February 2022

Explaining Cryptopunks Versions

Since it’s been a topic I’ve been yapping about recently a few people asked me for a quick explainer on all the Cryptopunks V1/V2 stuff so the other night I did just that in a Twitter thread but I thought I’d turn it into a blog post as well for easier future reference.

If you’ve spent 4 seconds in the NFT space or 4 seconds near the NFT space or just know some people have some crypto art or something you’ve seen Cryptopunks so I’m going to assume you know what I’m talking about when I say “punk” in this context. There’s no questioning the influence and significance of cryptopunks, there are a bazillion derivatives and they have made headlines for selling for bazillions of dollars. Hours ago in fact Punk #5822 sold for 8000Ξ which today converts to just shy of $23 Million USD. So yeah, they are pretty famous, and it’s important to understand that fame happened almost exclusively in 2021. Cryptopunks were actually released in 2017 and for most of that time very few people cared about them. Towards the end of 2020 people really started going after them and in 2021 they went nuts. But the cryptopunks everyone thinks of are actually the second version (V2).

Going back to 2017, a company called Larva Labs put Cryptopunks online as free to claim and promised the ability to trade/buy/sell them after they were all claimed. It took a few days/weeks for that to happen and once they were all claimed people started trying to trade them. But there was a problem. A bug in the code meant that if you tried to sell a punk the buyer got the punk AND the eth from the sale, leaving the seller with nothing. This is obviously a problem and as soon as it was found Larva Labs said “wait! Don’t trade them yet” and started working on a fix. Because things on the blockchain are immutable they couldn’t really “fix” the punk that were already out in the world, so they made new ones. They airdropped the new (V2) punks to everyone who had claimed the original (V1) punks and figured that was that. Potentially important detail: Larva Labs didn’t send the new punks to the the current punk holders – they sent them to the claimers. So if you claimed a V1 punk and gave it to a friend, you got the V2 punk, they didn’t.

Because the V1 punks were not really sellable everyone kind of forgot about them, and all focus was put on the V2 ones that people could easily trade. It’s worth noting that punks predate the ERC-721 NFT standard we know and love today. Cryptopunks are in fact ERC-20 tokens. In order for Cryptopunks (or any other pre-ERC-721 NFT like Mooncat Rescue) tokens to be traded on NFT marketplaces like OpenSea they need to be wrapped inside of an ERC-721 token. Wrapping is confusing but also really straight forward. It’s just putting one token inside of another. You’ve probably seen WETH which is just Wrapped ETH. Here are a bunch of V2 Cryptopunks that have been wrapped for example, and here’s LarvaLabs recognizing them. That’s apparently an important detail as some have suggested that wrapping changes or somehow negates the NFT that is being wrapped, which obviously isn’t the case. The socks your mother bought you for your birthday don’t cease to be socks when she wraps them in wrapping paper – same idea here. Anyway, for years people were happily buying and selling V2 cryptopunks both wrapped and unwrapped. But they just called them “Cryptopunks” and not “V2 Cryptopunks” because they were the only ones being traded so it was obvious what you meant. But in 2021 some people started working on a wrapper for the V1 Cryptopunks so they could be traded as well. This is where things get interesting. If you look at the incredible timeline Leonidas has assembled you’ll note that Cryptopunks is the very first 10k Avatar project on the Ethereum blockchain.

Despite claims made by lots of people, notably Larva Labs themselves, Cryptopunks are not the first NFT, but they are the first 10k avatar project. But now suddenly you have 2 Cryptopunk collections in motion. Both made by the same company, both pointing to the same art. Released within weeks of each other. Fun fact, the V1 contract calls them “cryptopunks” but the “fixed” V2 contract calls them “cryptopunksmarket” – anyway, with V1s being safely wrapped inside an ERC-721 wrapper they can now be traded, and people started trading them. Anyone who has spent any time around collectors knows that an error or a misprint or a fuckup is always super desirable – and that’s how people started to think of the V1s. They are this mostly forgotten mistake, which is appealing to some people.

