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 give artists more creative and financial control over their work, or launch a “completely dysfunctional” art market characterized by bot-driven pricing and undetectable digital heists.
The Cornell Tech team wrote a new primer which makes several recommendations on how to avoid this dystopian and dystopian future. This includes:
- create smart contracts for NFT distribution that work as “secure documents” for startups
- automated processes to verify NFT buyers and prevent market manipulation by robots, including buy limits and sell restrictions for certain auctions
- innovative royalty payment structures that offer commissions or other financial incentives to NFT artists
“While many articles have recently explored NFTs, we believe this article is the first true exploration of NFTs as an extension and transformation of the contemporary fine art market,” says lead author Sarah Allen, Head of Cornell Tech’s Initiative for Cryptocurrency and Contracts (IC3) research program.
The article was co-authored by Cornell Tech professors Ari Juels and Mukti Khaire, IC3 research engineer Tyler Kell, and Singapore University of Technology and Design (SUTD) researcher Siddhant Shrivastava. Juels is a blockchain researcher who is also Chief Scientist of Chainlink Labs, a top 25 crypto-currencies with a market cap of $6.6 billion, while Khaire is a business professor specializing in traditional art markets. The work was based at the Jacobs Institute at Cornell Tech.
In the world of venture capital funding, investors and lawyers have put together standardized “safe documents” as a low-cost way to close an investment so that both parties are reasonably protected. Juels says a similar set of smart contracts for the distribution and resale of NFT artwork could shield participants from challenges in what is now a largely unregulated market.
Over time, a more ambitious system may be possible, for example, an engine that allows artists to tailor contracts to their specific preferences, but with strong safeguards in terms of legal enforceability.
Automated Buyer Verification
Allen and his colleagues say the bot-driven nature of the NFT marketplace means art sellers will need to get more creative with vetting buyers to make the buying process more equal for us non-artists. algorithms. Here are some ways to do it:
- discounts for established NFT artists
- “just drops” of new work (for example, limiting purchases to one piece per buyer for
prevent hoarding 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 to artists if it continues to offer strong royalty structures to creators. For example, DADA.nyc pays NFT artists a 30% commission for reselling their work – a key way for artists to make a financial profit after their initial purchase. A similar structure has been attempted in the traditional art market with “resale right”, but application has not been practical and has only been attempted in a few countries. In contrast, NFT royalty payments are borderless and enforceable for all transactions.
Some companies are getting 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 we’re really only at the beginning when it comes to the kinds of royalty structures that might incentivize artists, buyers, and sellers. For example, they envision a future NFT collection that adds a gaming element, in which all royalties are awarded by lottery to a randomly selected owner of a piece in the collection.
Researchers at Cornell Tech and elsewhere are working to design systems that enable a fair and forward-looking NFT art market. For example, this spring, Juels and his colleagues collaborated with digital artist Zach Lieberman to demonstrate an auction system that uses decentralized identity technology to ensure “fair drops” in NFTs (i.e. one person, one entry).
“This raffle was a key first step in showing that we can limit robot dominance when artists sell their work,” Allen says. “More tools like this will be needed to ensure that the NFT art market delivers on its full promise rather than becoming a dysfunctional, undemocratic dystopia.”