prizes respect within a community rather than control over IP/copyright of a BAYC token. Yuga Labs can still enforce IP sanctions against those who abuse their BAYC IP, even while commercial rights and the right to display have been given to BAYC NFT holders.

There is also the possibility of transfer of exclusive rights without an assignment signed by the copyright holder. Is the transfer of the NFT such a signed assignment? It very well can be, depending on the smart contract code as instantiated by the seller. Thus far, Yuga Labs has declined to display such generosity to its market of consumers.

While some have argued that this model of decentralized collaboration has pumped the sales of BAYC tokens through some mishappen market manipulation tactics, it is unknown what future approach BAYC token holders, or Yuga Labs, may take in future against those who abuse BAYC IP, and even whether Yuga Labs can retract and redistribute IP powers transferred in the sale of each token to BAYC token holders. In fact, as per the terms and conditions on the BAYC website, the NFT++IP holders within the BAYC market have the power to issue DMCA takedown notices, for example. For holders of tokens of a BAYC-derivative or BAYC copycat project, or for the creators of such projects themselves, this aforementioned power can present a problem in the future with regards to the right to display IP that belongs to BAYC NFT owners, and otherwise commercialize upon BAYC IP that does not belong to the owners of a derivative project’s tokens.

Previously, I discussed how an NFT is not the content or artwork itself, hence my use of the terminology throughout this paper, “NFT++IP.” Thus far, common use of NFTs in the contemporaneous marketplace has been to associate each token with art or content that is stored on the IPFS or another similar file hosting system. The types of NFTs traded that make up the bulk of today’s trading volume usually contain content license terms and conditions allowing the buyer certain rights, with fewer rights provided by the NFT license and more rights provided by BAYC’s liberal terms and conditions, as previously stated.

This so-called paradigm of decentralized collaboration enables a creator or IP owner like Yuga Labs to sell NFTs that are stored on the Ethereum (or other) blockchain that permits downstream BAYC or BAYC-related (MAYC and BAKC) NFT pwners to create derivative works and commercialize upon them in an unlimited fashion.

While Larva Labs signed a deal with UTA, Yuga Labs similarly signed a deal with Guy Oseary, the manager for famous musicians like Madonna, to represent their IP to produce new film, TV, and gaming creations that incorporate BAYC and BAYC-related IP. This seems to conflict with Yuga Labs’ choice to transfer commercial rights to BAYC token holder and hodlers alike, who maintain the right to create books, TV shows, and even beer that displays their proprietary ape on them.

In the long term, despite the nuanced differences from one ape to the next, it seems to me that such commercial rights are empty of value. While some token holders may utilize their commercial rights in certain industries before their BAYC token holding peers, the right to commercialize upon the image of individual apes will inevitably amount to a zero-sum gain. Copyright Ownership versus NFT Pwnership: Transacting in Clout Earlier, I established from a technological standpoint what an NFT is, so now we can discuss what it means to “own” an NFT. For this portion of my analysis, I draw upon an excellent piece of writing, After Copyright: Pwning NFTs in a Clout Economy [hereinafter After Copyright].

Recall a fundamental level, an NFT is not an actual image. Rather, an NFT is “a receipt or digital deed that points to an image,” so selling an NFT pointing to a copyrighted image or another type of digital work, including music mp3 or video mp4 files, cannot violate a copyright holder’s rights because the copyright holder has an ownership interest nor exclusionary interest in the NFT technology but the artwork attached to a particular NFT, hence the term I have used throughout this paper, “NFT++IP.”

To reiterate, only the image uploaded to and hosted on an online NFT marketplace platform can possibly violate a copyright holder’s rights which may lie in the attached artwork, be it an image, music, or video file.

Frye correctly says all an NFT “is, is a URL saying ‘[l]ook at this place on the [I]nternet.’” He continues, “[t]elling somebody to look at this URL, there’s no copyright infringement there, because no original copyright-protected element of anything is being copied…so the NFT itself is just irrelevant to the question.”

The effectiveness of copyright protection in the ever-burgeoning NFT space is growing increasingly questionable. Perhaps instead of federal copyright law, which can be ever-confusing with its need to comply with alien jurisdictions’ copyright standards, other protective measures such as the novel technology-based solution underlying NFTs can achieve a different goal than copyright law altogether. Such protections can provide effective remedies to holders of intellectual property seeking to separate their private rights in their “ownership” from what are inherently digital public goods. The artworks contained within NFT++IP tokens are fundamentally such goods, and in fact, any information contained within an NFT++IP token can be considered a digital public good. Frye argues that copyright law has significant shortcomings when a party attempts to protect digital art that they “own,” and for several reasons.

