From "code is law" to "art is code"
The year 2021 will undoubtedly have been the year of the shattering encounter between the world of art and that of blockchains with the discovery, then the craze, of the general public for NFTs (“Non-Fungible Tokens”). Many still mock this sudden runaway that they equate with the speculative fever of tulipomania in the seventeenth century. While it is true that not all initiatives are created equal, blockchain technologies seem to meet an essential need as old as the art market, traceability, while proposing to improve its liquidity.
1. Traceability, an old idea of art dealers
Origin is perhaps a fundamental question when it comes to artworks. In the first place, it makes it possible to determine authorship, which will result legally in the attribution of copyright to its creator. Secondly, it is obviously possible to determine its historical and commercial value.
For centuries, art dealers, collectors and experts have been striving, thanks to their historical research, to determine the identity of the creators, the time period of the work, its rarity as well as its journey in the hands of their successive owners.
Armed conflicts, the proliferation of black markets and cross-border movements - facilitated by free-trade agreements - have made it difficult to trace these goods. The sale of fake copies as well as antiques resulting from looting are concerns that worry the stakeholders of the art market. State therefore imposes on dealers particularly strong obligations in terms of traceability of artworks.
Now imagine that these art dealers and collectors could have at their disposal a directory, containing the world history of all transactions concerning cultural property in a reliable, immutable, inviolable way, without a central supervisory body (protected from censorship) and available for consultation by anyone.
Such a register would make it possible to prove the anteriority of a work, to verify its traceability thanks to the exact knowledge of its journey between different hands, but also to automate the payment functions whenever this property would be trade between owners.
This is what Distributed Ledger Technology, offer, such as public blockchains, of which NFTs are a particular application already of interest to collectors and art dealers.
Applied to NFTs, these guarantees offered by blockchains do not, however, go without conditions, which are as much about the legal architecture proposed by the platforms or artists, as to the technical solutions they choose.
To understand this, let us briefly go back to the origin and look at how NFTs work.
2. Colored coins... and tokens will eat the world
To simplify it, Bitcoin is a large public ledger that records at regular intervals of time all the transactions carried out by the participants. All participants in this network share an identical copy of the ledger.
To do this, transactions are aggregated within time-stamped digital blocks, such as the pages of an account book, all linked together through cryptographic links (the so-called “blockchain”). Thus, each block contains the “digital signature” [1] of the previous block and is added to the end of the chain.
These links between the blocks guarantee the integrity of the transactions since the first one, as a modification of a single bit contained in a block would result in a modification of all the following blocks, and therefore to an inconsistency of this version of the ledger compared to the one shared by the other participants.
Also, this blockchain is public and maintained by a network of computers (peer-to-peer) that performs constant checks, following a consensus protocol that ensures that the falsification of past transactions is unfeasible from a computer point of view.
This immutability of the blockchain, and its public character, inspired the development of new uses beyond the mere transaction of Bitcoins between participants in the network. In particular, Bitcoin allows to store small amounts of metadata [2].
Between 2012 and 2013, some researchers and developers [3] had the idea of exploiting this property to “color” certain transactions (certain bitcoins) by associating metadata with it.
Their goal was to mark certain bitcoins of the Bitcoin network in such a way as to make them unique (“non-fungible”) so that, by agreement between those who exchange it, they no longer represent a unit of account (one or more Bitcoins), but proof of ownership of rights.
The advantage is that these tokens work on Bitcoin and therefore take advantage of its immutability, permanence, ease of transfer and transparency of the ledger.
To take a simple analogy, this metadata would be like a text written on a ten euro note to make it unique. The author of this text could, for example, indicate that any owner of this ticket would be the holder of a fraction of its business, or its car or a painting that s.he would have at home.
In our opinion, if the operation seems virtual, it is probably no more so than the one which consists in considering that a share represents the ownership of a fraction of the capital of a company, or that the digital units of account (euros) that are displayed on the interface of our banking application have any exchange value.
It is also a clever solution to exchange assets on a blockchain. Because the data stored on a blockchain must be processed, verified and replicated by all participants in the network, it would be very expensive to store large amounts of data on‑it [4], such as an entire document or table image.
In any case, these “colored coins” have paved the way for the “tokenization” of any asset, meaning their representation and exchange in a blockchain.
But it was the Ethereum Blockchain that popularized its use thanks to a particular function that multiplies its uses: “smart contracts”.
