SSRN Id3212662

Sylve CHEVET
Master Thesis
Academic Year 2017-2018
Blockchain Technology and Non-
Fungible Tokens: Reshaping value chains
in creative industries
Sylve CHEVET
Under the supervision of Alain BUSSON
Page 1/73
Electronic copy available at: https://ssrn.com/abstract=3212662

Sylve CHEVET
I Abstract
This paper offers an analysis of cryptocurrencies and blockchain’s technical
underpinnings, specifically of Non-Fungible tokens or “cryptocollectibles”, and the
changes these innovations can bring about in the art market and creative industries at
large. The paper is based on a resource-based analysis of creative industries, their value
chains and the various bargaining powers and revenue sharing of the industries’ agents.
II Thanks
I would like to thank the Axiom Zen team for their time, Pierre Entremont for his advices,
Hari Dewan for the discussions, Medium, Twitter and Reddit for providing the
knowledge.
Page 2/73

Sylve CHEVET
IV Summary
Summary
I Abstract ................................................................................................................................................2
II Thanks ..................................................................................................................................................2
IV Summary ..............................................................................................................................................3
V Introduction .........................................................................................................................................5
VI Blockchain and cryptocurrencies: an explanation ...................................................................6
a. Bitcoin, the first cryptocurrency ................................................................................................6
b. Ethereum and smart contracts .............................................................................................. 11
c. ERC-20 tokens ............................................................................................................................ 14
d. The token economy ................................................................................................................... 18
e. The DAO and the limits of Blockchain ................................................................................ 25
VII Crypto-assets and Non-Fungible Tokens .......................................................................... 31
a. Rare Pepes: the first crypto-assets for art ......................................................................... 32
b. Cryptokitties, the ERC-721 standard and sound digital goods .................................... 35
c. New possibilities: crypto-composable and “living” assets ............................................ 38
d. Limits ............................................................................................................................................. 42
VIII Power and value chain in digitized creative industries ................................................... 43
a. Creative industries and digitization ....................................................................................... 43
b. Value chain of creative industries ......................................................................................... 46
IX Blockchain technology and power shifts................................................................................. 50
a. Creators ......................................................................................................................................... 50
b. Producers and publishers........................................................................................................ 53
c. Distribution ................................................................................................................................... 56
d. Blockchain: ultimate support function? ............................................................................... 60
Page 3/73

Sylve CHEVET
X Conclusion ........................................................................................................................................ 61
XI Bibliography...................................................................................................................................... 64
a. Books ............................................................................................................................................. 64
b. Research papers ........................................................................................................................ 64
c. Articles ........................................................................................................................................... 65
d. Other .............................................................................................................................................. 68
XIII Annex ............................................................................................................................................. 70
a. Detail of creative industry mapping ...................................................................................... 70
XIV Glossary......................................................................................................................................... 71
Page 4/73

Sylve CHEVET
V Introduction
On February 14th, 2018, the Forever Rose1 project sold a digital picture of a rose to a
collective of 10 people for $1 million paid in cryptocurrency. The sale was conducted
and registered on the Ethereum blockchain. The image is publicly available, anyone can
copy it, store it on a hard-drive, but the certificate of ownership linked to it, cannot. Only
the 10 members of the collective can sell, destroy, exchange their share of ownership in
the digital asset and no third party is required to process any of these transactions. The
Forever Rose project is one of many possibilities provided by the Cryptocollectibles
movement, a technological movement based on using blockchain technology, a
decentralized and trustless data storage protocol, to create unique assets and bringing it
to the art business.
We can define a Cryptocollectible as a “cryptographically unique, non-fungible digital
asset”2, which, simply put, means they are like art pieces stored on a blockchain, any
form of data, (image, text, sound), that is uniquely identified by a blockchain. Unlike
cryptocurrencies which are fungible, meaning that any Bitcoin is equivalent in value to
any other Bitcoin, just like a dollar is equivalent to any other dollar, non-fungible assets
are unique and differentiated from one another. This unique characteristic of
Cryptocollectibles entails the notion of scarcity, a digital art piece stored on a blockchain
can therefore be unique and traced back to its rightful owner with no need for a
centralised clearing house keeping records of every transaction.
1
http://www.foreverrose.io/
2
https://blog.decentraland.org/cryptocollectibles-decentraland-and-you-130676002015
Page 5/73

Sylve CHEVET
Since the birth of the Internet artists have struggled in finding a sustainable business
model for digital assets, because the very notion of scarcity is rendered non-existent by
the fact that data visible on the Internet can freely copied. If an artist creates an image
and stores it on his website, anyone can copy it, destroying any notion on ownership,
contrary to a physical art piece.
The blockchain revolution is bringing about a wide variety of evolutions that the art
business can greatly benefit from. Scarcity is the cornerstone of the art business and, so
far, digital art has failed to find a viable business model. Blockchain technology provides
interesting new ways to create, sell, authentify and exchange digital art and more
broadly any art piece. But with these new capabilities come new legal, economic and
artistic challenges.
We will formulate the research question as such: is the Cryptocollectibles movement a
fundamental paradigm shift of the art business? And how will revenue sharing,
bargaining power, might shift in creative industries value chain?
VI Blockchain and cryptocurrencies: an explanation
a. Bitcoin, the first cryptocurrency
In 2008 an anonymous user on the P2P Foundation forum named Satoshi Nakamoto
published a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System3 laying the
3
https://bitcoin.org/bitcoin.pdf
Page 6/73

Sylve CHEVET
foundation of what will later become the cryptocurrency known as Bitcoin4. The paper
provided an innovative way of using cryptographic protocols and decentralized
computing to create a digitized currency, a type of money that would not be operated by
a government, a bank, or any centralized entity, but solely by its users in a peer-to-peer
fashion. The core problem solved by the paper is known as the “double-spending
problem”, how can one make sure that money is not spent twice? As Wired puts it “if a
digital dollar is just information, free from the corporeal strictures of paper and metal,
what’s to prevent people from copying and pasting it as easily as a chunk of text,
“spending” it as many times as they want? » The double-spending problem precluded
previous digitized currency from achieving true decentralization. Usually, banks act as
clearing houses for paperless money, keeping a precise ledger of which accounts owns
which quantity of money and, thus far, a currency has always relied on a centralized
third-party acting as a system administrator to keep the ledger updated and correct.
4
https://www.wired.com/2011/11/mf_bitcoin/all/
Page 7/73

Sylve CHEVET
Brief explanation of how bitcoin works5.
The paper introduced a way to operate such a ledger with no central oversight or data
centralization. A blockchain system provides incentives in the form of a digital currency
for independent agents to provide computing power to maintain a publicly-available
ledger of all transactions6 The Bitcoin system’s first innovation was in using the digital
5
https://medium.com/iotforall/blockchain-explained-the-basics-of-blockchain-and-how-it-might-affect-
iot-84367ac7f61a
6
For more precise explanation please refer to these videos and articles:
- https://www.youtube.com/watch?v=Lx9zgZCMqXE
Page 8/73

Sylve CHEVET
currency as an incentive for miners (agents who provide computing power) to secure the
network. The second consisted in using mathematical functions known as hash
functions to verify the authenticity of previous transactions. A hash function acts like a
compressor, any input no matter the size will be shrunk into a fixed-size series of
number and it is impossible to reverse-engineer the function to find what was the initial
input. This function enables the network to carry compressed versions of itself across
the network to verify if the hashed versions are similar and guarantee the system’s
integrity. The final innovation is the proof-of-work system. To secure a group of
transactions known as a block, miners compete between each other to find the solution
to a complex equation. The miner who successfully solves the equation will be rewarded
in bitcoin and the result of the calculation will be embedded in the block. Therefore, if
anyone wanted to hack a blockchain to tamper with a recorded transaction he will need
to perform all the complex mathematical calculations that came after the transaction.
The hacker would need to produce the equivalent of 51% of the network’s computing
power to be able to “convince” the rest of the network that he is holding the correct
version of the ledger, which is nearly impossible from a computation standpoint7.
Bitcoin was launched in 2009 and encouraged other networks to be created based on
the same technology. To this day Bitcoin has an unparalleled record in security, as the
network was never hacked, and no bitcoin was successfully counterfeited. Theoretically,
transactions on the Bitcoin blockchain are fast, anonymous and irrevocable. The
- https://www.youtube.com/watch?v=_160oMzblY8
- https://youtu.be/2dgdGWyJoK4?list=WL
7
This is known as the 51% problem.
Page 9/73

Sylve CHEVET
articulation of hashing, proof-of-work and incentivizing miners for computing has
become the linchpin of all blockchains.
Bitcoin is not without its flaws. Due to its very design the network does not handle
transaction very quickly (it takes about 10mn to validate a transaction8) and miners get
an unfair share of power: indeed, about 80%9 of the computing power is at the hands of
a few group of miners (called pools) located in China who can decide how the network
will evolve and what updates will be made. This concentration of power is clearly at
odds with Bitcoin’s initial goal of decentralizing payments and empowering individuals 1011
and has fuelled the chaotic development of Bitcoin with the creation of blockchains spun
out of the original Bitcoin blockchain through a process called “fork”. As the source code
is publicly-available anyone can copy it and modify it, which is what happened with the
Bitcoin Cash fork12 which dealt with the contentious topic of whether block size should
be increased from the 1MB limit imposed by Nakamoto (to decrease curb fake
transaction) to speed up transaction validation.
Bitcoin’s value relative to another currency, such as the dollar or the euro, is set
according to supply and demand, much like gold or any other commodity. But contrary to
a regular currency Bitcoin is not backed by any real-world asset, legislation or
redeeming power. Employees accept to be paid in euros because they know the
8
https://blockchain.info/charts/avg-confirmation-time?timespan=180days#
9
https://blockchain.info/en/pools
10
https://hackernoon.com/why-mining-pool-concentration-is-the-achilles-heel-of-bitcoin-ce91089ce1f
11
De Filippi (2016), The invisible politics of Bitcoin: governance crisis of a decentralised infrastructure
12
http://www.slate.com/blogs/future_tense/2017/08/04/explaining_bitcoin_s_split_into_two_cryptocurren
cies.html
Page 10/73

Sylve CHEVET
currency is stable and they will be able to trade their euros for food or gas. Citizens’ trust
in their national currency is based on the belief that everyone will accept their currency
in exchange for goods and that they will be able to keep it (as a store of value). The right
to mint and distribute currency is a historical attribute of power and Bitcoin aims
precisely at offering an alternative solution to store and exchange value in a way that
cannot be tampered with by a banking institution, a central bank or a government.
Indeed, on the Bitcoin network no central authority can decide to suddenly emit more
bitcoins and trigger inflation as in Venezuela13 or decide to demonetize part of the
currency like in India in 201614. Wired magazine believes that Bitcoin can prove its
potential in countries and areas where citizens have no access to legitimate storage of
value or exchange solutions, for remittances for example, like in Venezuela or Somalia15.
Bitcoin is the first truly decentralized digital currency and holds an outstanding track
record of usability and security, even more so when considering it was created by a
handful of developers as an open-source software and not a proprietary piece of
software. Bitcoin brought forth a new type of network design that will be capitalised on
to generalize the concept of blockchain not only to value storage but also computing
power to run decentralized programs and store data.
b. Ethereum and smart contracts
13
https://www.bloomberg.com/news/articles/2018-01-25/imf-sees-venezuela-inflation-soaring-to-13-
000-percent-in-2018
14
https://www.forbes.com/sites/suparnadutt/2017/11/07/one-year-later-indias-demonetization-move-
proves-too-costly-an-experiment/#1851e430378a
15
https://www.wired.com/story/where-could-bitcoin-succeed-as-a-currency-in-a-failed-state/
Page 11/73

