Is Smart Contract Copyright Museum-Quality?
In our most recent WAC Weekly we covered the technical and legal aspects of smart contracts, moving quickly from the basics of the software to the legal complexities experts are grappling with today.
Tristan Nicolaides from TZ Connect and D-Art joined the group to give a presentation on smart contracts before a live demo which showed us the inner workings of a blockchain transaction. Following on from that, the group discussed the technology’s murky relationship to well-established contract law with layer and Contract Killers contributor Sarah Conley Odenkirk.
What is a smart contract? How do they work?
A smart contract, as Tristan covered, is just a piece of software that runs a transaction on the blockchain. The contract could act as an automated escrow service that only swaps assets once all conditions have been met, but it might also hold assets such as NFTs and act as a virtual vending machine.
Unlike a vending machine, the contract is not maintained by a company but is deployed to the blockchain where it is — in theory — available for users to run forever.
That permanence is achieved by some limitations. The contract’s code has to be initiated from a user and can’t be scheduled to run in the background, the way you might set up a direct debit from your bank account every month. Smart contracts usually can’t interact with the outside world, as they can only process on-chain data.
The appeal of smart contracts is that they don’t need a third party to approve or process transactions. This enables more automated contract-bound processes, which the growing legal technology industry is very interested in. Because of the public and permanent nature of the blockchain, the process each transaction took is automatically documented and archived forever.
This is useful for the kind of on-chain processes which crypto enthusiasts are currently into. That includes marketplace contracts to buy, sell, and distribute tokens, auction contracts to automatically negotiate prices, and split contracts to divide up revenue from royalties.
But the lack of access to off-chain data limits their current utility for real contract law. You’re not going to merge two companies through a smart contract anytime soon, for example.
“Oracles” are one solution to this problem, but this requires both parties to trust the oracle to report accurate data to the blockchain; when the oracle is just a piece of software that could be hacked, this introduces all kinds of issues for the “on-chain maximalist” dreaming of fully-automated legal and economic spheres.
In a brief demo of a smart contract transaction, Tristan talked through the attributes of one contract in Better Call Dev and showed how quick it was to run a transaction on the Tezos chain. It’s clear that smart contracts are a valuable piece of infrastructure, but are they legally binding?
The legal gray areas
After all, projects like Bored Ape Yacht Club use their copyright as a selling point. In 2021 they gave their token holders the right to use their apes’ likeness for any reason, which holders have taken to create music videos and pop-up restaurants.
But as Sarah Conley Odenkirk explains, there’s no general-purpose solution for embedding those rights and terms in the NFT’s metadata. That means the terms and conditions don’t travel with the NFT where buyers can see them. The terms and conditions are often just linked to an external location like IPFS, or the NFT project’s website.
In many parts of the world like the USA, it’s important that buyers can be assumed to have seen the terms and conditions they’re consenting to. You might not read Apple’s terms of service every time you update your iPhone, but you’re clearly given a chance to read what you’re agreeing to before you hit “Agree” regardless.
As we’ve discussed before, copyright around NFTs is still a gray area. When the copyright information pertaining to those NFTs is, at best, linked to in the OpenSea listing, that’s another layer of uncertainty around the enforceability of the law here.
The appeal of the smart contract software is that it’s utterly “deterministic”, meaning the same circumstances would result in the same outcome every time. Compare that to any two real-world contract law cases, where the outcome might hinge on the ability of the lawyers and the intuition of the judge.
But when the copyright isn’t enforced in code, and the whole idea of NFT copyright is yet to be tested in a high-profile court case, Odenkirk wishes people would use something other than “smart contract” to describe these small programs. As she wrote for Contract Killers last year:
At the moment in time that these NFTs are offered for sale, the marketplace is currently lacking in protocols, rules, remedies, or any formal structure that would protect NFT owners or creators against any number of eventualities, including but not limited to the loss or evaporation of NFT assets. Despite claims to the contrary, the current structure of NFTs neither guarantees true authenticity nor establishes a reliable provenance for artwork assets. Nor do NFT transactions address concerns around intellectual property ownership and appurtenant rights; or remedies in the event that built-in resale royalties provisions are ignored by transacting off-chain. And, perhaps most glaringly, there is no recourse in the event that the embedded link to the purchased asset breaks or the location of the asset disappears.
A better way to protect copyright?
As with the hardware and software used to acquire NFTs in the first place, clear and enforceable copyright around NFT art is something museums, artists, and blockchain developers are going to have to work on together.
With smart contracts proper being limited in scope without an oracle — as far as trustless, decentralized, automated regulation is concerned — it’s down to the NFT itself to make its own terms of use enforceable. And for most museums, which need to manage very intricate contracts and paperwork around their works, the whole NFT endeavour will live or die on its ability to translate that paperwork into code.
With Web3 offering the potential for countless social and governance structures to arise, the solution might be in finding ways to manage NFT copyrights in a way that all parties can agree to. Or perhaps we’ll find an answer by going deeper into the software stack: upgrading the standards of the blockchain itself.
Museums are trying to adapt to the challenges and opportunities the blockchain presents. But if they took a more active role in the development of the technology and made it work for their needs, we could see contract standards which guarantee copyright, usage rights, as well as mutual responsibilities in a way that’s much stronger than what we have now.
As in the increasingly automated sector of real contract law, we’re not going to see the elimination of skilled human professionals because of this tech. Rather, the technology will simply put artists, curators, and collectors in a position to focus on the work they love while the paperwork takes care of itself.
Which solution might get us to that future is still an open question. But by giving artists and museums a seat at the table with the technologists, the WAC Fellowship is striving to prototype ideas that will move the discussion forward.
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WAC Weekly is part of WAC Lab, a new program unleashing the full potential of Web3 for the arts and culture produced by We Are Museums in collaboration with TZ Connect and Blockchain Art Directory, and powered by the Tezos ecosystem.
