Anyone familiar with the NFT space will invariably also have been introduced to a popular project known as CryptoPunks. These algorithmically-generated 24×24-pixel avatars have taken the blockchain and NFT worlds by storm in 2021. They are among the most sought-after crypto collectibles, and recent sales of the scarcer CryptoPunks have been made to the tune of several millions of dollars.
This article will provide a primer on the CryptoPunks project and subsequently attempt to decipher the speculative mania that has fueled the NFTs’ recent all-time record sales. In particular, the following subjects will be covered:
1. The Origins of CryptoPunks
2. A Review of CryptoPunks’ Attributes
3. Examining the Price Mechanics of CryptoPunks
4. The Technical Infrastructure Underlying CryptoPunks
5. What Drove the Surge in CryptoPunks Prices in 2021?
The CryptoPunks NFT collection was launched in 2017 by US-based Larva Labs. The founders of the studio, John Watkinson and Matt Hall, created an algorithm that generated 24x24 pixelated avatars, each with a unique blend of attributes which drew inspiration from the punk and cyberpunk subcultures. Not unlike the London punk movement which emerged in the mid-1970s, the cryptocurrency and blockchain spheres have long shared a similar anti-establishment esprit du corps. Thus, as an apparent homage to the punk and cyberpunk movements, Watkinson and Hall deemed their generative avatars as CryptoPunks.
Galvanized by the innovation in the blockchain world and the rapid rise of Ethereum in 2017, Watkinson and Hall curated 10,000 CryptoPunks and chose to host them on the Ethereum blockchain. They adopted a not-for-profit approach to issuing the NFTs, offering them to the community entirely non gratis. In fact, users looking to claim their CryptoPunks needed only to pay a small gas fee to interact with the smart contract on the Ethereum blockchain. A mere week after the launch, all 10,000 CryptoPunks had been claimed. Suffice it to say, few of those early adopters had any impression at launch of the sheer scale that the CryptoPunks market could one day grow to.
Each CryptoPunk is defined by its type and has a unique assortment of different attributes or accessories that round out its genetic makeup. With respect to type, a Punk can be either a Male, Female, Zombie, Ape or Alien. Note that these types are listed in ascending order of scarcity (i.e., Male-types are most common while Alien-types are least common).
CryptoPunks are further categorized based on their unique combination of attributes. The attributes available reflect some distinguishing feature of the Punk’s clothing, such as wearing a multi-coloured beanie, or facial appearance, such as having buck teeth. Some attributes are restricted based on the Punk’s type. For instance, beanies and hoodies are limited to Male Punks. In contrast, orange hair side-parted is limited to Female Punks.
Finally, CryptoPunks can have up to 7 different attributes at once. Only one Punk was created having 7 attributes simultaneously, while 8 were created having 0 attributes. The remaining Punks in circulation fall anywhere in between with 1-6 attributes.
As with virtually all NFTs, the prices of CryptoPunks are defined by the laws of supply and demand. Supply was defined in the underlying smart contract’s original code, which capped the maximum number of Punks in existence at 10,000. Accordingly, there will be no future issuances of new CryptoPunks. The different types and attributes available across the CryptoPunks population are also fixed. This built-in scarcity and stable supply are central drivers of prices.
Another factor influencing Punk prices pertains to so-called ‘whale’ activity. The term ‘whale’ is used colloquially within the wider cryptocurrency space to refer to individuals hoarding a large supply of coins or other digital assets. When a ‘whale’ buys a Punk, that action tends to put upward pressure on the prices of other Punks. Conversely, when a ‘whale’ sells a Punk, it tends to put downward pressure on prices. For instance, an Ethereum ‘whale’ recently paid USD$6M to purchase a Punk. The ensuing change in average prices of other CryptoPunks amounted to 53%, representing a price increase from USD$87.8K to USD$135K over the one-week period ended August 1, 2021.
Finally, the prices of CryptoPunks are closely correlated with the price of ether. When ether increases, Punk prices will naturally increase as well. This is because CryptoPunks owners tend to hold ether, and so will become less price-sensitive when the value of their ether increases.
At the time of the project’s launch, only the ERC-20 token standard was in existence. ERC-20 was created by Fabian Vogelsteller in 2015 and was intended to define a smart contract application programming interface (API) – in other words, a set of attributes and functionalities for certain programs on the blockchain – that could be common to all fungible tokens. The benefit of this standardization would be to streamline the development of applications and tools that relied on being able to interact with different community-created tokens. In essence, if all fungible tokens shared the same fundamental behaviour, application developers could create a one-size-fits-all program which needed only to know how to interact with the API in order to interact with all tokens built using that API. The set of functions needing to be defined for an ERC-20-compliant fungible token include the token name, its supply, and its balance, among some others.