Sylve CHEVET
In 2013 Vitalik Buterin, a Canadian developer aged 19 at the time expanded on the
Nakomoto whitepaper to publish a paper titled A Next-Generation Smart Contract and
Decentralized Application Platform16. Buterin capitalised on Bitcoin’s strengths (incentive
scheme for miners, proof-of-work and hashing) to create a new blockchain called
Ethereum, which major improvement was the implementation of a Turing-complete
language. This means that the Ethereum blockchain can handle complex code to
leverage the computing power harnessed by the incentive scheme, something the
Bitcoin blockchain did poorly due to design restrictions. Indeed, Bitcoin was designed to
be an unhackable store of value and has few capabilities other than this exact purpose.
Ethereum, on the other hand, expands the scope of capabilities offered by blockchain
technology to, theoretically, create a decentralized world-scale computer.
With this Turing-complete language implemented in the Ethereum blockchain, it is
possible to develop what is called smart contracts17, code that is embedded in a
blockchain and run by miners. For a concrete example, let us say that Alice makes a bet
with Bob on tomorrow’s weather: that she will pay him 10€ if it rains tomorrow, and he
will pay her 10€ if it doesn’t. The code can be summed up as follows:
IF rain THEN Alice -> 10€ to BOB
ELSE BOB -> 10€ to Alice
Since they are weary the other will not honour the contract they would like to use a third
party to oversee their bet. On the Bitcoin blockchain such a scheme is possible but
16
https://github.com/ethereum/wiki/wiki/White-Paper
17
For an explanatory video: https://www.youtube.com/watch?v=qdoUpGg_DpQ
Page 12/73

Sylve CHEVET
requires a centralised server to run most of the program, and such a server can be
tampered with by Alice or Bob18. On the Ethereum blockchain the program can be
written and run with no external computing power, the weather data will be acquired
with a trustworthy source called an Oracle (for instance www.weather.com) and the
program will run according to the result. This example shows the innovation brought by
the Ethereum blockchain, a decentralized third-party that can enforce contracts coded
into a blockchain with no central oversight.
A smart contract should not be confused with a legal contract, as Buterin indicates:
“Note that "contracts" in Ethereum should not be seen as something that should be
"fulfilled" or "complied with"; rather, they are more like "autonomous agents" that live
inside of the Ethereum execution environment, always executing a specific piece of code
when "poked" by a message or transaction”19
Ethereum has other differences, among which a faster transaction time (15 seconds
compared to 10mn for Bitcoin), a proof-of-work algorithm designed not to favour mining
pools, no limits on the cryptocurrency (Bitcoin is capped at 21 million Bitcoins, Ethereum
releases the same amount of Ether every year) and an internal currency called “gas”
used to pay for transaction costs (Gas is calculated as a fraction of an Ether)20
Ethereum launched on July 2015 and quickly rose to prominence in the blockchain
ecosystem, touted as the next step of the Internet, allowing developers to create “dApps”
18
Also, the Bitcoin programming language doesn’t handle basic tools such as loops (the ability to tell a
program to perform a task multiple times) which is a fundamental tool to write concise programs.
19
Ethereum Whitepaper, « Ethereum accounts »
20
https://medium.com/sunnya97/understanding-ether-vs-gas-82ce2f1dc560
Page 13/73

Sylve CHEVET
or decentralized applications, pieces of software that would run on the Ethereum
blockchain and guarantee security, anonymity and no central oversight. The second
generation of blockchains pioneered by Ethereum brings the hackers’ dream of a
decentralized Internet closer to reality. It could be theoretically possible to run a
Facebook or a Youtube clone on the blockchain (provided there is enough computing
power and processing speed) in an open-source fashion, meaning that all data is public
(though surely encrypted for privacy reasons) and everyone can copy and change the
source code. A social network running on the blockchain could threaten Facebook’s
competitive advantage since it relies on network effects garnered through massive data
collection, data that cannot be used by any competitor to create an alternate social
network21. The GAFA’s competitive advantage indeed lies in the massive troves of data
marshalled from their users that can be used to refine artificial intelligence algorithms
which feed on data to automate processes. The more data they are fed, the more
precise they get. On the blockchain if a development team considers that a social
network running on the blockchain has poor service they can decide to fork the network
to create their own, with different rules, but with the same data history, which drastically
reduces barriers to entry on many Internet-based business models.
c. ERC-20 tokens
21
The Market Dominance of US Digital Platforms: Antitrust Implications for the European Union, Ciriani &
Lebourges
Page 14/73

Sylve CHEVET
Smart contracts deployed on a blockchain such as Ethereum enable the creation of new
types of currencies called tokens, built on top of the Ethereum blockchain, that can
interact with each other. Rather than creating a blockchain and its cryptocurrency from
scratch a development team can leverage the already existing computing power of the
Ethereum blockchain and the reputation of the Ether cryptocurrency to manage a
registry of the new currency via a smart contract hosted on Ethereum blockchain. Such
a cryptocurrency, anchored to an already existing blockchain, is called a token. It can be
compared to a token used to access the rollercoasters in a fair: the token only has value
inside the fair and allows access to the services. Much like the fair token, a company
can sell a service and demand to be paid in its own currency distributed and managed
through a blockchain. An increasingly large number of projects have issued their tokens
on top of Ethereum to offer their services:
- Augur (www.augur.net): a prediction market which token is used to bet on the
outcome of events. If a bet is correct the user will be paid back in Augur tokens.
- Filecoin (www.filecoin.io): a blockchain-based storage network, it raised a record
$257 million in 2017 with the Filecoin token sale22.
- Golem (www.golem.network): a computer power market, users can purchase idle
computing power from remote computers with the Golem token.
- Harbor (www.harbor.com): a compliance platform using a token to trade
securities such as real estates, fine art, equity, etc.
22
https://www.coindesk.com/257-million-filecoin-breaks-time-record-ico-funding/
Page 15/73

Sylve CHEVET
- Basic Attention Token (www.basicattentiontoken.org): token powering a
decentralized advertisement exchange on the blockchain.
- GIFTO (www.gifto.io): digital gifting market powered with the GIFTO token.
All of these services use the Ethereum blockchain as the linchpin of their designs. Augur
for instance has a unique value proposition compared to already existing prediction
markets (such as www.predictit.org) because it runs on a decentralized system: bets will
be paid out automatically based on smart contracts stored and ran on Ethereum rather
than by a centralized entity, Augur therefore claims to be more secure and diverse in its
bets.23
The guidelines to create this type of token on Ethereum are explained in the Ethereum
Request for Comments #20 (or ERC-20)24. It is a standard agreed upon by the
community that defines the basic functions and gives guidelines a token should follow to
work properly. An ERC-20 token is a token that follows the ERC-20 guidelines. This
standard allowed the development of the burgeoning “token economy”, a term that
encompasses companies with business models based on the issuance, exchange and
management of a token. Development teams create a service based on a token issued
on a blockchain and will issue them through a process known as an Initial Coin Offering
(ICO), the online sale of the created tokens. These ICOs have multiplied in 2017 and
raised more than $6 billion on nearly 900 ICOs25, surpassing venture capital funding for
23
https://www.youtube.com/watch?v=yegyih591Jo
24
https://github.com/ethereum/EIPs/blob/master/EIPS/eip-20.md
25
https://www.icodata.io/stats/2017
Page 16/73

Sylve CHEVET
this year26. Most of these ICOs however were only conducted to scam buyers into buying
the issued token with no real team or product being actually developed27, some such as
Bitconnect were outright Ponzi Schemes28. Regulation has yet to catch up with ICOs and
lay out a proper legal framework and customer protection schemes but the very
definition of what a token is, legally speaking, rather difficult.
Depending on the answer, whether a token is a commodity or a security, the regulatory
bodies involved will not be the same, in the US it will be the CFTC (Commodities
Futures Trading Commission) for the former, the SEC (Securities Exchange
Commission) for the latter)2930. Depending on the country the legal framework will also
change: South Korea’s Financial Services Commission (FSC) has imposed a blanket ban
on ICOs in regards of regulatory uncertainty and customer protection31, and so has
China32.
Three types of tokens are usually considered as a theoretical framework33:
- Utility tokens (or user token, or app coins): tokens that offer access to a
company’s services (ex: Augur or Filecoin).
26
https://Techcrunch.com/2018/03/04/icos-delivered-at-least-3-5x-more-capital-to-blockchain-
startups-than-vc-since-2017/l
27
https://tokeneconomy.co/icos-youre-scammy-and-you-know-it-62c104dbfabb
28
http://fortune.com/2018/01/17/bitcoin-bitconnect-price-scam/
29
https://cointelegraph.com/news/us-regulators-debate-whether-bitcoin-is-commodity-or-security
30
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
31
https://www.ethnews.com/south-korea-announces-across-the-board-ban-on-token-offerings
32
https://www.ethnews.com/peoples-bank-of-china-forbids-icos
33
https://tokentarget.com/utility-vs-security-vs-commodity/
Page 17/73

Sylve CHEVET
- Security tokens (or tokenized securities): token that derives its value from an
already-existing asset, such as a stock, a house, a work of art or financial
products (options, bonds). The online retailer Overstock has created a tZERO
token supposedly compliant with SEC regulation that will entitle token holders to
quarterly dividends from Overstock.
- Commodity tokens: the most widely-known kind of token, tokens that can be
used as a virtual currency or much like commodity like gold (ex: Bitcoin).
What is particularly puzzling for regulators is that tokens can have at least one
characteristics of the aforementioned tokens, or all of them. For instance, The DAO
token mentioned above could be considered a utility token (it enabled access to the
services), but the SEC considered it a security token (it was supposed to pay out
investment returns to token holders)34. US regulators are still divided on the legal
definition of a token and evolutions are likely to come.
d. The token economy
To date (05/03/2018), the 10 top blockchains total more than $344 billion of market
capitalization (calculated as the number of tokens in circulation multiplied by the
exchange rate of a token in dollar)35.
34
https://www.sec.gov/news/press-release/2017-131
35
https://coinmarketcap.com/
Page 18/73

Sylve CHEVET
Source: www. coinmarketcap.com
The price of Bitcoin has surged from $600 in 2016 to a historic high of $20,000 in
December 2017 ($9,333 in 05/2018), even though the cryptocurrency is not backed by
any bank or tied to any asset, its price is purely driven by offer and demand on the
numerous exchange platforms (such as www.coinbase.com).
Page 19/73