“Copyright is a means to an end, not an end in [of] itself. We created copyright because we wanted to encourage the creation and distribution of works of authorship, not because we wanted to enable copyright owners to control the use of the works they own,” says Frye. Thus, copyright is flawed because it is inefficient, with most benefits of copyright enjoyed by publishers, rather than the authors themselves. Indeed, copyright is “overlong” because it protects works “far longer than necessary to encourage their production and keeps forgotten works out of print.”

Copyright has inevitably become a federally sponsored game of survival of the fittest, a rather Darwinist approach to artistic production and works of authorship. There are many reasons why public protections that enable creative producers, or worse, companies exerting control over creators such as book publishers, to have the ability to generate toxic levels of competitiveness are morally and ethically inadequate. This cutthroat approach advanced advertently or inadvertently by the Copyright Office sort of misses the point of creative works, which are fundamentally collaborative in nature and are not the results of raw and unadulterated competition.

The “competition” that presents itself in successful artistic productions is healthy at worst and meant as a form of flattery between collaborating parties rather than as a harmful practice meant to hurt either party.

Crucially, NFTs offer something entirely different than copyright. While a copyright owner has control over a particular piece of IP, an NFT owner gets something else entirely: clout, which is to say power within a particular sphere of influence. Frye aptly names this type of ownership, which he stresses is entirely disparate from IP ownership, “pwnership,” a word for which the etymology has roots in Internet meme culture, from the expression “to pwn,” meaning “to exert power or mastery over someone” or several people. Within the context of NFTs, an NFT “pwner” has something beyond intellectual property or real private property, something intangible that is akin to the respect of the community in which a particular pwner operates or conducts business.

Pwnership contrasts with traditional IP ownership because NFT owners depend on NFT creators’ endorsements, rather than control and use of the potentially copyrightable, trademarkable, or even patentable elements of NFT creators’ works. Id.

In Section IV, I will build upon the idea of pwnership to analyze the new phenomenon of horizontally flipping the distinctly rightward-facing apes of BAYC to create the successful PHAYCs project. Recall in Section II I elaborated upon the reasons for flipping the rightward-facing jpeg images of CryptoPunks to create CryptoPhunks. Ultimately the reasons for flipping in each case go back to the way the original NFT creators, Larva Labs and Yuga Labs respectively, handled their IP for each, with Larva Labs adhering to the controversial NFT license, and even then, in an ambiguous fashion.

As stated above, both CryptoPunk and BAYC tokens are technologically different in nature, with CryptoPunks adhering to an ERC-20 standard versus the ERC-721 standard of BAYC. In many cases, NFT pwners encourage remixes and use of their work that would not traditionally fall under fair use cases under copyright law because the highly sought-after clout lies with the NFT holder so long as they hold the token in their wallet. Another accepted term, based in part on the ERC-721 token standard that forms the basis of a significant portion of NFTs available on the market, is the metadata value denoting who is the “ownerOf” a particular NFT.

The terms “pwner” and “ownerOf” are interchangeably congruent, for the purposes of this writing. The point is, if you pwn an NFT, aka if you the ownerOf a particularly “blue-chip” NFT, you have clout in the vein of owning any other Veblenesque good, such as an Hermès Birkin or van Gogh painting. In terms of microeconomics, most digital works of authorship, and digital information at large, are inherently public goods, meaning, they are non-rivalrous and non-excludable; my personal consumption of most information authored online does not diminish your opportunity to consume the same information, supposing it is readily available with nothing more than an Internet connection, and it is resultantly impossible to prevent others from consuming the same online information that I consume.

The idea of information as a public good is especially true for the associated digital resource frequently attached to an NFT, which has given rise to the meme “Right Click and Save-As,” because blockchain public ledger technology is publicly accessible information, assuming you know how to search for it using a variety of Internet applications, and an Internet connection to start. Microeconomics dictates that markets should allocate resources, including IP, to those parties that value it most; so why does Larva Labs push to hold on to ten thousand Cryptopunks’ IP, relying upon the questionable and strange NFT license instead of transferring those rights to the downstream buyers who can utilize that IP to build marketable and equitable brands?

I can imagine some die-hard copyright-heads would argue against clout, and in support of control facilitated by the copyright system. What might some of the other arguments supporting copyright look like? To be frank, I find myself on the same side of the argument as Frye and find it a little difficult to imagine what sorts of arguments against "pwnership" and NFTs might prevail. It has occurred to me that much in the way that constitutional copyright protection is a blunt instrument, NFTs and pwnership is far more precise; a kind of CRISPR CAS9 or Exacto knife that offers benefits that the copyright system's inherent impreciseness and blunderbuss approach is unable to accomplish.

Even the Supreme Court concurs with this sentiment: in Eldred v. Ashcroft, 537 U.S. 186, 208 (2003), the Court held “[i]n sum, we find that the CTEA is a rational enactment; we are not at liberty to second-guess congressional determinations and policy judgments of this order, however debatable or arguably unwise they may be.”

