February 8, 2022 • 27 mins
Host Mary O'Brien interviews Wilson Sonsini partner Adam Shevell, and their conversation takes us through the wild, wild west of non-fungible tokens (NFTs).
Conversation Highlights:
Adam's passion for video games has been prevalent throughout his life carrying over into his career today. This episode's highlights include:
- What are NFTs?
- Commercializing NFTs—purchasing and selling these assets as well as claiming ownership
- Recent NFT adoption in games
- An introduction into the metaverse
- Legal considerations for adding NFT into games
Meet the Host:
Learn More:
The information in this podcast episode is for general information purposes only and may not reflect current law in your jurisdiction. Nothing in this podcast should be taken as legal advice for any individual case or situation, and this information is not intended to create, and receipt or listening does not constitute, an attorney-client relationship. No listener of this episode should act or refrain from acting on the basis of any information included in, or accessible through, this episode without seeking legal or other professional advice from an appropriate licensed professional in the recipient’s state, country or other appropriate jurisdiction.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
Hi, everyone.
Thank you for joining Wilson Sonsini's Electronic Gaming Group podcast.
I'm Mary O'brien, an associate at Wilson based out of the Palo Alto office.
I'm thrilled to have you join me as I interview several of my colleagues and dig into key topics surrounding early-stage companies with a focus on gaming specific issues.
The information in this podcast episode is for general information purposes only and may not reflect current law in your jurisdiction.
(00:26):
Nothing in this podcast should be taken as legal advice for any individual case or situation and this information is not intended to create and receipt or listening does not constitute an attorney client relationship.
No listener of this episode should act or refrain from acting on the basis of any information included in or accessible through this episode without seeking legal or other professional advice from an appropriately licensed professional in your state, country, or other appropriate jurisdiction.
(00:52):
Today, I have with me Adam Shevell,
a partner in our technology transactions group.
Adam,
would you mind telling me a little bit about yourself and your experience in the gaming space?
Sure,
happy to.
So I'm a partner in our technology transactions group based in San Francisco and we work with companies across many industries focusing on commercial contracts,
(01:14):
intellectual property strategy, and other intellectual property related matters.
I really like working in the gaming space for a number of reasons,
you know,
as a,
as a kid, I remember playing games on the original Nintendo system and and kind of grew up as the consoles started to be a,
(01:35):
you know,
a feature of at home life and and would love to go to video game arcades.
And, I'll say I don't get a chance that often anymore to play games because of my busy schedule.
But I, as an intellectual matter,
I still love how e-gaming and video games combined facets of technology and content and storytelling and adventure and to create magical, immersive worlds.
(02:03):
So, I love the creativity and I love how it intersects with technology itself and how we are creating more interesting faster computing and new facets to how we can interact with a world
that's really the creation of a team,
which is which is pretty cool.
Yeah,
it sounds like you have a lot of experience and because of that experience,
(02:26):
I know you know that N.
F
Ts
have been at the top of everyone's mind and into the news.
So, I was kind of hoping on a high level,
could you walk me through what Blockchain based technologies such as these N
F
Ts
actually are, and how they work and what forms they can actually be.
Sure.
Sure.
So,
you know,
at a high level,
(02:47):
taking a step back,
you know,
a blockchain,
if we start there is what we call distributed ledger,
which is a network of many computers.
Right?
So, the computers are located potentially anywhere in the world and they're connected through a network and each of the computers or nodes as we call them,
(03:07):
runs the same computer code and communicates in concert with the rest of the network.
And, each of the nodes on the network is tracking the transactions that occur on the blockchain.
So, any time there's a transaction from one person or wallet to another,
(03:28):
all of the different nodes,
all the different computers track that together,
you know,
and you know,
so, so assuming it's a permissionless blockchain,
which means it's a public and openly available blockchain,
all of these transactions are open and transparent to anyone who wants to inquire.
So, you imagine you have,
you know,
a wide network of computers running the same code.
(03:51):
Every computer has the exact same ledger tracking the transactions. And anyone who is interested and curious can see exactly what's happening on the ledger.
So, in theory, if one computer goes down, or gets unplugged, or loses its access to the network,
that shouldn't impact the rest of the network.
(04:12):
And similarly,
if one computer gets hacked and is manipulated,
it wouldn't track with all the others.
So, it's easy to to find any errors compared to the rest of the network.
So, essentially think of blockchain as a as a,
you know,
a record of transactions.
(04:34):
And so um the N
F
T
And how the N
F
Ts
And, how they come into play with with blockchains as you know,
think of an N
F
T
as a thing.
It's a cryptographic hash that's unique and can be transacted over a blockchain from one user to another.
And that would go,
let's say from one user's wallet to another user's wallet.
(04:57):
And that hash,
that cryptographic hash, is linked uniquely to a digital asset.
Right?
And that digital asset can be a picture,
it can be a small video that loops,
it can be a longer video.
It can be a work of music. Really,
you know,
the imagination is our only limit to what kind of digital content can be linked to the N
(05:22):
F
T
Itself.
But essentially the N
F
T
Acts as the um,
you know,
chain of,
you know,
there's a record of who owns the N
F
T
And it can prove authenticity and originality of the asset.