Sylve CHEVET
Bitcoin price evolution (source: https://bitcoin.fr/cours-du-bitcoin/)
This recent price surge has raised awareness on the topic of blockchain from the public.
But this interest is most circumscribed to speculation and the value storage use of
cryptocurrencies, rather than the possibilities offered by decentralized computing (utility
and security token). But utility tokens, for instance, have great potential.
Let us imagine an online marketplace specialized in paintings called BitPaint based on a
Paint token. On BitPaint, the Paint Token is a utility token, meaning that it is necessary
to use the token access the BitPaint service. Users need to purchase the Paint token to
buy paintings listed on the exchange, the proceeds of the sale will be paid out in Paint
tokens which can be later changed in dollars, euros, Ether or any other currency or
cryptocurrency through an exchange. The Paint token is the cornerstone of the BitPaint
marketplace and aligns the interest of all the stakeholders. We can list three main
stakeholders in this token-based market:
- Users: those who will buy and hold tokens to buy and sell paintings. They are
interested in buying the token for the service it provides. If the BitPaint system is
useful and brings them value, they will be willing to use it more and buy more
tokens.
- Investors: those who invest in the token in the hopes of making a profit. They will
not use the token to buy paintings, they are only interested in the value of the
Paint token. They are usually referred to as HODLERs. The more the BitPaint
network is used, the more users will want to buy the token, increasing the value.
Contrary to a stock in a regular company, here the token value is directly linked to
Page 20/73

Sylve CHEVET
the usage of the service it provides, what value it brings to the User so that he
will be incentivized to buy it to trade paintings and, therefore, to drive its value up.
If BitPaint offers poor service, few people will buy the token and the price will
decrease, the Investors will therefore book a loss. On the contrary, if the service
is popular and users flock to buy Paint tokens to trade paintings, the token value
will increase. This incentive scheme ensures that the system serves primarily the
Users and not the stockholders since catering to the Users’ need will directly
increase usage of the service and, therefore, token value.
- Developers: those who created and manage the BitPaint network. The team will
create a first batch of tokens, let us assume 1,000 Paint tokens, and will sell 500
to the public at a certain price. If the BitPaint network is successful the Pain
token will increase in value and considering the massive stake the development
team holds in BitPaint, they will greatly benefit from it. Additionally, the
Developers can enforce a transaction fee of 5% on the BitPaint network to
diversify their sources of revenue.
The token economy’s greatest upside is this alignment of the three stakeholders to
contribute to the network, at least for utility tokens. The token directly reflects BitPaint’s
usage value contrary to a stock that will need investors to interpret the company’s
performance to buy or sell the stock and change its price. It is similar to the currency of
a country and most valuation models today indeed rely on macroeconomics to perform
analysis on token price.
Page 21/73

Sylve CHEVET
There is much speculation on the future of the token economy and the evolutions it can
bring about to the economy. Chris Dixon, a venture capitalist at a16z, stated3637 that the
token economy’s greatest achievement is in creating a business model for open-source
software development. Open-source refers to a type of software that is made publicly
available without licensing or copyrighting and usually created and maintained by
volunteer software developers. Most of the Internet infrastructure relies on open-source
protocols such as TCP/IP (which manages data transfer and communication), SSH
(cryptographic network protocol) and others. Despite the tremendous savings due to
open-source software38 the development teams are not financially incentivized to
maintain the protocols and do not benefit from its success. With a token-based protocol
many tech services that are now private such as Airbnb or Facebook could be operated
on a peer-to-peer basis with fewer transaction costs and greater consumer protection,
as the development team would not have to resort to sell their users’ data to maintain
the platform.
This phenomenon were protocols capture most of the value chain is referred to as a “fat
protocol” paradigm by venture capitalist Joseph Monegro39. In the current Internet
ecosystem protocols form the basis of the system but capture nothing of the value of the
Internet compared to applications that use these protocols: « The previous generation of
shared protocols (TCP/IP, HTTP, SMTP, etc.) produced immeasurable amounts of
36
https://a16z.com/2017/09/28/cryptocurrencies-networks-tokens/
37
https://a16z.com/2018/01/21/mental-models-tokens-crypto-trends/
38
Rothwell, Richard (5 August 2008). "Creating wealth with free software". Free Software Magazine.
39
http://www.usv.com/blog/fat-protocols
Page 22/73

Sylve CHEVET
value, but most of it got captured and re-aggregated on top at the applications layer,
largely in the form of data (think Google, Facebook and so on). »
Explanation of the “fat protocol” analysis (images from www.usv.com)
On a blockchain the application layer is significantly slimmer for several reasons:
- Thinner barriers to entry: because a blockchain provides a shared data and
protocol layer, anyone can plug on these data to create an application. For
example, if someone creates a social network on the blockchain, the data is
public40, meaning that a competitor can use these data to create an alternate
40
Public doesn’t mean that it is « readable » but rather accessible. Data will be most likely encrypted and
only a user’s password can access it. It does not prevent a competitor from capitalizing on the data to
create another service that the user will be able to access with the same credentials.
Page 23/73

Sylve CHEVET
social network with the same data. Today it is impossible to transfer one’s data
from a social network to another, but on a blockchain it is indeed possible. The
Shared Data Layer41, as Monegro explains, acts like a global database on which
every application can plug itself to get data, but no central operator ensures the
system’s integrity, miners provide computing power to maintain it.
- Personal data ownership and cryptography: Facebook is free to use but the users
surrender the control of their data to Facebook. They can be sold to advertisers,
fed to AI algorithms, etc. Since network effects are so powerful for data-centric
companies such as Google and Facebook, creating an alternate user database to
compete with them is nearly impossible, the switching costs are too high for
users (the more users Facebook has, the more valuable the network for users).
With a Shared Data Layer the data’s owner is not by the application layer or the
protocol layer (it is only a recipient) but the user. Only the user has the
credentials to give access to an application to his data on the Shared Data Layer
and can revoke it easily. The layer that ensures the data cannot be hacked, and
thus provides value, is the protocol layer, as Monegro insists: “Instead of a third
party holding your data and your keys, the network holds your data and you hold
the keys” 42
- Application usage and speculation increase the protocol token’s value: the protocol
layer can be considered like our example for BitPaint, the more users it garners,
the more valuable the token. The same goes for the application layer, but instead
41
http://joel.mn/post/104755282493/the-shared-data-layer-of-the-blockchain
42
http://joel.mn/post/104755282493/the-shared-data-layer-of-the-blockchain
Page 24/73

Sylve CHEVET
of only users it is the applications’ success with users and investors that will drive
the application layer’s token upwards. The more development teams will create
application, the more investors will be drawn to buy tokens as an investment and
the more users will be required users to buy the application tokens, and since the
application tokens are linked to the protocol’s token it will drive the value of the
protocol token up. Even if an application is not successful, the investment
process of buying the different applications’ tokens will significantly increase the
protocol token value. Indeed, Monegro insists: “The market cap[italization] of the
protocol always grows faster than the combined value of the applications built on
top, since the success of the application layer drives further speculation at the
protocol layer.”43 Speculation on the application layer is actually going to stabilize
and increase the protocol layer’s value capture.
This “fat protocol paradigm” contradicts the now-common “winner-takes-all” strategy of
Internet companies. With such a market dynamic it is impossible for an application to
gain a significant advantage on a competitor based on data alone. As application fail to
capture most of the value chain, users will have the possibility to control their data more
precisely and will be offered a wide range of services based on new token-economy
business models.
e. The DAO and the limits of Blockchain
43
http://www.usv.com/blog/fat-protocols
Page 25/73

Sylve CHEVET
The DAO (Distributed Autonomous Organization) was founded in April 201644, its aim
was to create an investment vehicle on a blockchain for the community to invest in and
support software development for Ethereum. The DAO was not a company, not a
venture capital fund, it was a smart contract developed by a company called Slock.it.
The aim was to bring capital into Ethereum and let the community vote on which project
to back, similarly to a crowdfunding website. The DAO issued tokens on top of the
Ethereum platform that granted holders voting rights on the organization and rewards
from the investments, much like a stock for a company. The DAO collected $150 million
worth of Ether, about 15% of all Ether on the network at the time 45 from 11,000 users46.
Blockchain enthusiasts hailed the DAO as the crowning achievement of Blockchain
architecture, enabling the creation of decentralized companies and communities around
specific goals, with no middlemen or central oversight, Indeed, Techcrunch wrote: The
DAO is a paradigm shift in the very idea of economic organization. It offers complete
transparency, total shareholder control, unprecedented flexibility and autonomous
governance.”
44
https://Techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-autonomous-corporation-is-
already-here/
45
https://www.economist.com/news/finance-and-economics/21699159-new-automated-investment-
fund-has-attracted-stacks-digital-money-dao
46
https://www.nytimes.com/2016/05/22/business/dealbook/crypto-ether-bitcoin-currency.html?_r=1
Page 26/73

Sylve CHEVET
Explanation of how the DAO operates
In June 2016 a third of the collected funds ($50 million) was sent to an Ethereum
address without any vote from the community. The DAO had been hacked using a flaw
in the source code, allowing the hacker to send the money to a separate account. The
Ethereum development team responded by initiating a vote where token holders and
miners chose whether to fork the Ethereum blockchain to erase the hack or keep a
blockchain where the hack happened. The network chose to implement the fork and two
Ethereum blockchains span out: Ethereum Classic (where the hack happened) and
Ethereum (where the hack was erased). The Ethereum development team only supports
the Ethereum blockchain.
The DAO hack clearly shows that the popular blockchain saying “code is law” is a
double-edged sword: code implemented in a Blockchain is immutable and public,
meaning that the DAO hack was not technically a hack nor a theft in the legal sense. It
was a program running as instructed, even if its initial instructions allowed unforeseen
events to happen. The Ethereum development team chose to initiate a fork to save the
Page 27/73

Sylve CHEVET
funds at the cost of Ethereum’s integrity and the public’s trust. Such a hack would have
been possible on a centralised server, but the consequences could have been dealt with
in court, or an insurance company could have covered the loss. On a blockchain there is
no legal safeguard; anything that happens on a blockchain is lawful as long as the code
allows it, which means software developers need to take extra security steps to secure
their applications.
Among the other limits of the blockchain system as of today we can list:
- Scaling: the main limit of all existing blockchains is the poor transaction speed.
Compared to the Visa system that can manage more than 20,000 transactions
per second, Bitcoin can only manage 7, Ethereum 20 while Ripple, a competing
cryptocurrency claims to reach 1,50047. To compete with centralized systems the
scaling problem needs to be addressed. Proof-of-stake algorithms such as
Plasma are to be rolled out on the Ethereum blockchain to address this issue but
fundamentally, the theoretical speed limit for blockchain networks is much lower
than for centralized systems. By design, blockchain is less efficient since it trades
speed for decentralization and security.
- Energy consumption: due to the proof-of-work system running a blockchain
requires tremendous amount of computing power and consequentially enormous
amounts of energy. According to the latest peer-reviewed study on the subject
Bitcoin consumes 0,5% of the world’s electricity48. Addressing the scaling issue
47
https://howmuch.net/sources/crypto-transaction-speeds-compared
48
Joule, de Vries: "Bitcoin's Growing Energy Problem" http://www.cell.com/joule/fulltext/S2542-
4351(18)30177-6
Page 28/73

