The rise of web3 and NFTs in video game technology.
Over the past decade, the internet has continued to evolve towards its newest form, “web3”, wherein peer-to-peer transactions are enabled by decentralized networks powered by blockchain technology. While “web2” institutions relied on centralized, third-party systems of records, distributed ledger tech-nology allows users to directly interact with one another to independently agree upon and validate a shared source of truth regarding any recorded transaction, without any third-party intermediary. As a result, blockchain technology offers significant efficiencies and other advantages for peer-to-peer transactions. It is also the underlying infrastructure for “smart contracts”, software that independently and automatically executes specified transactions based on pre-set triggers and dependencies written into its code.
The surge in web3 usage has been particularly pronounced in the video game industry, where new classes of blockchain-enabled digital assets such as non-fungible tokens (“NFTs”) and fungible to-kens have found natural and accelerative applications within the industry’s existing and increasing use of in-game currencies and collectibles. Both web3-based and traditional game studios have praised the benefits of recording all gaming community transactions and NFTs interactions on the blockchain, citing improvements to efficiency and the reliability of establishing ownership. Simultaneously, gamers’ leveraging of a blockchain’s defining peer-to-peer networks has stimulated a rise in player engage-ment and connectivity, fueling the growth and acceleration of new video gaming platforms and communities.
However, the use and application of NFTs in digital video games also raises novel legal questions that have likewise been accelerating in their frequency and complexity. One of the most publicized such legal issues relates to copyright, a type of intellectual property that protects original works of author-ship. Original works are abundant in modern video games, where gamers may, for example, present, utilize or earn custom profile images, avatars or digital accessories. However, under the present structure of many web3-based or web3-supported video gaming platforms, when these works are linked to NFTs and sold or otherwise transferred to a receiving player’s digital wallet, it may be un-clear what bundle of legal rights – if any – go with it.
Fundamentals of copyright within NFTs
Copyright protection in the United States is based in Article I, Section 8, of the US Constitution, which empowers Congress to provide authors with certain exclusive rights in their “writings” – broadly inclusive of any work of original expression in any form or medium – for a prescribed period. Upon creation of a qualifying original “work”, in the absence of an express written assignment to another party, the author owns the copyright therein and is entitled to certain exclusive rights, including as to reproduction, distribution, public performance, public display, and creation of derivative works. Likewise, the copyright owner may transfer any or all of these rights, or license any or all of these rights to third parties, on an exclusive or non-exclusive basis, all while retaining ownership of the work.
NFTs, put in the simplest terms, are a unique, trackable string of characters stored on a blockchain and linked to underlying content (for copyright purposes, a “work”). This content – which may be any form of expression, including but not limited to pictorial, graphic, dramatic, musical and literary works – is then permanently associated with the NFT, which may be used for in-game purposes such as a digital game piece. However, owning the NFT does not necessarily mean the NFT owner has ownership or any other license rights under copyright in the underlying work. Without an express assignment of copyright, or a copyright license agreement, the NFT owner likely only owns, at best, a copy of the underlying work – much like the owner of a baseball card or other physical collectible only owns the single copy, without further rights to the actual photographic image. In such a case, the NFT owner cannot, among other things, copy, distribute, modify, publicly perform or display or make derivative works of the underlying work, including within the very digital community in which it was obtained. Instead, those rights remain with the copyright owner of the work (who may be different from the original author of the work, and/or the minter of the NFT).
In practice, these legal realities of copyright often conflict with the growing subcultures of expression, innovation and artistic communication within game spaces – and, by extension, the interests of game developers issuing and facilitating the creation of NFTs, who seek a more permissive environment to foster rising in-game engagement and creativity by game players.
Special factors for copyright within NFTs
Many factors can impact what bundle of legal rights in an underlying work carry over to an associated NFT. Key among these is often the process through which the NFT is first created or transferred. The technologies behind NFTs, their creation, and rights related to subsequent NFT transfers all play an important role in determining the necessary copyright licenses and protections.
The process of creating a digital asset and first recording it on a blockchain is known as “minting” the digital asset. Importantly, at its time of minting, an NFT contains three basic components:
- Its token – a unique signature that makes it singularly identifiable from any other NFT;
- Its metadata – the underlying description of the NFT’s properties and characteristics, often including a uniform resource identifier to indicate and link to the permanent lo-cation of the associated original content (as virtually stored through the Interplanetary File System, or another decentralized or “off-chain” permanent storage protocol);
- Its smart contract – self-executing software code with predetermined conditions that, when met, will generate an automatic effect on the token, and subsequent transactions undertaken by it.
Game developers may enable the in-game minting of NFTs that use players’ original work (or work created by third parties) to provide rights to particular physical pieces, in-game characters, in-game incentives and other means of enhancing game play. Often, the attention of the parties involved falls on the relevant game rules for use of the minted NFT, while the copyright considerations in the underlying work are overlooked.