And especially if you have cryptopunks because they are historically important as a lot of people claim to, then this original version of the cryptopunks released a few weeks earlier is SUPER INTERESTING! (all caps for emphasis). This is where things which are seemingly clear get really messy quickly. LarvaLabs has an unclear relationship with the IP of the Cryptopunks. I wrote a bit about this last year in relation to their reactions to some derivative projects. 

Long story short on that, when Ryder Ripps made his derivative Cryptopunk LarvaLabs sent a DMCA notice to Foundation, Ryder contested it and LarvaLabs couldn’t support their infringement claim and the DMCA was dropped. That hasn’t stopped them from sending lots of DMCA notices though. Most people never appeal the DMCA so that is the end of it, but since Ryder did and won his appeal, it’s suddenly very interesting and there is question if LarvaLabs could even own the IP at all.

From their end, LarvaLabs didn’t have a license in place before they distributed them and have taken different and conflicting positions on the matter over the years, so there’s just nothing clear to fall back on which is why it’s such a grey area. 19/ Anyway, jumping back to now – V1 and V2 Cryptopunks are now on the market. Anyone with a V1 cryptopunk who couldn’t trade it before can now safely wrap it and then sell it. Guess who had a lot of V1 Cryptopunks? LarvaLabs. In what is now largely seen as a “bad move” LarvaLabs secretly wrapped a bunch of V1 cryptopunks and sold them for a couple hundred ETH. Then went on the attack saying that V1 punks were not legitimate.

As an aside, last year I wrote about how Blockchains have the potential to become social archives, and the documented provenance for each NFT might end up telling interesting stories about the history of specific NFTs and that’s exactly what just happened here. The 39 V1 Cryptopunks that were wrapped and sold by LarvaLabs are already being referred to as the “rainforrest punks” and have become especially desirable among some collectors in what is basically the Streisand Effect for Web3.

So LarvaLabs then sent a DMCA to OpenSea as they have been known to do, and OpenSea complied by taking down the listing for the V1 punks. Now if you’ve been following along this far you know that V1 punks were made by LarvaLabs. So they kind of just DMCA’d themselves. This is akin to Nike making shoes with a white swoosh, selling them and then deciding they want the swoosh to be red and then claiming infringement against someone who bought the white swoosh Nikes trying to resell them on ebay. In other words it makes no sense. V1 punks were made and sold by LarvaLabs. They can’t decide after they are already sold that they don’t like them and then claim they aren’t real, or that the secondary market is infringement. So of course the DMCA notice was appealed. 

That happened yesterday, so now LarvaLabs has 10 days to respond (or not) until we get to the next chapter in however this plays out. At the moment V1 punks are not being sold on OpenSea but are being sold on their own marketplace and on LooksRare. I don’t know if those sites received DMCAs and just ignored them or if they didn’t receive anything, doesn’t really matter though. What happens next however is going to have very serious implications no matter which way it goes. If the DMCA is upheld the secondary market for almost all NFTs is suddenly in legal question. If the DMCA is dropped LarvaLabs will have to accept that their flagship IP isn’t as locked down as they thought, and that there are now 2x as many cryptopunks out there.

Interestingly enough, V2 punk owners have been complaining about how LarvaLabs has been handling IP for quite a while now leading a number of high profile punk owners to sell theirs in protest. So in some ways V1 & V2 owners have a common foe. Though maybe foe is too strong a word. LarvaLabs did make these cool avatars which everyone loves, even if their community relations/communication has been a bit lacking since then. And a lot of V2 owners actually own V1s as well, so it’s not really 2 different audiences.

