Inside the $500,000 XCOPY Sotheby's Sale: Why ‘Code is Law’ in NFTs Isn’t True

The most important feature of the Web3 art ecosystem will not be royalties. However, it is an important conversation to have now, because the state of royalties reveals the current state of non-fungible token (NFT) marketplaces, both centralized and decentralized.

The millions of dollars in venture funds flowing into the ecosystem on a daily basis, combined with loud, trend-jumping discussions from “NFT influencers”, obscure the quieter but more important part of Web3 art — independent artists and collectors working to navigate the new, potentially life-changing space.

How these artists and art collectors are treated, and how they negotiate their terms of payment going forward, will be a deciding factor in how NFT art will be received in the long term.

It might sound crass, but the NFT space today is run mostly by greed — by speculators trying to find the latest collection to flip, and project founders in it for quick cash grabs — and brand legacies that are part and parcel of the Web2 world, where stakeholders manage their own private walled gardens and dictate to users how the marketplace functions. Rhetoric tells you Web3 shifts the power, and money, into the hands of the creators. That it is bottom-up, rather than top-down. But, except in a very few isolated pockets, activity reveals otherwise.

No starker representation of this is the recent experience of early digital art collector, ScrillaVentura. Scrilla began exploring blockchain art back in 2013-14 before Web3 was even a buzzword, and before Ethereum even existed. In those early days, Scrilla was minting and creating digital art on the Bitcoin blockchain and buying pieces on a marketplace called ascribe, which has since folded. One of the pieces Scrilla bought was “Departed” by now-renowned crypto artist XCOPY.

When ascribe folded in early 2018, the original “Departed” went with it. According to Scrilla, when Ethereum-based NFT marketplace SuperRare emerged in October 2018, he and XCOPY agreed that the version of “Departed” minted on SuperRare and gifted to Scrilla would be the new “Departed”. Scrilla sold the new version two years later, in October 2020, to Web3 investor and art collector MaxStealth for 30 ETH ($11.5K at the time).

Nearly two years after that, on September 14, 2022, that version of “Departed” sold at a Sotheby’s auction of pieces owned by MaxStealth for $500,000. If the SuperRare contract terms for collectors were followed, Scrilla should have received 1% of that sale, given that he was the first collector. This did not happen.

Even though “Departed” is an NFT, and every transaction is recorded on the blockchain, it’s hard to know what the human side of the agreements and conversations were. It seems obvious, but it’s important to note that Web3 is still run the way any other business or industry is run. Human foibles and human decisions rule.

In the case of XCOPY’s work, MaxStealth transferred the piece off of SuperRare before reselling it at Sotheby’s, a human decision that skirted the original contract, and thus the royalties for the original owner. The idea that “code is law” in NFTs simply isn’t true.

Scrilla, who has known XCOPY for years, is aware of the quirks of the NFT art market and isn't even that upset. “I don’t even think collector royalties is that big a deal or think it’s really necessary — artist royalties are what matter way more,” Scrilla tells me.

We turned to a handful of independent NFT artists to get their take on the state of royalties, and what other artists can do about it.

dovetail, a developer-artist, has minted several blockchain artworks through a platform called Capsule 21 run by Tom Lehman, the former CEO of Genius.com — who now goes by Middlemarch in his Web3 work.

dovetail is fond of stating during almost every Twitter Space he co-hosts that the idea of an NFT contract solving the problem of authentication and value is misleading.

What we think we know about an art object, and even what we cannot know about an art piece, is what gives art its value. This provenance, as it is called, is highly subjective and emerges mostly in the form of a story. A smart contract doesn’t replace this story. With NFTs, it is still as much about the unknowns and historical mysteries of a piece, not just who minted something or who owns it.

“The law is whatever the mutually agreed upon truth is, so whatever the most people believe is the truth is the truth,” Dove says.

It’s a mantra he and Middlemarch have been trying to beat into artists, collectors and developers who are enamored by the prospect of a marketplace that is free from the human dogma and drama that leads to misunderstandings and mistakes.

Middlemarch says one big problem here is the alteration of contracts after they have been deployed. “Royalties are fine, you just shouldn’t be able to change them at any time, which is the way they are currently implemented. A collector shouldn’t have to worry that an unknown % of the next sale might be gone at a contract owner’s (not even the artist) whim,” he says.

Another artist, who goes by Mike Three, points out that, typically, in other industries, royalties apply to usage. “Royalties applied to sales are better described as a tax,” he says.

The on-going royalty conversation is heavily geared towards money, not the future purpose or usage of NFTs. If artists are concerned with money, they should be focusing on the quality and quantity of their work, and how they plan to sell their artwork over time.

“If royalties are representative of an amount of money that would sustain them, then I don't know why holding onto a percentage of their supply doesn't make just as much, if not more, sense than taking a cut of every sale,” says Mike Three.

To find the real value of NFT art, artists are going to have to get comfortable with decentralized barter and exchange, nurturing collector relationships, and encouraging self-preservation. Right now there is a mismatch of values between how NFTs are sold and valued in the marketplace, and how artists value their own work.

“People smarter than me think royalties are going to collapse, so it's still smart to have a backup plan in case that happens across the board. Don’t list everything you mint, hold onto some art for later in case your work does become significantly more valuable down the line,” says Mike Three. “Seems like a better alternative to me than fighting against what might be inevitable in an inherently permission-less system."

Maybe it’s because so much attention is paid to dramatic sales and high prices, and the accompanying dream of getting rich off of NFTs, but Scrilla is right to suggest the collector royalties don’t matter. The NFT ecosystem is supposed to be a permission-less system. The most influential people in the space are not actually artists or collectors, but the owners and operators of exchanges, and even legacy auction houses. In the end, their platforms ultimately determine how NFTs are seen, and valued.

So, what is the most important feature of the Web3 art ecosystem? It really comes down to usage. What are NFTs going to be used for, five, ten, twenty years from now? Ironically, even with six-figure and seven-figure sales at Sotheby’s and Christie’s, the answer is still cloudy. We are at a halfway point, a kind of purgatory of blockchain art. What happens in the future is probably something, but it’s something that nobody can accurately or artfully imagine just yet.