So that if I have,
let's say one of the CryptoPunks for instance,
(05:45):
I can show you because of the,
the open nature of the ledger and the transaction history of who owns this CryptoPunk, since it was minted or created by Larva Labs,
I can show you that,
hey,
this is an actual original official CryptoPunk.
And, and that's where I think the unique facet of the N
(06:10):
F
T
technology comes in is because, suddenly we're creating an environment where authenticity and origin can be verified with respect to digital assets,
which was challenging before,
right?
In the real world if you have a real Louis Vuitton bag,
you know,
there's a way to show that hey,
(06:30):
I bought the set,
the LVMH store.
It was made by this company and therefore I own this asset,
right.
It was hard to do that with digital goods because of the medium and because how easy it is to say copy and paste a digital file,
whether you find it online or elsewhere.
(06:51):
So, what I'm hearing from you,
is that, is there a concern with simply people copying and pasting to claim ownership?
Or, are you saying that the cryptographic hash and the ownership ledger removes that?
Well,
it doesn't remove people's ability to right-click copy and reuse digital content,
(07:13):
whether or not they have the right to do that under license from the copyright owner.
What it does do is give the owner of the original asset,
the ability to signal to the market that they are the true owner.
And that's the difference,
right?
There can be millions of copies of an N
(07:33):
F
T.
But only one real owner of that N
F
T.
at one time.
So, think about a Picasso,
right?
Uh,
a Picasso is a unique asset.
That is that it can only be owned well,
it can it can be possessed by one owner.
Um,
but there can also be thousands or millions of posters of the photo image of that painting,
(08:00):
right?
The fact that there are many copies doesn't really denude the value of the original.
Is there a concern about people taking these copies and scamming or ripping off people that are seeking to buy NFTs.
Absolutely,
(08:20):
and that's one of the biggest challenges of the N
F
T
marketplace.
And and and a sort of cryptocurrency in general and and and sort of the online world here where users are anonymous.
There are a lot of scammers out there trying to look like the original projects.
Trying to put themselves off as the creator of a of a well-known project and trying to sell copies of well-known NFTs to dupe the public.
(08:51):
And and the fact that they're so prolific suggest that they're having some success.
So,
you know,
like in many areas, it's important if you if you're actually looking at the market, to understand the different ways in which sellers and projects are verified through the marketplaces.
(09:13):
It can almost be seen as a badge of honor when you finally get scammed because it happens to a lot of people.
And you know,
I think there's some well-known,
very sophisticated people who have been scammed and it's just something to be very wary of.
(09:33):
So, in a, in real, in the real world,
when someone sells you a counterfeit good or someone doesn't deliver a service that they've promised,
we can go to court and get restitution.
Is that the case here?
Yeah,
that's a good question,
you know,
so as a practical matter as far as the technology goes,
(09:54):
there's no way to unwind a transaction. Other than sort of putting on like the white hat hackers to go and try to steal it back by brute force of you know,
very good sophisticated hacking. As a legal matter,
you know,
I suppose if you were sold a counterfeit good being told that it was something that it wasn't,
(10:21):
I think, in theory, you have a breach of contract claim or some some form of potential legal claim against the seller.
But, we haven't seen people going to court yet to enforce contract claims like this or other claims relating to forgeries in the empty spaces. Possible that they'll start popping up now that the medium seems to becoming more and more popular and used.
(10:51):
And I imagine that we may see some cases,
but you know,
given the fact that the owners of wallets can hide behind a good deal of anonymity,
I think it would be challenging to find the right person to serve process, for instance, on for a claim if you wanted to take a seller to court.
(11:13):
Indeed,
you would need a lot of you need a lot of digging in and sleuthing in the background to find out who exactly that was.
So, it sounds like everyone really needs to do their research before diving into the NFT realm just to confirm authenticity here.
100%.
I can't, I can't emphasize that enough.
These N
(11:35):
F
Ts
as I'm reading and researching,
they really tell being these one of a kind assets which are bought and sold just like physical property but they exist only in the digital realm.
So, I was hoping you could kind of discuss the considerations around purchasing and selling beyond just establishing authenticity,
such as things like royalties.
(11:56):
Sure, sure.
I think you know the technology of N
F
Ts
reflects an interesting I'll say springboard innovation around the rights of artists.
And, if you think about it we can take the painting analogy too, you know very few painters who are famous now, sold their paintings in their lifetimes for the amount of money that is now being exchanged for those paintings. With N
(12:29):
F
Ts
You can build into the smart contract which governs their sale on the blockchain
a continuing residual or royalty that gets paid to the original author.
So if you sell an N
F
T
today for one ETH, with the, you know, the cryptocurrency on the ethereum blockchain.
(12:54):
If you sell it for one ETH today,
that's one in your pocket.
But, if the person who buys it turns around a year from now and sells it for 10 ETH, you can build into your smart contract that every time there's a transaction relating to that N
F
T
the original author gets 5% cut, 10% cut, to an 8% cut, so that the author participates in the market is being created for their art,
(13:19):
right?