Sylve CHEVET
might reduce energy consumptions but the very design of blockchain systems is
not efficient in energy consumption of computation power. It should be noted that
if Bitcoin is to be compared to another payment method, such as Visa, it should
be accounted for the Visa relies on the global currency system. It entails
producing, printing, distributing bank notes and coins and the energy
consumption of bank systems and datacentres. A ballpark estimate shows
Bitcoin is inefficient but not as inefficient as a regular banking system 49.
- Few real-world application: A famous online article read “Ten years in, nobody
has come up with a use for blockchain”50 explaining that despite ten years of
development blockchain has yet to find a real market other « besides currency
speculation and illegal transactions. » Because centralized businesses have such
strong network effects it is particularly difficult for decentralized competitors to
gain market share on regular customers who are not accustomed to the
blockchain and most of blockchain innovations are still circumscribed to the
blockchain ecosystem and fail to reach out to the « real economy ». Blockchain
will need to become invisible, like most of Internet protocols are invisible to the
user, before it can expand further than the crypto-enthusiasts sphere.
- Interoperability: so far, cryptocurrencies have relied on centralized exchanges
such as Mt. Gox ($460m in Bitcoin were hacked from it in 201451), Binance or
Coinbase in order to exchange currencies and tokens. A usage token only holds
49
https://hackernoon.com/the-bitcoin-vs-visa-electricity-consumption-fallacy-8cf194987a50
50
https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain-
ee98c180100
51
https://www.wired.com/2014/03/bitcoin-exchange/
Page 29/73

Sylve CHEVET
value inside the system it is created in and users need to exchange them with fiat
currencies to buy other goods. These centralized exchanges are both the linchpin
and the greatest flaw of the token economy because they allow users to
exchange tokens, bringing liquidity to the market, but also centralize user
information and are potentially hackable, as the Mt. Gox hack showed. The need
for interoperability on-chain between cryptocurrencies is direly needed for token-
based services to take off. So far, exchanging a usage token for another token
requires several transactions on centralized exchanges, all of which constitute
potential points of failure. Furthermore, these exchanges collect commissions
from the transactions, making the interoperability less easy. Decentralized
exchanges and “atomic swaps”52, if properly implemented, can bring this
interoperability into action for users. Buying a usage token will become a
seamless experience since this token can be automatically exchanged with
another token, or even with fiat currency. 0x53, EtherDelta54 and especially
Bancor55 are one among many projects aiming at creating a decentralized
exchange protocol between different blockchains which will hopefully bring a
“long trend” effect on blockchain instead of a very polarized where few tokens
hold the majority of the value, prompting users to adopt new services and tokens
more easily.
52
https://www.cryptocompare.com/coins/guides/what-are-atomic-swaps/
53
https://0xproject.com/
54
https://etherdelta.com/#PPT-ETH
55
https://www.bancor.network/discover
Page 30/73

Sylve CHEVET
- Poor user experience and customer ignorance: buying tokens, storing them and
exchanging them is slow and difficult for laymen. Even buying Cryptokitties, a
“user-friendly” blockchain collectibles game where users buy digital cats stored
on the blockchain, needs the user to install a chrome plugin, buy ether, store his
passwords securely, understand how the game works, etc. All these steps are a
clear deterrent to regular customers who are 1) unsure about the technology 2)
wary of holding a digital asset with no customer protection whatsoever. The
Cryptokitties team has shared insights on how difficult customer education was
for blockchain-native assets as they were often asked “where is my cat? Where
is it stored? How can I trust you” on social media.
- Unclear legal framework: see the next section.
Despite these limits and the general weariness that comes with emerging technologies
(Famous investor Warren Buffet famously declared “Stay away from it. It's a mirage,
basically...”56) development teams, the blockchain community, tech experts and some
investors are bullish on blockchain57 for it allows the development of new business
models, among which the “token economy” that can directly compete with tech giants
and attack their network effects.
VII Crypto-assets and Non-Fungible Tokens
56
https://www.cnbc.com/video/2014/03/14/buffett-bitcoin-a-mirage.html
57
https://cryptobriefing.com/five-famous-investors-turning-bullish-on-blockchain/
Page 31/73

Sylve CHEVET
a. Rare Pepes: the first crypto-assets for art
One of the first crypto asset to gain significant traction are Rare Pepes. The concept
revolves around an Internet meme about a green frog called “Pepe”, created by Matt
Furie and originally featured in online comic series “Boy’s Club”58. The original meme
consisted in Internet users creating very obscure images of the Pepe character in
different scenarios with the end goal of providing the community with a “Rare Pepe”, a
Pepe set in a very original setting with elaborate pop culture references. Originally a
tongue-in-cheek Internet phenomenon, since the notion of a “rare” Pepe is nullified by
the publication of the pepe on the Internet, a blockchain system was created to provide
users with actual scarcity, allowing them to buy, sell and trade Rare Pepes.
Example of Rare Pepes (source: http://rarepepedirectory.com)
58
https://www.dailydot.com/unclick/4chan-pepe-the-frog-renaissance/
Page 32/73

Sylve CHEVET
Curated Rare Pepes are issued as tokens via the Counterparty59 platform, a
decentralized exchange run on the Bitcoin blockchain. Each of the Rare Pepe featured
on the screen capture has a finite set of tokens linked to it that can be bought by users.
The whole creation process is the following:
- A creator issues a Rare Pepe on http://rarepepedirectory.com at a cost,
- The curators decide if the Rare Pepe is “rare enough” to be featured on the
website,
- If it is, the Rare Pepe image will be featured on the website as part of a series,
and put up for sale,
- Users can buy tokens linked to Rare Pepes, and there is a finite quantity of token
for each one,
- The “certificate of ownership” is the token and, like a bitcoin, it is impossible to
fake a token or create another one without the network knowing. Essentially the
token linked to a Rare Pepe acts as a proof of ownership and a digital signature
from the original creator.
It should be noted that the actual image is not stored on the blockchain but on the
www.rarepepedirectory.com servers, as is the case with all digital art on the blockchain.
Here the blockchain only acts as a convenient, liquid, unhackable proof of ownership.
The token-based model for digital art allows developers to build applications that may
use the art for other purposes, for example a game. Rare Pepe Party60 is a card game
59
https://coincentral.com/counterparty-xcp-beginners-guide/
60
http://rarepepe.party/
Page 33/73

Sylve CHEVET
under development where Rare Pepes are integrated in the combat system. Users
create their decks with the Rare Pepes they actually own (or more precisely, with the
tokens linked to the Rare Pepes they own).
It was possible before Rare Pepes to manage digital art or digitized art pieces, through
proofs of ownership and digital rights management (DRM) which is essentially an
access control system to restrict usage of a digital asset. DRM is an essential part of
creative industries that precludes user from copying content ad infinitum. Many
techniques are used to restrict illegal copying of digital content, for video games it can
be forcing the user to register online and prove he has indeed bought the game, for
DVDs encrypting the content of the disc and restricting decryption to approved devices,
for e-books DRMs are embedded in the text and limit the number of device it can be
read on. The DRM is not without complication as it concentrates power in the hand of
the publisher. In a famous occurrence Amazon deleted copies of 1984 from the library of
Kindle users without them knowing61. Opponents of DRMs refer to it as “digital
restriction management” as the DRM’s goal is indeed to provide a set of rules from
which the users cannot diverge, with possible complications. Some games bought online
now require permanent Internet connection to be played in order to authenticate the
user. The main issues raised against DRMs revolve around 1) possible monitoring of
user activity, as SONY was accused of62 2) concentrating power at the hand of the
61
https://mashable.com/2009/07/17/amazon-kindle-1984/#jZ8G1kwzuiq5
62
https://www.pcworld.com/article/125838/article.html
Page 34/73

Sylve CHEVET
publisher 3) limiting consumption of the content for the user who, in the end, does not
“own” the product.
Today, digital ownership, contrary to physical ownership, entails a set of rules such as
DRMs that make property more akin to a license usage. Although DRM aims to protect
creators from illegal copying of their works, it also creates a barrier to entry a market as
managing a DRM system requires dedicated staff and equipment. Blockchain
technology could provide another standard for DRM management, and SONY has
launched an initiative in this direction63.
b. Cryptokitties, the ERC-721 standard and sound digital goods
Axiom Zen, a Vancouver-based startup, proposed a new standard for Ethereum called
ERC-721 to create sound digital goods. The ERC-20 standard provided the technological
framework and best practices for token creation and emission, likewise, the ERC-721
standard did the same for non-fungible token. The standard allows developers to create
digital asset that can exchanged and tracked on the blockchain. Although Counterparty
predates ERC-721, the latter is considered the reference for asset creation on the
blockchain because of the extended user base.
Axiom Zen then launched Cryptokitties in November 2017, a blockchain-based collection
game where users can buy, breed and exchange digital cats with unique traits randomly
generated by the original smart contract. Every 15mn Axiom Zen’s smart contract issues
63
https://www.coindesk.com/sony-eyes-blockchain-use-for-digital-rights-data/
Page 35/73

Sylve CHEVET
a new cat with specific characteristics that make it distinct from any other cats. The cat
is then sold to a buyer who then possesses the cat in the form of a token. It is very
much like owning a bitcoin, with the twist of the cryptokitty being unique with special
properties. Embedded in the cat’s code is the equivalent of its “DNA”, governing the
rules of his appearance (colour, type of eyes, whisks, etc.) and attributes it can pass on
to its offspring if another cats mate with it. If two cats mate a third will be created,
inheriting characteristics from its parents. This cat (more precisely the token linked to
the cat) is also stored on the blockchain.
Examples of Cryptokitties.
Page 36/73

Sylve CHEVET
Like Rare Pepes, the images are not stored on the blockchain. The cat’s DNA is
interpreted by Cryptokitties servers to show what the cat looks like64. Here, the proof of
ownership and the good owned are stored in two antagonistic fashion: the cryptokitty is
store on a centralised, private server paid for and maintained by Axiom Zen whereas the
proof of ownership is stored on the blockchain.
Cryptokitties quickly became a success and Cryptokitties transactions amounted to a
staggering 12% of all transactions on the Ethereum blockchain65. The most expensive
cryptokitty was sold for a whopping 250 ETH on November 2017 (roughly $100k at the
time). Cryptokitties raised considerable awareness about non-fungible tokens, which
resulted in venture capital firms a16z and USV investing $12 million in the company to
expand the product. A16z’s Fred Wilson 66declared: “Digital collectibles and all of the
games they enable will be one of the first, if not the first, big consumer use cases for
blockchain technologies.” Indeed, the Cryptokitties team was surprised67 by the type of
users Cryptokitties attracted, not only blockchain-savvy users but also regular people
drawn to the game primarily for the collecting mechanism and rather oblivious to the
blockchain-based system Cryptokitties runs on. This forced the Cryptokitties team to
provide learning material and reassure users that Cryptokitties is not a scam, what
blockchain is, etc.
64
https://news.bitcoin.com/crypto-collectibles-are-worthless-without-a-website/
65
https://qz.com/1145833/cryptokitties-is-causing-ethereum-network-congestion/
66
https://www.usv.com/blog/cryptokitties-1
67
Interview
Page 37/73