III. A. Tokenomics Study: To Centralize or To Decentralize?

In short, it is better to decentralize one’s IP. Decentralization means that the power of stewardship, control, or what have you, rests entirely within the community of token holders and those they touch upon within their networks, digital or otherwise. Clout and consumer goodwill are developed by these token holders, not the originators of the project, be it Yuga Labs, Larva Labs, or Dapper Labs, the last of which is the creator and host of the Flow blockchain, a technology exclusively built for an NFT blockchain environment.

All IP owned by Yuga including CryptoPunks and BAYC live in an IP gray area as Yuga continues to develop its terms and conditions for token holders and wanna-be market entrants alike. But how realistic is it really to hold on with diamond hands to IP that is hard to connect to, or manage? Indeed, Larva Labs was far less “invested” in their CryptoPunk characters as their consumers; they sold their IP to Yuga and sold their tokens to a decentralized community of buyers.

As ex-punk hodler Twitter user @punk4156 says, “it’s not about copyright vs no copyright, it’s about making the pixels as censorship resistant as the token they’re attached to. If you don’t assign the token and the image the same rights, what’s the point of binding them together eternally on a blockchain?”

By controlling the use of CryptoPunks once the tokens have changed hands to the buyers, Larva Labs creates more work for itself managing that IP where such work produces no additional value to the CryptoPunks projects and arguably adds value to those projects that push back against Larva Labs, in the spirit of decentralization and crypto, rather lofty ideals.

As I previously stated, economics demands that resources flow to those who are best able to utilize it, so why hold on so tightly as in some ill-fated love affair? On some level, CryptoPunks hodlers only own the right to sell and display this art, and not the copyright, which was owned by Larva Labs. This makes CryptoPunks rather static in their usage, compared to the dynamic usage of BAYC tokens and artwork (NFT++IP) that those token hodlers own. There is more diversity of ownership/pwnership within the BAYC community by numbers alone; nearly six thousand different parties own BAYC tokens compared to the three thousand or so different CryptoPunks owners.

Previously, Larva Labs skirted controversy by announcing its intent to take action against V1 CryptoPunks for copyright infringement. Those in the NFT trading community and legal experts alike do not know whether there is any point in asserting copyright claims. Perhaps they realize, quite accurately, that everyone involved is better off simply allowing non-token holders and LARPers (Live Action Role Players, a term to describe those who are hangers-on, or faking it till they make it) use the artwork and images that are associated with blue-chip NFT++IP projects.

The V1 CryptoPunks project, which is not affiliated with Larva Labs, reflects Larva Labs’ original artistic intent by incorporating “mistakes” made in the original smart contract code that led Larva Labs to build version 2, the highly popular and world-famous CryptoPunks that are now considered blue-chip art NFTs. While CryptoPunks have achieved their own version of clout within NFT circles, BAYC tokens and their holders have too achieved clout-like status within NFT circles and without; there were rumors of Snoop Dogg combining his ape with a super rare one-of-thirteen M3 mutant serum during the Superbowl this year, and high-profile celebrities including Steph Curry, Eminem, Dave Chappelle, and Paris Hilton have “aped into” BAYC buy buying highly coveted BAYC tokens from Yuga Labs.

Ultimately, it has yet to be seen how and why token holders will utilize their highly coveted tokens to build something new. Keep in mind the rights afforded to CryptoPunk HODLers (Hold On For Dear Life, a term meaning to rarely sell your crypto assets) is limited in comparison to those given by Yuga Labs to BAYC token hodlers, including MAYC and BAKC. I imagine the proliferation of BAYC will be much higher, as the community is encouraged to meet at ApeFest NYC, token holders are building a “clubhouse” in Miami for socializing, and some subsect of the community of six thousand is collaboratively writing a Web3 book that will maintain its own IP moving into the future.

III. B. The Phuture of PHAYCs

Just over a year has passed since BAYC was launched and the total sales volume of these NFTs has exceeded one billion dollars in sales. One online news source read: “Bored Ape Yacht Club NFTs Flip CryptoPunks Floor Price in Ethereum. The upstart Apes have overtaken the O.G. Punks in terms of entry-level price, signaling changing sentiment around the NFT projects.”

The large sales volume has raised the interest in abusing BAYC’s IP, incentivizing third-party NFT sellers to use BAYC and BAYC-related IP in non-fair use contexts. For example, in July 2021, a horizontally flipped stolen BAYC-IP project popped up online but did not progress further than the initial Twitter advertisement. This, however, was nothing compared to the cutthroat competition that has become commonplace in the NFT space, and which was amply illustrated by the fierce battle to seize the market for horizontally flipped apes between the creators of PAYCs and the creators of PHAYCs.