However, as previously stated, the ERC-20 standard was designed for the creation of fungible tokens. Given that each CryptoPunk was supposed to be unique, and therefore non-fungible, ERC-20 would not have been a suitable choice of contract. As a result, Larva Labs modified the ERC-20 standard for their use case, enabling them to create a foundation for NFTs through which they could issues the unique CryptoPunks.
As a sign of just how early CryptoPunks were to the NFT world, the launch of the project actually preceded the creation of the ERC-721 standard. This standard was written as a logical extension of ERC-20 to allow for the creation of non-fungible tokens, or NFTs, with common attributes and functionality. CryptoPunks did not adhere to ERC-721 by virtue of predating the standard. As a result, taken in their original form, CryptoPunks are incompatible with NFT marketplaces that only support ERC-721-compliant tokens. Thus, original CryptoPunks can only be transacted on the native marketplace built by Larva Labs to support secondary trading. The workaround to this issue has been to simply ‘wrap’ CryptoPunks – or embed them into an ERC-721 layer – thereby making them compliant with the standard and compatible with all Ethereum-based NFT marketplaces.
Shortly before the landmark sale of Beeple’s Everydays: the First 5,000 Days for USD$69M, 2 of the 9 ultra-rare Alien-type CryptoPunks each sold for roughly USD$7.5M. At the height of the 2021 NFT speculative mania, floor CryptoPunks – that is, the cheapest CryptoPunks on the market – were being auctioned for something in the realm of USD$30K –USD$50K, while the most expensive commanded prices closer to USD$10M. Given the above background on the CryptoPunks project, it would not be unreasonable to wonder why such programmatically-generated digital characters could be the center of so much demand.
The first and most self-evident explanation for the meteoric resurgence in the popularity and prices of CryptoPunks in 2021 relates not to anything unique about the project, but to the wider macro environment. The first half of 2021 was a period of unparalleled expansion in the NFT world, something that was attributable to a host of factors ranging from the speculative surge in the prices of cryptocurrencies such as bitcoin and ether, to the ascendancy of Dapper Labs’ NBA Top Shot into the mainstream, to the growing interest in physical collectibles such as sports trading cards. All of these changes, among others, converged to create a rising tide which drove up the popularity of NFTs at large, and CryptoPunks was no exception.
Factors specific to the CryptoPunks collection could also offer some insight into why they seem to trade at a premium to comparable NFT projects. For one, many perceive CryptoPunks as being the earliest conception of a provably scare, unique digital asset on a blockchain. While this is not technically accurate, that prevailing narrative has elevated CryptoPunks into a rarified air that no other NFT project can truthfully claim to be in. It is as though CryptoPunks are the antiques of the blockchain world, commanding additional value simply by virtue of being older; this is analogous to the higher values conferred on ancient artifacts discovered in the real-world.
Additionally, the known limited supply of CryptoPunks no doubt plays a role in driving up prices. Where other NFT projects may have an uncapped supply, it is known with certainty that only 10,000 authentic CryptoPunks will ever be in circulation. The fact that many CryptoPunks are held in wallets that have not exhibited any recent activity implies that the true maximum circulating supply is in fact well below the 10,000 limit originally defined by the developers. This scarcity argument is made all the more believable when thinking back to the USD$7.5M sales alluded to in the opening to this section; because only 9 alien-type CryptoPunks exist, they will naturally command far higher prices than more common segments of the NFT collection.
Another facet to the two preceding arguments about historical significance and scarcity is that both of those attributes make CryptoPunks a digital status symbol. Anyone holding an antique and provably scarce asset were either visionary enough to acquire their stake in the early days, or have a high enough net worth to have purchased the asset at auction. In either case, the social implications of owning a CryptoPunk are incredibly beneficial to the holder; in pursuit of this lofty social status, buyers will be inclined to bid prices up and so sellers will be inclined to set ask prices high.
Finally, more insidious explanations for the astronomical prices of CryptoPunks revolve around their potential usage for money laundering, as well as the common accusation in frothy crypto-markets of wash trading. While no substantive evidence has been found to indict CryptoPunks owners of either allegation, and the practices may be unworkable given the non-fungible nature of the CryptoPunks, many view some form of concerted price manipulation as being the only reasonable answer for why pixel art can command such hefty price tags.
It is remarkable to see how CryptoPunks, at their core being little more than 24x24 pixelated characters, have created so much value in the span of 4 years. One must wonder why NFTs with more utility have not transcended the value of CryptoPunks, and whether the explanations proposed above do in fact hold weight. Ultimately, whether CryptoPunks represent a bubble or an enduring paradigm shift in how humans interact with art is a question that will only be definitively answered with time.
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