3. From “smart contract” to NFT: this is not a contract
Theorized in 1996 by Nick Szabo [5], the concept of “smart contracts” consists in putting contracts in computer form so that they perform themselves when the conditions they provide are met. For example, a person could take out insurance in the event of a flight delay, and the funds would be automatically transferred to them if a delay was found, without human intervention.
In practice, smart contracts are therefore computer programs, that is to say:
- a set of instructions in the form of a source code (human-readable) to perform specific tasks,
- compiled to be understood by machines,
- then registered in the blockchain
- to be performed by the machines belonging to this network when certain conditions specified by this code are fulfilled (e.g. the delay of a flight),
- when this program runs, the result of this execution is recorded in the blockchain
If Bitcoin already offered the possibility of writing simple smart contracts, it is the Ethereum blockchain that made it possible to popularize the practice thanks to its more complete programming language ("Solidity") and its virtual machine (called “EVM”) used by the machines of the network (called “nodes”) to easily execute smart contracts.
In January 2018, some programmers [6] talked about using smart contracts to represent unique assets on the Ethereum blockchain by writing metadata into their source code: the NFT was born.
These smart contracts have thus opened up new possibilities that the previous colored coins did not offer for their creators: not only can they represent a right or an asset in a unique way, but the rules of their management can be programmed in advance so that, for example, any transfer of a token automatically results in the sending of coins to its creator to remunerate it during each transaction.
This feature, which could be (imperfectly) similar to a form of resale right, is of interest to NFT's exchange platforms as well as to artists.
But then, why are NFTs said to be tokens, if they are smart contracts?
Terminology related to blockchain technologies is not yet fixed and standardization work is underway, such as that of ISO technical committee ISO/TC 307. Without pretending to exhaust the possible distinctions, “token” can designate a digital file (colored coins, smart contracts, etc.) deployed on a blockchain, and charged by its creator to represent an “underlying asset”. This being said, the token is used to symbolize the ownership of a right, such as shares in a company or the ownership of a property (movable or immovable).
Currently, one of the most widely used standards for writing an NFT is “ERC-721”. Let us briefly see how it works.
4. Dissection of a famous NFT: “EVERYDAYS: THE FIRST 5000 DAYS” by Beepl
As in many open-source communities, in the Ethereum blockchain ecosystem, the world can offer improvements for the development of programs and protocols [7].
If these proposals for improvement are retained, they become “standards”, called “ERC” [8] in the world of the Ethereum blockchain. These standards are adopted by the community in order to promote the development of an interoperable ecosystem using harmonized standards (development of APIs, platforms, etc.).
Because it was one of the first, the “ERC-721” standard is currently one of the most used to make NFTs [9].
Electronically, it takes over functions already used by other smart contracts [10] that preceded it, allowing in particular:
- to know the name of the token (“function name”), its symbol (“symbol”),
- to inform about the total number of tokens in circulation (“TotalSupply”),
- to inform about the total amount of NFTs owned by a particular address (“BalanceOf”),
- to transfer it between different addresses on the network (“Transfer”)
- or approval functions that grant someone other than the owner the right to transfer the token (“function approve”, “getApproved”, “sandApprovalForAll”, etc.).
What distinguishes ERC-721 from other smart contracts seems to us above all the “token URI” function. Most often, this function points using a link (URL or other) to a metadata file stored outside the blockchain (“off-chain”), in the form of a JSON file, or more rarely to the asset that the NFT is supposed to represent, such as the visual of an image or a music file.
It is therefore this function that makes it possible to link the NFT to any asset (work of art, contract, etc.) and to make it truly unique.
Let's take an example with the most famous NFT, Beepl’s “Everydays: the First 5000 days” sold in March 2021 by Christie's for $65 million – actually for 42329,453 ETH.
If we take chronologically what Beepl has achieved, the latter has:
- made a work in the form of a digital file;
- placed a copy of this file in a decentralized content storage and distribution network called “IPFS” (see below), in which the data is listed as a digital fingerprint (“hash”);
- described the characteristics of this work in a “metadata file” including a link to his work in IPFS (“hash”), which he also stored through the IPFS network;
- Encoded a smart contract in which a line of code links to its “metadata file” stored on IPFS;
- deployed its smart contract [11] on the blockchain (“to mint”) and transferred control to the auction winner.
