How is a derivative work defined wrt &quot;low entropy&quot; artwork
<p><a href="https://en.wikipedia.org/wiki/CryptoPunks" rel="nofollow noreferrer">CryptoPunks</a> are a set of 10,000 Ethereum-based NFTs, each token corresponding to a unique 24 x 24 pixel cartoonish figure.  They have been automatically generated from human generated components representing traits and types of characters.  They are quite valuable, for example <a href="https://cryptopunks.app/cryptopunks/details/1886" rel="nofollow noreferrer">CryptoPunk 1886</a> sold for $1.06M in July last year.  It had only 6 colours:</p>
<p><img src="https://cryptopunks.app/public/images/cryptopunks/punk1886.png" alt="CryptoPunk 1886" /></p>
<p>The creators, <a href="https://www.larvalabs.com/" rel="nofollow noreferrer">Larva Labs</a> are somewhat litigious and <a href="https://editorial.superrare.com/2021/08/19/cryptophunks-cryptopunks-parody-or-copycat/" rel="nofollow noreferrer">have sued CryptoPhunks</a>, who made versions that have been “hand-flipped” (ie. look the other way), as well as being a different size and having a border.</p>
<p>Suppose one was to take this idea a bit further, and generate many small images with vaguely face-like features.  Because of the limited number of colours distinguishable to the human eye, and with only 576 pixels in a 24*24 image, many are going to be more similar to CryptoPunk 1886 than <a href="https://static.nftgo.io/asset/metadata/image/d0d8dc2ab5b9753f30eadc7ef4d01ca9ad5da680f587ef44647b24089ca6b4f8.png" rel="nofollow noreferrer">CryptoPhunks 1886</a>.  With a large enough set it is quite possible that an identical image could be produced (there are less than 10^10 combinations for a 24 x 24 8 bit RGB image).</p>
<p>If Larva Labs claimed these similar images were derivative works, and it was demonstrable that they were generated independently, would it be legally justifiable to claiming that they were derivative works?</p>

<h2>There is no case law as yet</h2>
<p>However, the most likely situation is that there is no copyright in the original works because they are computer-generated. There is certainly copyright in the <em>code</em> that created the art but the output of that code, the art itself, would probably not be subject to copyright.</p>
<p>Copyright only exists in art created by humans. The US Ninth Circuit has <a href="https://en.wikipedia.org/wiki/Monkey_selfie_copyright_dispute" rel="nofollow noreferrer">held</a> that animals cannot create copyrighted works. Subsequently, the US Copyright office has rejected applications for registration (a prerequisite to a suit in the US) of computer-generated art because it “lacks the human authorship necessary to support a copyright claim.” While this position has not been tested in the courts, I don't think they are any more likely to grant copyright to a program than they were to a monkey.</p>
<h2>What's going on?</h2>
<p>The OP states that there is litigation: there isn't. What there is, is a DCMA takedown request from Larva Labs. If this is complied with that will be the end of the matter; if it isn't then there may be litigation.</p>
<p>However, before Larva Labs could sue CryptoPunks in the US they would first need to get a writ of <a href="https://en.wikipedia.org/wiki/Mandamus" rel="nofollow noreferrer">mandamus</a> to force the USCO to register it. If they try and fail then there will be a legally binding court decision that Larva Labs don't own the copyright in any of their computer-generated art. Which kills their business model and, presumably, them. This would be a very high-risk move.</p>
<p>They may choose to sue in a jurisdiction where registration is not a prerequisite, however, that court would still need to be satisfied that there was a copyright that could be breached. So that's just a different take on the same problem.</p>
<p><em>I have ignored the issue of NFTs as these are legally problematic in their own right and irrelevant to the main question. However, the NFT and the artwork are <strong>not</strong> the same thing.</em></p>

copyright derivative-work cryptocurrency