March Update: In an unexpected surprise turn of events LarvaLabs announced that they sold the IP for CryptoPunks to Yuga Labs, producers of the Bored Ape Yacht Club, who immediately announced that they would not be pursuing any of the DMCAs filed by LarvaLabs and also that they would be granting commercial rights to CryptoPunk owners. As part of the deal LarvaLabs transferred their CryptoPunks to Yuga, including some 1000 V1 punks. Almost immediately the V1 collection was reinstated on OpenSea.

But what about V3? V3 Punks is a totally unrelated project created by unrelated fans. It’s just a fun nod to the whole project distinguishing itself as different but also promoting unity and joy, which is kind of nice. Personally I’ve really enjoyed the very rich derivative world that Cryptopunks has spawned and I think the project is incredibly significant. I’ve bought pieces from a lot of the so called “shitpunk” derivative projects over the last year. I also really nerd out about the IP stuff which is obvious from last years article. I bought some V3s because I think it’s fun and I recently traded an NFT I received for free for a V1 because I think it’s a cool piece of history. I have no idea where this will go, or how that will impact values of anything. None of what I’m talking about should be seen as endorsements or speculation, but I find it super fascinating and look at it kind of like collector memorabilia. Anyway, that’s my quick catch up. We’ll see what happens next!

The Floor Is A Myth

Let’s talk about NFT projects and “the floor.” As you likely know “the floor” is the absolute lowest price at which you can buy a piece from an artist or from a collection right this very second. This comes from the “price floor” idea in the Law of Supply and Demand where there is a minimum viable price that something must be sold for in order to cover the costs of supplying it. With digital artwork you have different production concerns so “price floor” became “floor price” and is now just called “the floor.” Let’s unpack this a bit more.

First and foremost it’s important to understand that the value of anything is decided by two people. The buyer, and the seller. Other people might have an opinion about it but that doesn’t matter. If I want to sell you something and you agree to the price, it irrelevant if your neighbor thinks that’s a good price. With retail prices of various products a significant amount of work is done to decide what the public will accept as a reasonable price. With used, secondary, etc sales it is more hands on. Craigslists, eBay, your local farmers market, a yard sale, whatever – all of this commerce depends on just two people agreeing on a price and it’s understood that sale stands alone and it’s indicative of an entire market. This is why people walk away from a yard sale saying “I got such a good deal on this lamp!” rather than “I can’t believe the floor price on hammers is crashing.”

I should take a moment to give some context as to why I think I’m qualified to run my mouth about shit like this. Between 1999 and 2007 I co-owned and operated an art gallery called sixspace, originally in Chicago and then later in Los Angeles. We produced monthly exhibitions by many artists including some that we directly managed as well. In addition to our in-house exhibitions we also collaborated with other galleries on events and participated in global art fairs. After the gallery closed I maintained relationships with both artists and collectors which have turned into multi-decade friendships. An art collector myself, I began buying work from artists and galleries in the mid 90’s and nearing 30 years later almost every inch of my living space (and probably too much storage space) is filled with art. So while I agree that the NFT space is too new to have experts about any of it, I have a lifetime of experience buying and selling art.

Like all art, most NFTs are illiquid. This means just because someone wants to buy something doesn’t mean there is anything available at a price they are willing to pay. Similarly just because someone wants to sell something doesn’t mean there is anyone willing to pay the price they are asking. I own pieces by world famous artists and if I wanted to sell them It would take weeks/months of working with dealers and/or other collectors to find someone who wanted to buy them at a price I’d be comfortable taking. That’s illiquidity. If it was liquid I would just snap and they would be sold but that’s not how most art works.

With stocks or other investments it’s less of an issue as all shares are equal, with artwork there are more details to consider. Not the least of which is aesthetics, that is what does this piece of art actually look like? Not everyone buys or sells art for the same reason. Not every single piece created by an artist is the same. In the physical art world there are artists I love with pieces I’ve chosen not to buy because they just didn’t work for me personally. Maybe the color or the theme or something was just not to my taste, but another piece by the same artist was a direct hit. With NFTs, especially with larger collections how it looks plays into what someone is planning to do with it, as does various functions or rarities – so trying to project the demand for any one piece onto an entire body of work is a mistake. 

