Earlier this week, Larva Labs, the creators of the ever-popular CryptoPunks NFT project, came under fire. The team faced backlash for the way they handled a situation regarding an NFT project called V1 CryptoPunks, which was born from the original CryptoPunks smart contract.

In a move that was condemned by many members of the NFT community, a Larva Labs’ cofounder sold off his stock of V1 Punks. Then, days after selling, the team attempted to blacklist the budding project.

Admittedly, the community at large seems to be partially split on whether or not what Larva Labs did was actually wrong. Some argued that the company wasn’t worthy of criticism, as the team clearly stated that they didn’t approve of the project and intended to sell. Others found fault with the company because the team only condemned the project and stated that they were selling two days after the cofounder had already sold.

To understand why this event triggered such a firestorm and prompted Larva Labs to publicly apologize — and also to ensure a similar situation never happens — we need to take a deeper dive into what the company did and flesh out the nuances regarding why members of the NFT community found the situation problematic.

What Are V1 Punks

When CryptoPunks launched in June 2017, they were originally free to claim (minus a gas fee, of course) for anyone with an Ethereum wallet. Yet, in the original CryptoPunks smart contract (V1), there was a code error that made it so only the buyer who was purchasing a Punk could withdraw the crypto used to pay for it, not the seller. So, if you bought one of these Punks, you could get the NFT and then take your money back. The seller would be left with nothing.

This prompted Larva Labs to scrap the contract and launch an updated version. The updated version (V2) was released in quick succession, and all CryptoPunks were airdropped into the new contract.

However, V1 punks still existed on the blockchain via the original contract. As a result, developers eventually came up with a revamped version of V1 Punks. They took the original CryptoPunks contract, debugged it, and enabled anyone who owned an original V1 punk to “wrap” their V1 Punk so they could withdraw the proceeds if they sold. This essentially made the V1 Punks functional and tradeable by today’s Ethereum Blockchain standards.

In short, there are now two sets of Punks, V1 and V2, that are basically indistinguishable from one another. As CryptoPunks is one of the most prestigious and expensive NFTs on the market, it wasn’t long before there were over 1,000 V1 Punks in circulation, and many of them ended up being owned by Larva Labs.

“V1 Punks are not a derivative, but are in fact the original set of Punks released by LarvaLabs in 2017 (and actually predate the release of LarvaLabs CryptoPunks NFTs). This is verified on the Ethereum blockchain and is immutable.”

A Statement From the V1 Punks OpenSea Collection

Setting the stage for backlash

Derivative projects are nothing new in the NFT space. When a popular collection (i.e. CryptoPunks, Bored Apes, Loot) experiences a spike in popularity, developers — both those who are bad and good-intentioned — hit the ground running on projects that pay homage to, or sometimes just blatantly rip off, the original. This can definitely be a problem. Unsavory project leads will mint a “cash grab project” based on a popular collection, and then turn around and pull the rug out from under their collectors’ feet.

Unfortunately, it’s not a new issue in the NFT space. But Larva Labs knows this, and the majority of the NFT community knows this. As a result, when scams are identified, they are more often than not brought to light quickly. However, Larva Labs has recently faced backlash for allegedly attacking valid projects that aren’t actually trying to scam people.

Larva Labs has also been condemned for failing to clarify what rights users have to the V2 Punks.

To clarify, when the CryptoPunks NFTs were launched more than four years ago, Larva Labs’ didn’t provide a content license or provide terms on their website that outlined how buyers could use the CryptoPunks’ artwork or characters. Edward Lee, a Professor of Law and Co-Director of the Program in Intellectual Property Law at the Chicago-Kent College of Law, published a research paper in December of 2021 noting that, to this day, the terms still haven’t been officially adopted on the company’s website. Although the Larva Labs reportedly discussed terms on Discord, Lee ultimately stated that they haven’t been publicly adopted and that “such an omission is glaring.”

These twin issues set the stage for growing resentment in the NFT community, which leads us to the latest backlash.

Why was Larva Labs condemned?

Days before the product studio publicly announced their distaste for the project, Larva Labs cofounder John Watkinson offloaded a sizeable supply of V1 Punks onto buyers via a pseudonymous wallet named “Blocktagon.”

Let’s break down exactly why some members of the NFT community took issue with this.

Watkinson sold V1 CryptoPunks and made money off the sales. Then, only days later, Watkinson’s company denounced the very NFTs he had just sold and made money off of. This denouncement, of course, had the potential to cause the price of V1 Punks to plummet, creating a financial loss for everyone who bought them from Watkinson. Watkinson, meanwhile, kept all the money from his sales and would incur no losses from the drop in price, which, again, is a drop that was caused by his own company.

Although Larva Labs still ultimately decided to take legal action against V1 Punks, it quickly became apparent, even to the company itself, that Watkinson’s actions were unethical — prompting a swift response and apology from the company via Discord.

Where Larva Labs Stands Now

While Larva Labs is the creator of one of the most important NFT projects of all time, in 2022, some argue that the product studio is more of an outsider of the NFT community. Yes, the company has been instrumental in the evolution of the NFT ecosystem, but some in the NFT space argue that, in stark contrast to other popular brands like Bored Apes, Cool Cats, and the like, they seem relatively detached from the community sentimentality of NFT and web3 users.

While numerous entities within the NFT space, notably Gremplin and Punk4156 of the Nouns project, have been promoting open dialogue around NFT licensing, Larva Labs has remained firm in their stance to uphold CryptoPunks NFT License, further distancing themselves from the desires of the seeming majority of the NFT community.

While this kerfuffle with V1 Punks hasn’t seemed to have made an immediate impact on the CryptoPunks ecosystem, as the project has been losing popularity for months, it surely hasn’t helped the public image of Larva Labs and their products.

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Photos courtesy of V1 Punks.