In practice, we have reproduced below the metadata file to which his NFT refers, freely accessible, and which contains in particular a link to a copy of his work (that you can download if you click on it):
https://ipfsgateway.makersplace.com/ipfs/QmZ15eQX8FPjfrtdX3QYbrhZxJpbLpvDpsgb2p3VEH8Bqq
{“title”: “EVERYDAYS: THE FIRST 5000 DAYS”, “name”: “EVERYDAYS: THE FIRST 5000 DAYS”, “type”: “object”, “imageUrl”: “https://ipfsgateway.makersplace.com/ipfs/QmZ15eQX8FPjfrtdX3QYbrhZxJpbLpvDpsgb2p3VEH8Bqq”, “description”: “I made a picture from start to finish every single day from May 1st, 2007 – January 7th, 2021. This is every motherfucking one of those pictures.”, “attributes”: [{“trait_type”: “Creator”, “value”: “beeple”}], “properties”: {“name”: {“type”: “string”, “description”: “EVERYDAYS: THE FIRST 5000 DAYS”}, “description”: {“type”: “string”, “description”: “I made a picture from start to finish every single day from May 1st, 2007 – January 7th, 2021. This is every motherfucking one of those pictures.”}, “preview_media_file”: {“type”: “string”, “description”: “https://ipfsgateway.makersplace.com/ipfs/QmZ15eQX8FPjfrtdX3QYbrhZxJpbLpvDpsgb2p3VEH8Bqq”}, “preview_media_file_type”: {“type”: “string”, “description”: “jpg”}, “created_at”: {“type”: “datetime”, “description”: “2021-02-16T00:07:31.674688+00:00”}, “total_supply”: {“type”: “int”, “description”: 1}, “digital_media_signature_type”: {“type”: “string”, “description”: “SHA-256”}, “digital_media_signature”: {“type”: “string”, “description”: “6314b55cc6ff34f67a18e1ccc977234b803f7a5497b94f1f994ac9d1b896a017”}, “raw_media_file”: {“type”: “string”, “description”: “https://ipfsgateway.makersplace.com/ipfs/QmXkxpwAHCtDXbbZHUwqtFucG1RMS6T87vi1CdvadfL7qA”}}}
Metadata related to NFT Everydays: the First 5000 days by Beepl
Technically, what the NFT buyer has therefore bought is the control of the first link in a single chain of cryptographic links ultimately linking it to a copy of Beepl's work: a smart contract (1), which refers to a computer file, stored on a decentralized file sharing service (IPFS) (2), and referring itself to the digital fingerprint of a work stored on the same service (IPFS) (3).
The value of an NFT thus depends on the asset to which it refers and therefore on the robustness of this cryptographic chain existing between the two. However, as the saying went: “a chain is as strong as its weakest link”.
5. NFTs are cryptographic chains as strong as their weakest link
The robustness of the chain, that goes from the smart contract to the asset, is first assessed at its first link, the smart contract. As a computer program, it must provide guarantees concerning its operation. A defective NFT with bugs preventing it from performing the tasks for which it was programmed, such as the impossibility of its transmission between several owners or the failure of the function to pay its creator, would greatly lose its interest.
Obtaining guarantees concerning the operation of the smart contract therefore seems essential to us, both for the artist and the successive owners.
For an artist wanting to have an NFT made by a computer developer, these guarantees could be obtained before the deployment of the NFT on the blockchain, via test operations and receptions on test environments such as “testnet”. We will therefore find here a familiar practice in the field of IT projects.
For buyers, it is always possible, a posteriori, to consult the source code of a smart contract deployed on a blockchain before acquiring it. For example, Christie's indicates the address of Beepl's smart contract on its website, which allows any Internet user to go directly to the source code on the blockchain here.
In addition, if a smart contract cannot be modified once compiled and deployed on a blockchain, since it is immutable, this is not the case for data that is outside the blockchain (“off-chain”).
Thus, in the case of a classic URL link, which would point to data stored on a centralized server and managed by a natural or legal person, these could be modified, destroyed, or made unavailable at any time.
In such a situation, the buyer of the NFT would therefore find him/herself the owner of an NFT that would no longer point anywhere (judicial liquidation of the entity managing the server, change of ownership of the server, destruction of the server, etc.) or to another asset whose integrity or existence no one guarantees (images, music, contracts could easily be modified).
For all these reasons, decentralized solutions are used in the world of NFTs such as the “IPFS” or “Arweave” solutions, which offer decentralized storage and distribution systems (peer-to-peer network), allowing in particular to identify files in a unique way and to guarantee their integrity via cryptographic functions.