But since neither project is fully endorsed by Yuga Labs, or the totality of the BAYC token holders, at any given time, a concerted effort by BAYC token holders to issue DMCA takedown requests can result in the forced removal of all PHAYCs artworks, which blatantly infringe upon IP that was once owned by Yuga Labs and is now in the hands of BAYC token holders.

Further, efforts to tokenize and flip the artworks for MAYC and BAKC to monetize upon the sale of such tokens, especially if these sales incorporate royalties that fatten the wallets of the BAYC-IP infringing sellers, will simply incite these BAYC-related token holders to act against such flagrant copyright infringement of their IP. The sellers of flipped BAYC artwork NFTs further do not possess the right to transfer IP that belongs to BAYC token holders, so the downstream buyers of flipped ape projects will ultimately suffer the consequences of DMCA takedown notices sent by the original IP token holders to the online centralized platforms where most NFT sales take place.

There may at surface level appear to be a workaround: build your own marketplace, so that you can sell your “counterfeit” NFTs on that marketplace without reserve or worry about DMCA takedowns; the web is decentralized, and if players wish to participate in this unregulated marketplace that refuses to remove copyright-infringing material, then so be it!

However, this does not work for another reason; as the content for more complicated NFT++IP tokens that host content like BAYC and BAYC-related IP often does not live directly on a blockchain, but rather, on another file hosting system as previously discussed, this file hosting system can be a centralized party that can be targeted by IP owners for DMCA takedown requests, and they will have to comply. A possible solution, assuming there is alleged infringement, could be the following.

Flipping the BAYC ape images has not yet been shown to be a prima facie case of infringement, or infringement as stated by black letter law. PHAYCs and similarly allegedly IP-infringing NFT projects must make a fair use case much in the vein of CryptoPhunks, which eventually made a strong enough argument for fair use by way of transformative use. It is yet to be seen in the context of decentralized collaboration what types of transformative use the PHAYCs could illustrate to attain fair use status in the eyes of centralized platforms that exist outside of marketplaces for auctioning NFTs online, namely centralized file-sharing systems that interact with blockchains, but I have several ideas. For one, it can be argued that since the developer behind PHAYCs randomized the ape numbers so that a 1:1 correlation between BAYC and PHAYCs numbers in the 10k set does not exist, this can very well constitute fair use under copyright law, because consumers could not simply look up the corresponding one-through-ten-thousand number to pinpoint a specific ape in the BAYC set that they wanted to own the flipped-image NFT to.

Even more compelling is if our project team came out with a statement saying simply “we flipped the images because we thought the original NFT++IP looked better facing left instead of right, and we did this to point out the frivolity and silliness of ape image tokens as art,” this may yet make a strong parody use argument that will be given due consideration by courts.

The randomized numbers may very well be considered a transformative use of copyrights held by BAYC token holders. In the same way that CryptoPhunks added a border color to each Phunk to denote its rarity in the pool of ten thousand available Phunks, which was eventually deemed fair use by the OpenSea marketplace-cum-platform, the randomized numbering for PHAYCs is transformative and prevents market minters and downstream buyers from merely looking up a corresponding BAYC token to find the equivalent PHAYC token.

This means that trading PHAYCs is inherently different than BAYCs, because searching by BAYC number does not reveal the same PHAYC by number, and one must search a data set manually, based on an image search, or even by some semblance of photographic memory.

IV Conclusion

To conclude, there are two ends of the current spectrum for NFT licensing: centralize or decentralize. Decentralized collaboration leads to more diversity of meme-driven projects and may pump the long-term investment prospects for such tokens that follow this type of license, as in the case of BAYC and the BAYC license penned by Yuga Labs. The diversity of partnerships is much higher than if a centralized party continues to control the IP behind a popular NFT++IP project, as in the case of Larva Labs, prior to the sale of their core IP to Yuga Labs in mid-March 2022.

One final remark is that there is much more diversity of ownership in BAYC, and BAYC-related tokens as well, compared to Larva Labs’ CryptoPunks; there are double the number of BAYC token pwners/owners compared to CryptoPunks, not including the additional diversity provided by Yuga Labs’ other offerings that are BAYC-related, namely BAKC and MAYC. And while Larva Labs might in future attempt to use the mishappen “NFT license” or perhaps some proprietary terms of service to act out as a disgruntled landlord against its many tenants, the floor price of Yuga Labs’ tokens climb ever so higher while Larva Labs’ creations stagnate in price and decline in value, despite the recent mega-IP sale of CryptoPunks and Meebits to Yuga Labs, which now controls this important NFT++IP, quickly becoming an Internet behemoth in the span of less than a year.

V Milady

Thank you for reading. Now here’s the sauce.

Real clout is measured in Milady. No other NFT project matters. [sic.]