Sylve CHEVET
Like Fred Wilson we believe Cryptokitties is the first successful consumer use-case of
blockchain that does not use a commodity token. Even though the user base is still
limited68, with fewer than a thousand daily active users, Cryptokitties proved a
blockchain architecture can be an asset rather than a liability for a business.
c. New possibilities: crypto-composable and “living” assets
The possibilities offered by crypto-assets gathered a crowd of enthusiast who start
integrating blockchain in their business model. Left Gallery69, a German digital art
gallery, offers multimedia art to be purchased and managed through a blockchain. Much
like Cryptokitties, a user can buy a song a have a way to prove he owns the asset.
New asset classes are emerging called “crypto-composables”. The concept is to
combine a cryptoasset with another one or use the cryptoasset to create a new one. For
example, Kitty Hats70 allows users to give their Cryptokitties hats (the hat is an ERC-20
token linked to cryptokitty), or DADA linking art pieces to Cryptokitties71.
68
https://www.ccn.com/cryptokitties-isnt-as-popular-as-you-think-it-is/
69
https://left.gallery/#
70
https://www.kittyhats.co/
71
https://medium.com/@PowerDada/cryptokitties-collect-cryptoart-925b2b01879e
Page 38/73

Sylve CHEVET
Cryptokitties with linked art (DADA, 2018)
Several marketplaces have emerged to trade cryptocollectibles, such as Rare Bits72,
Super Rare73, and Open Sea74, they provide a decentralised distribution system that
essentially bypasses historical art galleries or traditional auctions. DADA75 is a social
network where users communicate with crypto-art. A real auction for crypto-art was
held at the Rare Digital Art Festival76. Codex77 aims at providing the art market with a
decentralized ledger for art and collectibles, tracking art pieces, jewellery, watches, etc.,
partnering with auction houses.
72
https://rarebits.io/
73
https://superrare.co/
74
https://opensea.io/
75
https://dada.nyc/home
76
https://www.theparisreview.org/blog/2018/01/23/much-pepe-scenes-first-rare-digital-art-auction/
77
https://www.codexprotocol.com/
Page 39/73

Sylve CHEVET
The natively digital art scene is developing in a new direction with the help of non-
fungible token, providing what could be a viable business model for the ecosystem.
So far, we have focused on natively digital art, but the innovation provided by ERC-721
tokens, the distributed ledger system for non-fungible assets, can be extended to
physical assets. In an article78, Jill Carson, a blockchain analyst, theorizes that blockchain
technology is valuable if 1) the user is dealing with assets 2) the assets need to be
exchanged 3) transactions are complicated or require meddlesome third parties.
Transaction costs and necessities can reduce a market’s liquidity: for example selling a
house requires third parties (brokers, notaries) that will facilitate the transactions either
physically or legally. Art pieces are difficult to authentify and require experts that are
paramount to the ecosystem’s viability. The downside is that 1) a majority of users can
be priced out of the market 2) data is extremely valuable and erects effective barriers to
entry for top players, such as auction houses who get a commission for providing
liquidity to the market. Blockchain could address this issue with tokenized assets who
could be easily tradeable on an exchange, and authenticity or compliance ensured
through smart contracts, applying the “fat protocol paradigm” with a unified shared data
layer. As an example, Harbor79, a blockchain startup, aims at “tokenizing” real-world
asset through the blockchain. The end goal is to bring liquidity to assets that are
historically hard to trade and expensive to track down, such as art, real estate, company
shares.
78
https://medium.com/@jillcarlson/always-start-with-the-assets-9b3dd1a9a656
79
https://harbor.com/
Page 40/73

Sylve CHEVET
Some projects highlight the possibilities offered by “tokenization” of real-life assets.
Flowertokens80 are tokens linked to actual living flowers, monitored 24/7 by cameras
and sensors. This use case can be considered pretty useless, but it shows how tokens
can be used to track and collect data about real-life assets, a Flowertoken is a unique
token linked to a specific flower, the token will carry information about the flower’s state,
identity, owner, lifespan, humidity rates, etc., and these data will be updated in real-time
with data fed from trusted Oracles (here, the Oracles are the sensors). The same
process can be applied to other assets, such as precious items. The implications for
supply chain and logistics are enormous: a buyer can know the exact origin of a product,
who manufactured it, which third-party had access to it. These data and metadata exist
today but are not leveraged because they are proprietary, usually owned by the
distributor, or not collected at all or sparsely: the manufacturer has part of the
information, the 1st intermediary has another part and so on, all the way down to the
retailer who sometimes has few information about the provenance of a good. With this
method, tuna was tracked on the blockchain from the fishing to the sale 81, ensuring the
respect of international fishing laws and the quality of the fish. NFTs have the potential
to automate supply chain in a way the current information technology cannot; data is
proprietary and usually messy, making reconciliation between actors tricky when they
want to share data. With blockchain, data is pooled, open and agreed upon by all actors
of the chain. The trick is to ensure that Oracles feeding the data are trustworthy and all
actors can access a global ledger to reconcile and automate logistics with smart
80
https://flowertokens.terra0.org/
81
https://www.wired.com/story/following-a-tuna-from-fiji-to-brooklynon-the-blockchain/
Page 41/73

Sylve CHEVET
contracts feeding of blockchain data. It could be possible for a museum to know exactly
which third-party damaged the art piece during an exposition, tracking the provenance
of a painting and other difficult use case for logistics today.
d. Limits to non-fungible tokens
As explained before, non-fungible tokens only attract a small crowd of passionate users.
But many caveats still preclude it from reaching a global audience:
- Public resistance to digital art: cryptocollectibles, despite their success, draw only
a small crowd of crypto-enthusiasts. For art pieces one key element is for the
user to enjoy it, either listen or look at it privately. Rare Pepes are confined on the
Rare Pepe directory, the user can download the picture, but it lacks a sense of
real ownership compared to a painting that can be framed and displayed in a
home. Displays for digital are not yet common, with a few companies providing
Internet-powered art screens, such as Meural82.
- Legal concerns: legal frameworks vary depending on the country, therefore
creating a global standard to tokenize art needs to take local legislation into
account. For instance author’s rights differ significantly between common law
and Germanic/Napoleonic law. In France, for example, moral rights are
“perpetual, inalienable and imprescriptible” 83 which is completely different from
82
https://meural.com/
83
Article L121-1 of French intellectual property code.
Page 42/73

Sylve CHEVET
the US intellectual property code where moral rights have a time limit 84. One
possibility is that consumer protection actually bans the usage of blockchain
technology to track or sell assets, or enforces higher customer protection
standards like SEC’s KYC for ERC-20 tokens.
- Blockchain-related issues: the limits we have encountered in part VI are also
applicable for crypto-assets.
This brings our technological primer to its conclusion. We will now lay down the
hypotheses we will work on for our value-chain analysis.
VIII Power and value chain in digitized creative industries
a. Creative industries and digitization
Creative industries are defined as industries revolving around the trade of artistic and
cultural products created by an artist or a group of artists is central to the industry, with
industries like cinema, visual arts, crafts, design, museums, architecture and books.
More specifically, the trade revolves around the usage and exchange of intellectual
property85. Listening to streamed music on Spotify involves an industry-wide process,
from the musician creating the music and signing a publishing contract with a major, the
major signing another contract with the distributor for streaming rights. The same goes
for buying and displaying a painting in one’s home, the buyer must comply with authors’
84
17 U.S.C. Ch. 3
85
Lash et al. (1994), Economies of sign and space, Sage p117
Page 43/73

Sylve CHEVET
moral rights and copyright licensing. Licensing and copyrighting, proofs of ownership are
the linchpin of creative industries. These industries have faced numerous evolutions,
among which digitization and online distribution, the first starting in the 80s’, the second
in the late 90s’.
Digitized art refers to art pieces created, stored, used and delivered digitally. This
definition encompasses every piece of art that can be put in a digital format: image,
sound, video games, video, etc86. The definition also entails that a physical art piece,
such as a painting, can be digitized and stored in digital form separate from the first one,
the digitized version is considered a different version of the physical asset, with its own
properties. Digitization refers to the process of converting an analogical or physical
source into a digital asset.
Digitization of media files predates the Internet; the first commercial Compact Disk was
issued in 1982 but the second movement consists of online distribution through Internet.
Tim Berners-Lee posted the first picture on the Internet back in July 1992 which set in
motion the new possibilities offered by the World Wide Web. Online distribution was
popularized by increasing bandwidth and storage capacities, along with standardized
compressed data formats like the MP3 audio format. This twofold process (digital
storage and online distribution) brought forward a set of complications for creative
industries along with new possibilities.
86
https://www.techopedia.com/definition/1467/digital-goods
Page 44/73

Sylve CHEVET
The music industry was one of the first industry to suffer greatly from this new trend for
it enabled a new type of exchange between users called peer-to-peer. Contrary to a
physical CD, it is possible to copy an audio file and give it to someone else without
losing the initial file. Digitization could have been a smaller inconvenience for the music
industry, since it would have required users to physically give each other a USB drive
with audio files on it, but online transfer through the Internet allowed users to send
music to virtually anyone, with no possibility of stopping it. With companies like Napster
popularizing illegal downloading of audio files, the music industry lost revenue at an
alarming rate, dropping from $14.6 billion in 1999 to $6.3 billion in 2009 87. New business
models emerged in 2010 from the industry-crisis such as audio streaming with
companies like Spotify or Deezer offering their user the unlimited access to a wide
catalogue of music they can listen to through the Internet88. Streaming is responsible for
a significant increase in revenue89, in 2017 the industry is estimated to have reached a
retail value of nearly $9 billion90.
Creative industries are still undergoing market evolutions due to digitization, some earlier
than others, or with greater or lesser impact: the cinema industry has grown unabated
despite illegal downloading because of the importance of physical screening but
streaming allowed Netflix to become a strong contender in the cinema distribution
industry, Steam is the market leader of PC game distribution91. Other industries, such as
87
http://money.cnn.com/2010/02/02/news/companies/napster_music_industry/
88
www.spotify.com
89
https://www.riaa.com/wp-content/uploads/2016/03/RIAA-2015-Year-End-shipments-memo.pdf
90
https://www.riaa.com/riaa-releases-2017-year-end-music-industry-revenue-report/
91
https://www.pcgamesn.com/steam-revenue-2017
Page 45/73

Sylve CHEVET
the performing art industries, have seen few movements in their value chains due to the
importance of live experience. The 2017 European commission analysis of creative
industries92 offers a compelling framework of analysis about how digitization has
changed creative industries and their value chain, and we will leverage the analyses
offered to include blockchain technology.
b. Value chain of creative industries
The 2017 European Commission paper we cited offers the following framework, inspired
by the culture cycle analysis of a 2009 UNESCO study93 for value-chain analyses.
92
European Commission, Mapping the Creative Value Chains, a study of economy of culture in the digital
age (2017)
93
UNESCO FCS http://www.uis.unesco.org/culture/Documents/framework-cultural-statistics-culture-
2009-en.pdf
Page 46/73

