According to a team of Cornell researchers, the emergence of non-fungible tokens (NFTs) in the art world is poised to do one of two things: either fully empower artists with more creative and financial control of their work, or kick-start a “completely dysfunctional” art market characterized by bot-driven prices and undetectable digital heists.
The team from Cornell Tech has written a new primer that makes several recommendations for how to avoid this dysfunctional, dystopian future. This includes:
- creating smart contracts for NFT distribution that function like “safe documents” for startups
- automated processes for vetting NFT buyers and preventing market manipulation by bots, including purchase limits and sales restrictions for certain auctions
- innovative royalty-payment structures that offer commissions or other financial incentives to NFT artists
“While there have been many pieces exploring NFTs recently, we believe this paper is the first true exploration of NFTs as an extension and transformation of the contemporary fine art market,” says lead author Sarah Allen, the research program manager for Cornell Tech’s Initiative for CryptoCurrency and Contracts (IC3).
The paper was co-written by Cornell Tech professors Ari Juels and Mukti Khaire, IC3 research engineer Tyler Kell, and researcher Siddhant Shrivastava of the Singapore University of Technology and Design (SUTD). Juels is a blockchain researcher who also serves as Chief Scientist of Chainlink Labs, a top 25 cryptocurrency with a $6.6b market cap, while Khaire is a business professor with expertise in traditional art markets. The work was based at the Jacobs Institute at Cornell Tech.
In the world of venture funding, investors and lawyers have pulled together standardized “safe documents” as an inexpensive way to close an investment so that both parties are reasonably protected. Juels says that a similar set of smart contracts for distributing and reselling NFT artworks could protect participants from the challenges arising in what is today a largely unregulated market.
Over time, a more ambitious system is perhaps possible, for instance, an engine that allows artists to tailor contracts to their specific preferences, but with strong guardrails in terms of legal enforceability.
Allen and her colleagues say that the bot-driven nature of the NFT marketplace means that art sellers will have to get more creative in vetting buyers to make the purchasing process more egalitarian for us non-algorithms. Some ways to do this include:
- discounts for established NFT artists
- “fair drops” of new work (e.g., limiting purchases to one piece per buyer to
prevent accumulation by bots)
- in some cases, restricting sales to buyers who have previously purchased works that meet certain criteria (e.g., selling only to buyers who already own works by a given artist)
Innovative Royalty Structures
The team argues that the NFT art market will provide more autonomy for artists if it continues to offer robust royalty structures for creators. For example, DADA.nyc pays NFT artists a 30 percent commission for resales of their work – a key way for artists to financially profit after their initial purchase. A similar structure was attempted in the traditional art market with “droit de suite”, but enforcement has been impractical and only attempted in a few countries. In contrast, NFT royalty payments are borderless and enforceable for all transactions.
Some companies get even more inventive: Eulerbeats, for example, created a set of NFT artworks with a limited number of copies (“prints”) and sold them to generate a royalty paid to the owner of the original NFT. Rather than reselling prints, owners also have the option of sending them to a contract that “burns” them and pays a reward for reducing the overall supply.
The researchers say that we’re really only at the beginning in terms of the kinds of royalty structures that could incentivize artists, buyers, and sellers. For instance, they imagine a future NFT collection that adds a bit of a gambling component, in which all royalties are awarded by lottery to one randomly selected owner of a piece from the collection.
Researchers at Cornell Tech and elsewhere are working to design systems to enable a fair, forward-looking NFT art market. For example, this spring Juels and colleagues collaborated with digital artist Zach Lieberman to demonstrate an auction system that uses decentralized identity technology to ensure “fair drops” of NFTs (i.e. one person, one entry).
“That raffle was a key first step in showing that we can limit the dominance of bots as artists sell their work,” says Allen. “More tools like this will be required to ensure that the NFT art market fulfills its full promise rather than becoming a dysfunctional, undemocratic dystopia.”