If we take the work of Beepl, it seems that the metadata file points to a URL gateway managed by a start-up and not to the fingerprint of the file itself. In other words, the link between the work “Everydays: the first 5000 days” and its NFT could disappear with the liquidation of the company managing this portal.
In any event, even if Beepl had chosen a link pointing directly to the file of its work so as not to depend on the company managing that gateway, the permanence of the link between its NFT and its work would not necessarily have been better guaranteed.
The existence of a file on the IPFS network depends on its replication by one of the network participants. If no participant chose to host its work, it would disappear from the network.
While IPFS therefore offers an interesting solution to prevent anyone from modifying the file, it does not necessarily guarantee that the files will always remain available on the network[12].
Moreover, as robust as it is, what value does this cryptographic link chain have for French law? Does the buyer of an NFT acquire any right?
6. From cryptographic links to legal ties
Acquiring an NFT does not amount to acquiring any intellectual property rights in the smart contract or asset (e.g. work) it represents.
The existence of a series of cryptographic links between a person and an asset is not a sufficient condition for giving rise to legal links between that person to that asset.
Although NFTs are of interest to the art world, it also seems to us that the sector of activity to which it applies should not deceive us about their primary nature. Because they are overwhelmingly smart contracts, NFTs are computer programs developed by individuals and companies that differ from the asset they represent.
To take the example of the NFT linked to “Everydays: the First 5000 days”, the possible determination of an owner within the meaning of the intellectual property law of the smart contract seems to be based on at least two questions rarely asked: is the developed smart contract complex enough to be qualified as “software”, and original to be protected under copyright? If so, who will be its owner: the developer or the artist (if s.he is not the author of the contract) who gave the instructions to create it?
In any event, the buyer of Beepl's NFT has not obtained any intellectual property rights in the NFT's source code.
In the same vein, the buyer of the Beepl’s NFT has not obtained any intellectual property rights in the work it represents. Indeed, any author of an intellectual work remains the owner unless s.he has concluded an assignment with respect to a certain formalism [13]. The ownership of the work is thus completely distinct from the possession of the NFT which does not entail the assignment or concession of any rights.
In other words, this chain of cryptographic links has no legal value, unless a legal chain of devolution of rights is superimposed on it.
Consequently, the possible transfer of rights between the creator of the NFT and its buyer will depend on the NFT's owner rights in the asset it represents and on the contractual links between the creator and the owners of the NFT.
These rights could thus be property rights if an artist decided to assign the rights to its work to a buyer, which – let’s face it – is quite rare in practice.
In any case, for this operation to be legally effective, the legal chain of transmission of rights must be perfectly superimposed on the chain of cryptographic links.
The existence of a license, the terms of which could be written directly in the smart contract, or indisputably linked to the NFT, should be a point carefully scrutinized by any buyer of an NFT in the light of the expectations it places in its purchase.
Also, for the blockchain to become this reliable ledger, allowing the exchange of assets on the Internet benefiting both artists, collectors and art dealers, legal guarantees are necessary.In particular contractual guarantees must be obtained regarding the creation of the NFT, the transmission of rights possibly accompanying its acquisition, or the permanence of the link uniting the work and its NFT, but also the integrity of the work itself.
This shattering encounter between the world of art and that of the blockchains is perhaps also, basically, the one between computer science- and art market laws.
Footnotes
1. hash
2. Meaning arbitrary data entered by a network participant that does not affect the transfers of bitcoins.
3.In particulier Yoni Assia, Vitalik Buterin, Meni Rosenfeld and Rotem Lev.
4. For instance, the size of all transaction history of Bitcoin since its creation in 2009 was (only) a little more than 300 gigabits as of September 19, 2021.
5.“Smart Contracts: Building Blocks for Digital Markets”, Nick Szabo, 1996.
6.William Entriken, Dieter Shirley, Jacob Evans and Nastassia Sachs.
7. To do so, developers submit documentation describing a set of rules and functions to be followed called “Ethereum Improvement Proposal”.
8. “Ethereum request for comment”.
9.This standard is in fact a derivative of other well-known standards, since it will find for example the classic interfaces of the ERC-20 standard (used in particular during ICO).
10. Including “ERC-20”.
11. it was coded in a standard derived from the ERC-721, the standard " MakersTokenV2 ».
12. The " Filecoin " can, however, be used to reward network participants who choose to keep certain files.
13. CPI, arts. L 111-1 and L 111-3.