Sylve CHEVET
Mapping the Creative Value Chains (2017)94
The core functions are usual, as in any line of business, but creative industries are more
specific in the sense that support functions and ancillary goods are fundamental for the
industry to be sustainable. Authentication is key in evaluating a piece of art, on the
present framework it would fit into “management/regulation”. As the paper mentions:
“However, the concept of (economic) value creation is not always as straightforward in
creative value chains, as it is in many industrial value chains. This is the case, for
example, in the subsector of cultural heritage. Creative/cultural value chains therefore
can have a different shape and behaviour than that of a production-based industry like
cars or electronics. “95
For visual arts, the paper offers the following value-chain map:
94
See Annex for the full detail of the mapped categories
95 95
European Commission, Mapping the Creative Value Chains, a study of economy of culture in the
digital age (2017, p. 36
Page 47/73

Sylve CHEVET
Mapping the creative industries (2017) p. 45
We find this mapping compelling for it encompasses key aspects and characteristics of
creative industries and, as such, we will use it as a base to assert in which element of
the value chain can blockchain bring about significant disruption.
The conclusions of the study are the following:
- Digitization increased powers of online distributors, essentially cutting their share
out of brick-and-mortar retailers, with an increased bargaining power. This is
especially true for streaming services and platforms in music, film and video
where they are now challenging production companies with their own original
Page 48/73

Sylve CHEVET
content (Netflix), Their increased bargaining power also stems from their being
the first layer of interaction with clients, marshalling high-quality consumer data
for specific targeting to which other actors in the value do not have access to.
- Barriers to entry have been lowered for creators thanks to cheaper digital tools.
These tools allow them to essentially internalize processes that were before
devolved to producers (such as video editing, photography). Nevertheless,
creators have growing concerns about their bargaining power, as the study
concludes: “Individual creators’ bargaining position vis-à-vis online intermediaries
is at least as weak, thus making it very difficult for most creators to negotiate a
sustainable remuneration alone.”96
- Producers/publishers have earned the lion’s share of most creative industries
with increased bargaining power thanks to bigger markets opened up by online
distribution and more competition between creators. They essentially deal with
distributors on behalf of the creator.
The study concludes that two “gatekeepers” have been strengthened on the value
chains thanks to digitization: publishers/producer and distributors, each one trying to go
up (or down) the value chain to earn more bargaining power, publishers/producer with
dedicated distribution channels (such as Disney starting out their streaming service) and
distributors producing their own exclusive content, with Netflix being the best example.
Digitization may have not entirely reshaped value chains, since some of them such as
9696
digital age (2017), p. 215
Page 49/73

Sylve CHEVET
cultural heritage and performing arts where the “digitisation rate”97, the ratio of revenue
from digital sources over total revenue, is the lowest due to the importance of physical
display and live experience. Digitization has nevertheless made value chain in creative
industries them more complex, granting even more power to the gatekeepers as they
provide rights management and distribution framework to all the actors, like an industry-
wide central hub98.
IX Blockchain technology and power shifts
We will break down the categories listed on the stylised mapping shown earlier and
analyse where blockchain can trigger significant disruption.
a. Creators
Historically, barriers to entry are low for creators in many creative industries. The only
element precluding the emergence of more creators is financial capital, the ability to
finance an artistic activity, especially for younger artists, and the access to
publishers/distributors. Now, creators can create content more easily (for instance with
open-source software) and can distribute directly or even self-publish, bringing down
the cost to entry the market. For natively digital artists (producing already-digitized
content), it can be difficult to monetize their content, especially for visual arts where
97
Salmon, K. (2015), “Have the cultural and creative sectors found the formula for development in the
digital age?”
98
It should be noted that we are talking about activities here rather than actors. Distributors can have a
publishing arm, and vice-versa.
Page 50/73

Sylve CHEVET
artists have relied on commissions, crowdfunding or websites such as Patreon99 where
fans donate a monthly sum to have access to exclusive content from the creator. The
market structure of creators is heavily polarized, with a handful of artists gaining
significant recognition and capturing most of the value of the market.
Blockchain can bring liquidity to this space first through cryptocurrencies: they can be
used as a separate means of payment to bypass commissions from donation platforms.
Then, the potential of non-fungible tokens can be deployed to sell digital art.
Cryptopunks100 are a series of algorithmically designed pixel-art images that are issued
and sold on the blockchain for users to buy and trade. The creator directly benefits from
the ability to buy these artworks along with a proof of ownership.
Smart contracts can also help creators claim a higher percentage of the revenue
sharing. Smart contracts can be used for the creator to get a % of each subsequent sale
of his artwork, allowing him to track and regulate the usage of his art, following author’s
rights legal framework, and providing a second stream of income. According to the EU
commission study, visual artists get 50% of the initial art sale101 and 4% of the
subsequent income stream from the following sales102. It should be noted that this only
works for artists who sell their arts through promotion galleries and auction houses,
which means most creators are excluded from this second stream of income. Indeed,
99
https://www.patreon.com/
100
https://www.larvalabs.com/cryptopunks
101 101
digital age (2017), p. 57
102 102
digital age (2017), p. 57-59
Page 51/73

Sylve CHEVET
resale rights in the European Union are regulated following a 2001 European directive 103
according to which Member States can define a minimum value for the artwork to
qualify for the “droit de suite”. with a maximum of 5% for the creator. In the US the “first
sale doctrine” essentially precludes the author from benefitting the legal framework of
the droit de suite104.
Creators also heavily rely on third-parties to manage their rights, through copyright
collectives (who fall in the category of support functions). These copyright-collecting
societies often hold a monopoly due to cultural policies aimed at promoting national
culture, in other countries they are free to compete (like in the US). The third-parties act
on behalf of the artist to manage his copyrights, collect his royalties and enforce the
respect of his author’s rights, collecting a managing fee in the process. Blockchain
technology, through the use of smart contract, could allow creators to:
- Directly manage their relationships through with diffusers or buyers,
- Pay an automated blockchain company to scout for representation of their works
and automatically claim their royalties,
- Have a clearer access to the diffusers’ data, bypassing production/publishing. In
music, for example, majors act as negotiators with streaming services, but artists
seldom have clear understanding of,
103
https://eur-lex.europa.eu/legal-content/FR/TXT/?uri=celex%3A32001L0084
104
https://www.congress.gov/bill/113th-congress/senate-bill/2045
Page 52/73

Sylve CHEVET
- Self-publish more efficiently with access to open-source blockchain-based tools
such as decentralized exchanges, smart contracts and audience analysis to
internalize more activities currently performed by publishers or distributors,
- Rebalance the information asymmetry that currently allows publishers to earn the
lion’s share in contractual agreements thanks to the shared data ledger.
b. Producers and publishers
Publishers play three distinct roles: financing the creators’ activity, managing the rights
and providing infrastructure in the creation of the creative good (for instance typesetting
for a book, marketing a concert). Digitization has reduced the role of publishers in
creative roles; indeed, majors in the music industry make more money managing rights
than creating CDs. The market structure of publishers is usually an oligopoly with
competitive fringes, with few major players and numerous smaller ones.
In specific industries the upfront cost of creating a creative good is so great that
producers need to actively finance the creation of a good, the cinema industry being the
epitome of it, as a highly capital-intensive industry. When heavy financing is needed,
with either public of private financing, either for movies or large-scale art pieces,
producers have fair share of control in the creation process, the creation team needs to
secure financing first before doing most of the work. In the cinema industry producers
have a very high market power, with a few companies (Walt Disney, Fox, Sony,
Paramount) controlling both financing, marketing and providing creation tools for the
Page 53/73

Sylve CHEVET
teams. Producers have a much more hands-on approach in the cinema industry than in,
for example, the book industry, where the good requires less capital to be created.
With blockchain technology the rights management and financing activities could be
reshaped, with creators internalizing some processes.
Financing can be performed more easily through a token sale: a creation team issues a
token linked to the screening of a movie, a song. Investors buy the token if they believe
the movie will successful and the creation team, with the revenue from the sale, will buy
the necessary equipment and hire the cast. They might contract a producer but for
specific actions (marketing, access to talent) rather than signing a contract
encompassing all production activities. Here, blockchain technology could mean that
vertical integration is less attractive for producers since creators can have access to a
stack of services to contract without resorting to contract with a single point of entry.
With a smart contract a creation team could sell its movie directly to distributors and
streaming platforms on its own terms.
Nevertheless, the market power of producers/publishers will remain high in “complex
good” creative industries such as cinema or television where financing is the first
condition of emergence of a cultural good, even if blockchain technology can help bring
more capital and transparency in the creation process through a “token sale” model.
Rights management can be entirely outsourced on the blockchain, to the dismay of
producers/publishers for this activity will be internalized by creators. Projects like Ujo105
105
https://ujomusic.com/
Page 54/73

Sylve CHEVET
and Jaak 106aim at providing a “rights management” platform for artists on which they
can issue licenses, manage rights, goodies and even concert tickets. Akin to the “fat
protocol” showed in VI.e, rights management will be part of a shared data layer that any
competitor can access rather than one actor centralizing the data. For cinema, for
example, we can have a creation team issuing a token representing the screening of its
movie. To see the movie, one token must be purchased and then destroyed. The
creation will sell the tokens which will be distributed to distributors on streaming
platforms. Every time a user will watch the film, the distributor will buy one token from
the creation team. The token model means that another streaming service can come
and buy the token to get access to the movie and offer it to its users. Exclusivity
contracts can still be implemented but at a much higher cost since competing
distribution service can come and provide the exact same service.
It is now expensive to create tailor-made contracts and manage them, feasible yet
expensive because a central entity is indeed to manage it and enforce clauses. Smart
contracts circumvent this issue with the “code is law” doctrine. A creation team can sign
a contract to receive 50% of every sale of their license but need to trust the producer
and the numbers he provides. In case of a doubt the creation team can ask an audit at a
high cost, sometimes prohibitive, which essentially shifts the bargaining power in favour
of the producer. With a smart contract the creation team will link their Bitcoin account to
program running on a blockchain, the program itself plugged to the distributors’ sales
record (which can be stored on the blockchain) to automatically calculate everyone’s
106
https://jaak.io/
Page 55/73

Sylve CHEVET
share of sale. Rather than facing long payment delays, if copyright collectives need to
collect and distribute royalties, a direct link can be created between the creator and user
The activity deeply impacted by blockchain is indeed rights management.
c. Distribution
Distribution is an increasingly monopolistic market, contrary to publishers where smaller
players are numerous. Here the vast majority of the market share is captured by a
handful of distributors, either retailers, streaming websites, online marketplaces. For
books, Amazon dominates the distribution market by far, and is able to leverage its
bargaining power to coerce publishers into agreeing to favourable terms 107. They have
access to troves of data leveraged to create powerful matching algorithms and network
effects. Contrary to a producer, which essentially bets on the success of a movie, a
book, the distributor is hedged against the risk of failure with a “long trend”-type, or at
least a diversified portfolio of works to distribute, which is less capital-intensive than to
finance them.
Distributors are more likely to be less shaken by blockchain than producer, since the
delivery of the good and the storage cannot be achieved entirely on the blockchain,
contrary to rights management, and the network effects are so great that they are likely
to stay unchallenged. Netflix is a superior streaming solution thanks to the intensive
107
https://www.latribune.fr/technos-medias/20141113tribc4a04b94b/livre-numerique-fin-du-conflit-
entre-hachette-et-amazon.html
Page 56/73