To determine where certain contract rights need to be accounted for, it is important to assess who is minting the NFT. If the NFT minter is also the author of the underlying work, it is more likely (though still not certain in all circumstances) that they own the copyright and may validly transfer, the license and enforce any and all such rights. Conversely, if the NFT minter is a third party who mints directly to its digital wallet, using work that is subject to a third-party’s copyright, the NFT minter must obtain the copyright itself, or a license allowing use of the copyrighted work for certain purposes (including, at the very least, the right to use the work to create an NFT), to validly take any action with the work at all.
If NFTs are then transferred to subsequent buyers on the open market, or if changes are made to the digital asset, creating “derivative works” of the associated content, the failure to address these matters at the source are compounded. NFT purchasers may find themselves with insufficient rights to meaningfully use and engage with these digital assets – a result that could threaten the very reliability, efficiency, novelty and innovation that web3 has otherwise brought to the video game industry.
License fees / Royalties and NFTs
Further complicating the picture, copyright owners who issue (or whose works are associated with / linked to) NFTs may expect – or require – license fees or royalties from third parties who receive or use the NFT. Likewise, video game platforms may seek to extend royalty rights to artists and innovators as incentives for their novel contributions and ongoing engagement. However, this raises both practical and technical challenges.
By nature, the decentralized structure of web3 tools by which an NFT is minted, used or transferred on a video game platform, and the lack of any overarching system or gatekeeper to implement or enforce common terms, may result in patchwork, inconsistent or totally absent operating rules with respect to the following, amongst many other issues: (i) who is obligated to pay royalties (i.e., the NFT buyer or NFT seller in a transaction); (ii) to whom royalties are owed with respect to any given NFT / associated work; (iii) the amount of royalties owed and frequency of payment; and (iv) how royalties will be tracked and paid as a technical matter, especially in the case of secondary transfers.
Conveying copyright terms with NFTs
There are three primary ways by which basic contract and legal rights can adhere to an NFT:
- Smart contracts;
- Standard terms and conditions for the gaming platform; and
- Contracts embedded in NFT metadata.
“Smart contracts” are famously something of a misnomer, as they do not necessarily establish legally binding contracts. Ultimately, smart contracts do not, by themselves, sufficiently establish legal rights with respect to copyright in original works associated with digital assets. While smart contracts can be programmed to effectuate the mechanics of royalty payments, and other rules of engagement with respect to original content associated with digital assets, in practice, this can only be done if those rules (i) are clearly established and (ii) can be applied uniformly and consistently as a technical matter, especially in cross-platform transfers. At present, this is beyond the capacity – and in some senses, at odds with the principles – of much of the web3 landscape.
In contrast, standard terms and conditions can be an effective means to appropriately convey rights and protections typical of a legal agreement. Likewise, the metadata layer of the NFT can offer a technological ability to further address specific legal and functional concerns, such as licenses specific to the underlying work associated with an NFT. Increasingly, savvy web3-based as well as traditional game studios are seizing on these tools as a means of combatting the inherent challenges of web3 / blockchain’s decentralized landscape, and its absence of a centralized registration process, to ensure that key contract rights and copyright terms are consistently deployed and recorded with the digital asset to which they relate. Common approaches include one or more of the following:
- Requiring game players’ acceptance of standard terms and conditions (containing “table stakes” representations, warranties and covenants regarding intellectual property ownership, transfer and corollary rights) when digital wallets are linked to first participate in the game;
- Recording game players’ acceptance of such standard terms and conditions as a hashed val-ue on the blockchain; and
- Linking or otherwise including such “table stakes” provisions as contract terms in the metada-ta of the NFT.
As web3 games continue to mature, NFTs promise to be a critical part of their engaging experience offerings to a new generation of game players. All participants in these game ecosystems, from game platforms to studios to participants and creators alike, should be mindful of the following fundamental questions:
- Who owns the copyright in the underlying work associated with an NFT?
- What rights are granted to NFT owners? How are these rights conveyed to initial NFT buyers and secondary NFT buyers?
- What terms govern the rights granted to NFT owners? How are these rights presented to NFT owners?
- Are the governing terms enforceable as a legal matter? Can they be consistently tracked and applied as a technical matter?
- Do the rights granted strike the right balance between protecting copyright owners and foster-ing an engaging game play environment?
Critically, in as much as these questions remain open, the challenge for innovation lies not only with traditional industry actors and community players – the legal profession must push itself to be just as much “in the game” by remaining abreast of the fast-moving landscape of web3 and finding new ways to insert traditional legal infrastructure that is both sufficient and strategic to support its growth.