By Chris Kilbourn | Crescent City Capital Market Analyst Intern
After weeks of turmoil, conflict, inflation, and fear, the crypto market seems to be getting a rare and gracious rest day. Executive orders and FOMC meetings have come and gone, and almost three days have passed since the news cycle had anything new to report about war in Eurasia, cold or otherwise. What better time to escape the doom and gloom and discuss crypto’s eccentric, right-brained auxiliary? For just as digital gold promises to inexorably change the global financial order, and decentralized finance the face of lending, so too does the NFT space promise to change popular culture, and this week we see a minor turning point in that process. As of this week, Larva Labs has sold the Crypto Punks franchise to the creators of Bored Apes, and the relationship between creators and consumers in this society may be forever changed as a result.
The crypto punks were neither the first nor the most refined NFT collection, but they seemed to generate the most commotion at the time of their release, and even today their appeal seems far more enduring than contemporaneous projects. While Curio Cards and Rare Pepe NFTs have fetched $1.2M and $3.6M at auction for their status as early examples of crypto art, both are dwarfed by the prices commanded by the Punks. Four of the top ten most expensive NFTs ever sold came from the collection, with one garnering a $23M price tag. So what explains the mystique?
A Punk’s Allure
Two explanations come immediately to mind, one aesthetic and one practical. The obvious answer is that unlike ordinary tokens, the value of an NFT largely comes down to taste, and the Punks are genuinely valued for what they say. Great art often gains traction because it grasps historical developments early and produces cultural artifacts that express the emotional experience of the societies undergoing them. Just as Warhol used image to document the commodification of human life in a society where culture is mass produced, or Vaporwave artists employed auditory nostalgia to mourn the irretrievable loss of the analog world with the aesthetic language of the early tech that replaced it, the Crypto Punks seemed to encapsulate the time in which they were produced.
Their visual appearance – simultaneously interchangeable and unique – seemed to provide a self-aware commentary on a new system in which money isn’t just a condition for self-expression, but the very medium in which it takes place. The creators chose to suggest crude characters from an early NES video game, conferring the sense of a technology at its absolute infancy that we paradoxically know in advance will someday take over the Earth. For the same reasons that Curve is intentionally designed to feel like banking on Windows 3.1, the visual impact was very clear: to buy a crypto punk was to buy a piece of history before the history was even made, because Web3 is still in the Macintosh stage. If that’s not enough to make someone drop the cost of a college education on a new profile picture, what is?
This leads into the other reason for the Punks’ appeal, and into the broader topic of the developing role that NFTs will play in the culture of Web3. At the time that Crypto Punks were released, previous NFT projects had taken the form of games or collectible trading cards. The Punks, generally resembling 8-bit mug shots of exotic and unsavory characters, proved ideal for profile pictures in the notoriously private crypto world of 2018, and thus introduced the idea of NFTs not simply as collectible art, but as a means for branding or self-identifying.
The Commercial Rights Revolution
Yet while Larva Labs expanded the sphere of use cases for NFTs with this design breakthrough, their business model was essentially set up to limit their product’s utility beyond this simple application. While buyers were entitled to ownership of their NFT punk and permitted to use its likeness for whatever non-commercial use they desired, the terms and conditions of all sales put defined restrictions on a user’s rights to the commercial use of their newfound property. In essence, a purchaser could use a Punk as a profile picture, but any reproduction of their property for material gain was limited to physical goods, not digital, and limited to producing $100,000 of income per year before the user was required to seek a commercial license from Larva Labs. For a token billed as a unique and non-replicable piece of property under the sole ownership of whichever wallet holder happened to purchase it, this seemed strangely restrictive of user property rights.
This system of commercial rights remained the norm until April of 2021, when Yuga Labs’s flagship NFT project was released – the Bored Ape Yacht Club. BAYC introduced a policy of “You Own Your Ape,” in which Yuga granted users “unlimited, worldwide license to use, copy, and display” their NFT specifically for the purposes of creating derivative works to be independently marketed and sold. This was enabled by Yuga’s main sources of revenue – through royalties collected every time an ape was resold. By comparison, Larva’s marketplace had no fee structure in place, so no royalties were collected on an ongoing basis. Larva’s only method of generating income was through separating ownership of the Crypto Punks from the commercial rights, retaining the intellectual property, and then licensing it to brands or products who wanted to use a punk as part of their own business. By creating a model in which revenue came from a source besides extracting value through intellectual property, Yuga ultimately emancipated the NFTs from centralized control and put the power of commercial use into the hands of their owners — potentially recreating an entire industry in the process.
The Future of Intellectual Property
By the same token that Bitcoin produced a digital ledger to establish ownership of currency, the technology underlying NFTs has introduced a system of property rights that applies to digital goods. With this system in place, it’s now possible to put a price on something that exists only on the internet, and thus buy, sell, and own the intangible. When Yuga purchased all rights to the Crypto Punks this week and converted them to the unlimited commercial license model, it certainly struck a blow for property rights in the NFT space by distributing the licensing ability to the rightful owners. But the victory of this model represents significantly more than a user’s right to lease out his Twitter PFP.
Because we are more likely to trust the opinions of recognizable voices to whom we already know we relate, the concept of celebrity endorsement is as old as advertising itself. In the same way that the creators of Miquela experimented in 2018 with entirely fabricated celebrity in the form of a digital Instagram influencer, it’s easy to see how future franchises like the Bored Apes will develop stories and brand identities around entirely fictional characters and then use them to market to the demographics to whom they are designed to appeal. With owners now granted unlimited commercial rights to the use of their NFTs, Yuga has done more than accumulate multiple billion-dollar NFT franchises, they’ve created an instrument through which brands themselves can be valued and sold.
The next step on Yuga’s road map is to launch their decentralized NFT exchange, and while OpenSea’s dominance is unlikely to be challenged in that arena, Yuga may be positioning itself as the dominant broker in commercial NFTs – high profile NFT franchises designed to be used in marketing or brand collaborations. It’s easy to envision an immediate future in which new protocols are developed that enable commercial NFTs to be leased out to advertisers for set periods of time, or even pre-defined levels of engagement. It’s not difficult to imagine that in a world where all purchases are made on chain and can be easily scraped for data about purchasing habits, advertisers could factor analyze transaction histories, deduce demographic categories for the consumers behind them, and airdrop commercial NFTs calculated to appeal to them as a means of delivering targeted marketing material. These are all hypothetical reasons why advertising is likely a colossal future use case for blockchain technology and an emerging sector to watch going forward.
Epilogue: In the time it took to write this article, Yuga released a token called ApeCoin to serve their growing ecosystem. It is up 1400% in the past 24 hours.