Sylve CHEVET
research and capital expenditures leveraged on creating a robust video streaming
solution. Even with a shared data layer of shows, the actual delivery of the good is still
tricky and less prone to a pure and perfect competition. With a shared data layer, other
competitors will have access to a large portfolio of movies, but delivering the movies is
the heart of the distribution activity. As explained in VII.c, blockchain and NFTs can bring
more transparency in logistics and hack-proof traceability of assets. This is likely to
equalize the information asymmetry in favour of distributors but is unlikely to make the
delivery actually cheaper. The price will be cheaper on average since all actors will have
access to the same information, so customers are less likely to pay a higher fee for
distribution. Delivering a book will still require a truck and a delivery man, streaming a
movie still requires bandwidth, storage capacity and resilient algorithms. Nevertheless,
we can imagine a peer-to-peer streaming solution. Users will watch movies stored on
other users’ computers and the users sharing their movies will be rewarded in a specific
cryptocurrency. This system is likely to be less efficient than a centralized Netflix-style
distribution system, but it can provide an alternative distribution markets channel
content that would not otherwise be financially viable to distribute, even in digital format.
Platforms such as Steam, Netflix and Amazon are likely to retain their market power
because blockchain cannot provide logistics support like Amazon or compete with a
datacentre for efficient data transfer. It otherwise can provide clear traceability on the
market, allowing new actors to emerge to serve fringe markets, creating an oligopoly
with competitive fringes, much like the production/publishing ecosystem where 80% of
the customers are served by a handful of leaders, and 20% by numerous smaller
distributors. What is interesting is how tailor-made contracts from creators will coerce
Page 57/73

Sylve CHEVET
incumbent distributors to be more open in how they manage the business relationship.
The possibility for creators to completely bypass distributors through P2P digital
distribution on which they can track their sale will be a clear argument for distributors to
control their margins and lower the cost in order to compete with this alternative.
Auction houses for art sales are an obligatory bottleneck for art sales since they act as a
platform between sellers and buyers with every transaction verified by experts. A
decentralized exchange could provide the exact same service (although not the
experience) at virtually no cost except computing power and electricity to run the
transactions on blockchain. Anyone could set up an auction house and run a sale,
regardless of how many experts the auction house has access to since it will be
outsourced on the blockchain.
Another evolution comes with second-hand sales. For video games, retailers have
created a second-hand market to which producers and publishers do not have access.
Retailers could sell a game 50€, buy it back for 25€, sell it again for 40€ and go on for as
long as customers are willing to buy. The clear benefit for retailers is to retain all the
margin and not share any revenue with the other actors of the value chain. Producers
and other distributors have faced this problem with online distribution and DRMs: a
game downloaded online cannot be sold again by the buyer, and he cannot lend it.
With NFTs, it is possible to imagine a second hand-market for digital art: a user can
“buy” a song, or the token linked to it, which gives him access to a streaming service for
the song. The user can then sell back the song to another user, and so on. But contrary
to the second-hand market for video games we saw, a revenue sharing scheme can be
embedded in the token and benefit other actors in the value chain than the distributor. If
Page 58/73

Sylve CHEVET
I were to buy “crypto song” for 1 bitcoin, the 1 bitcoin will be split between different
actors (producers, publishers, distributors, creators). If I sell the song again, this time for
2 bitcoins, the 2 bitcoins will also be shared between the stakeholders according to the
same scheme. This secondary market will not necessarily hurt the distributors’ market
power but will add complexity to the distribution schemes. One key element is our
example is the ability to play the song. I, the user, buy the token but am only interested
in the song, I want to be able to listen to it. The song can be stored on another person’s
computer, the creator’s servers or the distributor’s but it does not matter, the only
important matter is that the user can only access the song if he possesses the adequate
token.
Digital art and goods will greatly benefit from this scheme, with protocols like GIFTO108
allowing users to send redeemable digital gifts tied to cryptocurrencies. As seen by the
Cryptokitties craze, the second-hand market is likely to bolster adoption of digital goods
by users as it allows the digital good to retain value even after it is distributed. Most
likely, streaming and token-based distribution will be intertwined distribution models,
with holders of exclusive tokens will have access to exclusive content.
Along with resale capabilities, interoperability will be the key element for online
distributors. With each distribution platform aiming at locking in its customers (for
instance with different consoles for video games, the same for e-readers), the potential
for industry-wide open-protocols is enormous. The only examples available so far are in
the video game industry: we have seen how games mix different NFTs to play with them
108
https://gifto.io/
Page 59/73

Sylve CHEVET
in-game. Decentraland pushes the idea even farther with a VR game where assets are
stored on the blockchain109.
This, plus the aforementioned elements, will most likely result in the distribution scheme
shifting from a quasi-monopolistic state to an oligopoly with competitive fringes, killing
many third-parties in the process and bolstering sales through increased liquidity.
d. Blockchain: a new support function
It can be argued that blockchain is, in itself, a support function for creative industries,
providing a stack of services (authentication, traceability, exchange) for all actors. We
have showed how blockchain can impact producers, distributors and creators but a
better explanation would be to argue that blockchain can be an actor of the ecosystem.
Authentication and traceability are important functions that bring value to assets in
creative industries, and such a function can be outsourced on the blockchain. In order to
prove that one has bought a painting from Chagall one need to provide a certificate of
authenticity, and such a certificate can be faked, and is expensive. Traceability, with
projects such as the Codex Protocol110 or Verizart111 (or Monegraph112 and Ascribe113 for
digitally-signed proofs of ownerships) will provide a cheap and easy ledger to track
109
https://decentraland.org/
110
https://codexprotocol.com/#whitepaper
111
https://www.verisart.com/
112
https://monegraph.com/
113
https://www.ascribe.io/
Page 60/73

Sylve CHEVET
valuable items, their prices and availability, to be used by third parties such as auction
houses. This service will not be overseen by an actor already present in the creative
value chain, a blockchain is neither a production, creation or distribution function but a
support function. The mapping provided by the European Commission paper can
therefore be expanded by including a blockchain stack in the list of potential actors in a
value chain.
Third parties such as copyrights collective are likely to only work as legal counsel since
payment can be automated directly from retailers to creators, with every actor along the
way getting his share according to the agreed-upon sharing scheme coded in the smart
contract. Blockchain fundamentally decreases the cost of transaction with automation
and open access to a consensus-based data layer. This new support function will, like
the internet now, constitute a brick from which other actors can build new application.
X Conclusion
To conclude, we have shown that blockchain technology can bring significant evolution
in creative industries because they are mostly based on rights management, licensing
and data management of digitized and digitizable information goods, elements
blockchain architecture can help manage in a decentralized, automated fashion.
Blockchain technology has great potential to compete with existing Internet-based
business models, offering a shared data layer that could bolster competition at the
application level rather than on the data level, giving more power to users and creators
and increasing competition for third-parties. The blockchain technology is paving the
Page 61/73

Sylve CHEVET
way for new business models based on the issuance and the management of a token by
a team of creators, either to use a service or have access to a digital good. This
framework provides a viable business model for Internet-based art, such as GIFs, videos
and memes that, so far, have failed to find a viable monetizing scheme due to the
absence of scarcity.
We believe that blockchain will compete and not replace centralized architectures or will
work in parallel, as of today, since the scaling problems of blockchain and the
governance issues we mentioned in part VI are inherent to the very design of blockchain
networks. As for software companies, there exist companies that operate in the standard
licensing model, and others that capitalize on open-source protocols, with email systems
for example. Iansiti and Lakhani provide a comparison with the TCP/IP protocol on
which most of the internet is based today114. They show how long the adoption curve
was, about 30 years, to finally become an almost invisible cog that holds together the
Internet and Internet-based companies. Much like TCP/IP, blockchain will provide tools
for companies to leverage and build new services, reshaping existing industries and
creating new services. Blockchain might become ubiquitous, and most users will not
even notice it, like TCP/IP. The authors conclude: “TCP/IP unlocked new economic
value by dramatically lowering the cost of connections. Similarly, blockchain could
dramatically reduce the cost of transactions”.
114
Iansiti & Lakhani (2017), The Truth About Blockchain, https://hbr.org/2017/01/the-
truth-about-blockchain
Page 62/73

Sylve CHEVET
Carlota Perez’s concept of “technological paradigm”115 is a compelling analysis tool in
the case of blockchain: a technological paradigm is a technological in the Kuhnian
sense116, not only encompassing changes circumscribed to the technology but new best
practices, legal framework and social dynamics inherent to the technological paradigm.
If the creative industries’ revolution with digitization stems from the Information
revolution of the early 2000s, the blockchain technology can very much provide the set
of conditions for the next technological paradigm shift. And much like the current
Information technology paradigm is competing with the analogic paradigm of the
previous years, so will the blockchain paradigm.
115
Perez, Technological Revolutions and Financial Capital (2002)
116
Kuhn (1962), The Structure of Scientific Revolutions
Page 63/73

Sylve CHEVET
XI Bibliography
a. Books
Perez, Technological Revolutions and Financial Capital (2002)
Busson & Evrard (2013), Les Industries Culturelles et Créatives
b. Research papers
Buterin (2013), A Next-Generation Smart Contract and Decentralized Application
Platform, https://github.com/ethereum/wiki/wiki/White-Paper
Ciriani & Lebourges (2017), The Market Dominance of US Digital Platforms: Antitrust
Implications for the European Union
De Filippi (2016), The invisible politics of Bitcoin: governance crisis of a decentralised
infrastructure
De Vries Joule (2018) Bitcoin's Growing Energy Problem,
http://www.cell.com/joule/fulltext/S2542-4351(18)30177-6
European Commission (2017) Mapping the Creative Value Chains, A study on the
economy of culture in the digital age
Iansiti & Lakhani (2017), The Truth About Blockchain, https://hbr.org/2017/01/the-
truth-about-blockchain
Lash et al. (1994), Economies of sign and space, Sage p117
Page 64/73

Sylve CHEVET
Rothwell, Richard (5 August 2008). Creating wealth with free software. Free Software
Magazine.
Satoshi Nakamoto (2008), Bitcoin: A Peer-to-Peer Electronic Cash System
Salmon, K. (2015) Have the cultural and creative sectors found the formula for
development in the digital age?
c. Articles
Cointelegraph
- Blockchain to Change the World Art as We Know it,
https://cointelegraph.com/news/blockchain-to-change-world-of-fine-arts-as-
we-know-it
Hackernoon
- Why mining pool concentration is the Achilles’ heel of Bitcoin?,
https://hackernoon.com/why-mining-pool-concentration-is-the-achilles-heel-of-
bitcoin-ce91089ce1f
- Ten Years In Nobody Has Come Up with a Use Case for Blockchain,
https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-
for-blockchain-ee98c180100
- The Bitcoin vs Visa Electricity Consumption Fallacy,
https://hackernoon.com/the-bitcoin-vs-visa-electricity-consumption-fallacy-
8cf194987a50
Page 65/73