Additionally, “the floor” lacks any context. It is ignorant of what other sales might be happening in an artists body of work (or in this case an NFT collection), it is ignorant of what personal, medical or business issues might be going on in the sellers life. The assertion that “the floor” says anything about anything other than what one person is willing to sell a piece for is absolute ignorance. And because these works are largely illiquid, if someone needs to get liquid fast – perhaps they have another opportunity they’d rather pursue or an emergency medical expense or any number of millions of reasons they might want to sell, this often means they are going to have to sell something below it’s potential value. Because again, lack of context. If a work is offered for sale for $1000 and someone buys it for $1000, all anyone knows is that it sold for $1000. Maybe the buyer would have paid $1500. Maybe the seller was willing to go down to $500. Who knows? Conversely, the very fact that a piece is available to be purchased at a “floor” price means currently, at this moment, no one is willing to pay that price being asked. If they were, it wouldn’t be for sale, it would be sold. So at any given moment “the floor” can be above or below the actual value of the work. Sometimes both at the same time.

Much more useful metrics for gauging current demand for a project are average sale price over some period of time (24h, 7d, 30d, etc which takes into account all the mid and higher end sales missed in “floor” discussions), what % of the collection is for sale and how that is changing over time (a decreasing % shows increasing demand), and how distributed the collection is. Do a few people own all of them (bad) or do lots of people own a few of them (good)? There are tools like Nansen, Icy and others which are helpful for a more comprehensive understanding.

Traders, flippers and speculators would have you believe otherwise. In any given project community would-be investors try to convince everyone listening that the “floor” is the end all be all metric for determining success or failure. The same people obsessing about “the floor” are the ones demanding roadmaps and asking about utility. Could you imagine anything more absurd than walking into an art gallery, walking up to an artist and demanding they tell you about their roadmap? Or saying “This is a lovely painting, I know exactly the place I want to hang it in my living room – but first can you tell me what the utility of this is?” Or, more egregious of all, contacting an artist and saying “I bought a piece from your gallery exhibition last year, what are you doing today to increase the value of it?”

If someone came into my gallery asking something like that I’d throw them out on the street.

An artist’s job is to make art. Making more art is the only roadmap they need. End of story. The work they made yesterday benefits and is complimented by the work they make tomorrow. Demand for work they made yesterday is increased by the work they make tomorrow. If you are worried about or trying increase the value of art work you own, hounding the artist is a waste of your time. You are distracting them from doing the one thing they are best suited to do, making art. What you can and should be doing is finding a way to increase demand for that artists work. Tell your friends, talk about why you love it, what attracted you to the work in the first place, why did you decide to buy it? As a collector, I love hearing these things from other collectors, and I’ve bought a lot of work because another collector tipped me off to something incredible. This is good for the artist, the collectors, the market and valuations.

You know what isn’t good for the artist, the collectors, the market or valuations? Crying about “the floor.” When I’m looking into a project if I see people throwing a fit about “the floor” I know that a lot of the owners bought in for the wrong reason and will be dumping soon so I would be stupid to buy in at whatever prices are offered today, rest assured they will be lower tomorrow. On the other hand when I discover something see collectors talking about how much they love the work, love the artist, love the project, I kick myself for not learning about it earlier. And because I know this, when I do see someone having a panic attack about “the floor” I know only one of two things can be true – either they are purposely trying to sabotage the valuations to drive prices down (potentially so they can buy in at a lower price) or they are an idiot. In either case, I know right away to ignore anything they say.

This all holds true in the regular art world where sales take days, weeks, sometimes months to complete. In the Digital/NFT space where sales happen in minutes, sometimes in seconds it’s even more true. Manipulation is real, and so are idiots. It’s best to avoid both. Buy art you love, by artists you respect. Do that, and you’ll never be disappointed.