Sylve CHEVET
Medium
- A Brief History of Blockchain, https://medium.com/@jillcarlson/a-brief-history-
of-blockchain-b674dc6f97c
- Always Start with the Assets, https://medium.com/@jillcarlson/always-start-
with-the-assets-9b3dd1a9a656
- Blockchain Explained — The Basics of Blockchain and How it Might Affect IoT,
https://medium.com/iotforall/blockchain-explained-the-basics-of-blockchain-
and-how-it-might-affect-iot-84367ac7f61a
- Cryptokitties Collect Crypto Art, https://medium.com/@PowerDada/cryptokitties-
collect-cryptoart-925b2b01879e
- Decentralized and Trustless Crypto-Paradise Is Actually a Medieval Hellhole,,
https://medium.com/@kaistinchcombe/decentralized-and-trustless-crypto-
paradise-is-actually-a-medieval-hellhole-c1ca122efdec
- ICOs, You’re Scammy and You Know It, https://tokeneconomy.co/icos-youre-
scammy-and-you-know-it-62c104dbfabb
- Infrastructure Matters, https://medium.com/@jillcarlson/infrastructure-matters-
e444180dc1d2
- Killer Assets not Apps, https://medium.com/@jillcarlson/killer-assets-not-apps-
50b41d3cbefc
- The Playful Paradigm Shift, https://medium.com/@jacobscott/the-playful-
paradigm-shift-4bf35d9d1d11
- Understanding Ether VS Gas, https://medium.com/sunnya97/understanding-
ether-vs-gas-82ce2f1dc560
Page 66/73

Sylve CHEVET
New York Times
- https://www.nytimes.com/2016/05/22/business/dealbook/crypto-ether-bitcoin-
currency.html?_r=1
Slate
- Explaining Bitcoin Split into two Cryptocurrencies
http://www.slate.com/blogs/future_tense/2017/08/04/explaining_bitcoin_s_split
_into_two_cryptocurrencies.html
Techcrunch
- ICOs Delivered at least 3-5x More Capital to Blockchain Startups than VC Since
2017, https://Techcrunch.com/2018/03/04/icos-delivered-at-least-3-5x-more-
capital-to-blockchain-startups-than-vc-since-2017/l
- The TAO of the DAO or how the Autonomous Corporation is Already Here,
https://Techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-
autonomous-corporation-is-already-here/
The Paris Review
- How Much for That Pepe? Scenes from the First Rare Digital Art Auction,
https://www.theparisreview.org/blog/2018/01/23/much-pepe-scenes-first-rare-
digital-art-auction/
Usbek & Rica
Page 67/73

Sylve CHEVET
- Comment les Blockchains peuvent sauver la culture,
https://m.usbeketrica.com/article/comment-les-blockchain-peuvent-sauver-la-
culture
Wired magazine:
- Blockchain Follows Tuna from Fiji to Brooklyn,
https://www.wired.com/story/following-a-tuna-from-fiji-to-brooklynon-the-
blockchain/
- The Inside Story of Mt. GOX, Bitcoin’s $460 Million Disaster,
https://www.wired.com/2014/03/bitcoin-exchange/
- The Rise and Fall of Bitcoin (2011),
https://www.wired.com/2011/11/mf_bitcoin/all/
- Where could Bitcoin Succeed as a Currency? In a failed state (2018)
https://www.wired.com/story/where-could-bitcoin-succeed-as-a-currency-in-a-
failed-state/
d. Other
A16z
- https://a16z.com/2017/09/28/cryptocurrencies-networks-tokens/
- https://a16z.com/2018/01/21/mental-models-tokens-crypto-trends/
GitHub
- https://github.com/ethereum/EIPs/blob/master/EIPS/eip-20.md
USV
Page 68/73

Sylve CHEVET
- http://www.usv.com/blog/fat-protocols
- https://www.usv.com/blog/cryptokitties-1
- http://joel.mn/post/104755282493/the-shared-data-layer-of-the-blockchain
- http://joel.mn/post/104755282493/the-shared-data-layer-of-the-blockchain
Youtube
- An Introduction to Crypto, https://youtu.be/2dgdGWyJoK4?list=WL
- Augur - How A Decentralized Prediction Market Works,
https://www.youtube.com/watch?v=yegyih591Jo
- Blockchain 101 – A Visual Demo,
https://www.youtube.com/watch?v=_160oMzblY8
- How Bitcoin Works Under the Hood,
https://www.youtube.com/watch?v=Lx9zgZCMqXE
- What is a Smart Contract? https://www.youtube.com/watch?v=qdoUpGg_DpQ
Page 69/73

Sylve CHEVET
XIII Annex
a. Detail of creative industry mapping
Page 70/73

Sylve CHEVET
XIV Glossary
Block Group of transaction stored on a blockchain
Blockchain Decentralized data storage and transfer protocol operating
without any central authority.
Cryptocurrency Currency issued and secured by a blockchain.
Cryptoasset Non-fungible asset stored on a blockchain.
Cryptocollectible
dApps Decentralized applications, a piece of software running on a
blockchain.
Digital asset Object that exists in a digital format with a specific right to
use. Example: a piece of proprietary software, a copyrighted
MP3 song, an e-book issued by a publisher, etc.
Hash function Compression function that is easy to calculate but nearly
impossible to reverse-engineer, meaning that one cannot
guess the initial inputs with the result.
HODL / Hodler The act of holding a token or a cryptocurrency in the
prospect of making a profit. HODL is an acronym for “hold on
for dear life”, a popular saying by blockchain enthusiasts
facing losses on their cryptocurrency investments.
ICO Initial Coin Offering: creation and distribution of a token,
similar to a company offering stocks in an Initial Public
Offering.
Page 71/73

Sylve CHEVET
Metadata Literally “data about data”, specs of data embedded inside a
piece of data (an image, a sound) giving information about
where it was issued, how it was used, etc.
Miner/Mining Agent providing computing power to a blockchain network in
exchange for the network’s cryptocurrency.
Open-source Type of software that is developed, maintained and
distributed to public free of charge or licensing. Open-source
software are often developed in open collaboration between
several software developers. Example: Linux operating
system, Mozilla Firefox, VLC. See St. Laurent, Andrew M.
(2008). Understanding Open Source and Free Software
Licensing.
Oracle Third-party data source that will feed smart contracts.
Pool (of miners) Concentration of miners who coordinate their efforts to
maximise their computing power and splitting the
cryptocurrency rewards according how much computing
power was provided.
Proof-of-stake
RSA Baseline Internet cryptographic algorithm.
Smart contract Program run on a blockchain that will perform specific
instructions, acts like a contract enforced by a decentralized
authority (a blockchain).
Page 72/73

Sylve CHEVET
Token Type of currency issued and managed by a smart contract on
top of a blockchain, that can be used only in a specific
system. Akin to a token used in a fair to access the
rollercoasters, the token only has value inside the fair and
can be exchanged with dollars.
Turing-complete Property of a programming language that can perform all the
language task a regular computer can perform.
Page 73/73

SSRN Id3212662

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SSRN Id3212662

Uploaded by

Copyright:

Available Formats

Sylve CHEVET

Academic Year 2017-2018

Blockchain Technology and Non-

Fungible Tokens: Reshaping value chains

Under the supervision of Alain BUSSON

Electronic copy available at: https://ssrn.com/abstract=3212662

This paper offers an analysis of cryptocurrencies and blockchain’s technical

underpinnings, specifically of Non-Fungible tokens or “cryptocollectibles”, and the

Electronic copy available at: https://ssrn.com/abstract=3212662

VI Blockchain and cryptocurrencies: an explanation ...................................................................6

a. Bitcoin, the first cryptocurrency ................................................................................................6

b. Ethereum and smart contracts .............................................................................................. 11

c. ERC-20 tokens ............................................................................................................................ 14

d. The token economy ................................................................................................................... 18

e. The DAO and the limits of Blockchain ................................................................................ 25

VII Crypto-assets and Non-Fungible Tokens .......................................................................... 31

a. Rare Pepes: the first crypto-assets for art ......................................................................... 32

b. Cryptokitties, the ERC-721 standard and sound digital goods .................................... 35

c. New possibilities: crypto-composable and “living” assets ............................................ 38

VIII Power and value chain in digitized creative industries ................................................... 43

a. Creative industries and digitization ....................................................................................... 43

b. Value chain of creative industries ......................................................................................... 46

IX Blockchain technology and power shifts................................................................................. 50

b. Producers and publishers........................................................................................................ 53

d. Blockchain: ultimate support function? ............................................................................... 60

Electronic copy available at: https://ssrn.com/abstract=3212662

b. Research papers ........................................................................................................................ 64

XIII Annex ............................................................................................................................................. 70

a. Detail of creative industry mapping ...................................................................................... 70

Electronic copy available at: https://ssrn.com/abstract=3212662

Forever Rose project is one of many possibilities provided by the Cryptocollectibles

movement, a technological movement based on using blockchain technology, a

to the art business.

We can define a Cryptocollectible as a “cryptographically unique, non-fungible digital

centralised clearing house keeping records of every transaction.

Electronic copy available at: https://ssrn.com/abstract=3212662

contrary to a physical art piece.

We will formulate the research question as such: is the Cryptocollectibles movement a

bargaining power, might shift in creative industries value chain?

VI Blockchain and cryptocurrencies: an explanation

a. Bitcoin, the first cryptocurrency

Electronic copy available at: https://ssrn.com/abstract=3212662

provided an innovative way of using cryptographic protocols and decentralized

“spending” it as many times as they want? » The double-spending problem precluded

Electronic copy available at: https://ssrn.com/abstract=3212662

Brief explanation of how bitcoin works5.

centralization. A blockchain system provides incentives in the form of a digital currency

for independent agents to provide computing power to maintain a publicly-available

Electronic copy available at: https://ssrn.com/abstract=3212662

network. The second consisted in using mathematical functions known as hash

integrity. The final innovation is the proof-of-work system. To secure a group of

version of the ledger, which is nearly impossible from a computation standpoint7.

Electronic copy available at: https://ssrn.com/abstract=3212662

articulation of hashing, proof-of-work and incentivizing miners for computing has

become the linchpin of all blockchains.

transaction) to speed up transaction validation.

a regular currency Bitcoin is not backed by any real-world asset, legislation or

Electronic copy available at: https://ssrn.com/abstract=3212662

cannot be tampered with by a banking institution, a central bank or a government.

bitcoins and trigger inflation as in Venezuela13 or decide to demonetize part of the

handful of developers as an open-source software and not a proprietary piece of

power to run decentralized programs and store data.

b. Ethereum and smart contracts