And think about Van Gogh or Picasso could or even their estates could get a cut of the types of quantums that are being paid for their paintings.
Now, that would be a significant improvement in the capturing of value that are to see to their artwork.
So, you mentioned this when you were explaining um your answer before what is a smart contract here,
(13:45):
what what kind of terms are built into these N
F
Ts
as people are buying and selling them.
Think of a smart contract as a contract that self-executes.
So, it doesn't need a third party to come in and perform.
It performs based on the conditions that are written to the contract.
So you know,
(14:05):
you know if this, then that, right?
So if this is if this N
F
T
is sold, then, you know, 10% of the transaction value gets sent to this wallet, which be the wallet of the original artist.
So like drafting a legal contract,
it's, it's a very flexible and and creative format in which to create a sort of a logical set of nesting terms.
(14:33):
But, the difference with the smart contract is because it's running on and ethereum,
you know, computer node it can execute itself. If the conditions can be confirmed within the blockchain,
I'm assuming the smart contracts may contain things like ownership right which I know now with these N
(14:55):
FTs have kind of started to deviate what from what people may consider a traditional ownership
right.
So, I was hoping you could kind of touch on a general sense,
how is ownership determines is it a license to the purchaser from the original artist?
Right.
So this,
this gets to a really interesting question around NFTs.
And, that is when we talk about owning an NFT,
(15:18):
there are two different things to consider.
One is the actual cryptographic hash itself.
Right?
So the,
the hash on the blockchain is what's transferred from one owner to another.
Right?
Um,
so in a sense,
when you say you own an NFT,
it's proper to say you you own the cryptographic hash that the NFT is linked to.
(15:40):
Right?
But the content itself,
I mean,
there there are many different ways in which we either,
sell ownership to content, or license content.
You think of all the different creative commons variety of licenses,
for instance.
And so, there isn't a unified way in which content gets licensed or or transferred as part of NFTs.
(16:07):
And so,
um,
a lot of very popular NFT projects are licensed under creative commons zero license,
which is essentially the public domain.
Right?
And,
and that's seen by some as a pure spirited NFT project because the actual content itself is free for all to do whatever they want,
make derivatives modify it copy it.
(16:29):
It's fine.
And you know those projects rely on the fact that the the content is linked to the cryptographic hash as being the driver of value.
And, in fact, they probably get extra cultural value and and attention if they're um if their I
P,
if their content gets spread by imitators and and and supporters who like it.
(16:52):
But, when you get to the more traditional kind of say private enterprise world,
you know, companies where controlling their I
P
and content has it drives their value.
Right?
Think about record labels.
Think about you know gaming companies or other you know think about Disney, for instance, right that the value of their I
(17:13):
P
has been built up by protecting it and having exclusive rights to monetize and to exploit it.
So, you know, coming up with ways to ensure that if you buy let's say an N
F
T
you know the the license rights you're getting um might not be public domain rights,
they might be the right to use it non-commercially.
(17:36):
But if you want a commercial use of the N
F
T
content you need a separate license from the the owner of the content.
So, all of to say is it can vary quite significantly, and will really depend on the project.
Yeah, it sounds like we're kind of in the forefront the beginning of this introduction and revolutionize of cryptocurrency and I wanted to talk about how we're now beginning to see the actual diversion from traditional gaming with the introduction of N
(18:05):
F
Ts
into these games.
So, could you touch on what role N
F
Ts
playing games as they are right now, and what role they may play or trending to play in the future?
Sure.
Given that N
F
Ts
can be used to create traceable,
verifiable digital assets.
(18:26):
I think there's a natural potential for it being introduced into virtual worlds.
Whether that's something that's more of like a decentralized universe,
like Decentraland or metaverses as people are calling them now where you can,
you know,
have the digital assets,
(18:48):
maybe that's a set of clothes,
maybe that's a special hairdo or avatar in the game itself as your avatar. Or you know,
in more traditional gaming environments,
you know,
like think, think of things like in Fortnite having different skins for your character,
Different weapons you can buy.
You know,
creating an N
(19:10):
F
T
enabled game would permit a gamer to take assets from one game and transfer over to other games or even within the same game,
create assets that you wouldn't lose if your game was up right there there be persistent and continued because most in-game assets and virtual items are licensed to the gamers to the users by the, by the companies that that that are publishing the games.
(19:39):
They're not you don't have an ownership right in in your your the different in-game items that you might buy in Fortnite.
But if it was an N
F
T
I think you would have an ownership right and ownership interest that you couldn't be revoked like a license can be revoked.
So, I think it creates an interesting potential for a new ecosystem but it's also been very contentious within the gaming community. And, you know I think there's there's a bit of history there which predates N
(20:12):
F
Ts
Which, is you know, if you go back console games were bought you know up front for whatever the publisher was charging.
And then, once you own the game you could go and go on and play it and play as much as you want.
And then, it was sort of a pay once and and and play forever type scenario,
(20:35):
right?
And then every now and then you'll have you know,
add-on packs,
things like that.
But the concept wasn't where gaming has has sort of evolved which is into more of a freemium or micro transaction environment where it's largely free up front.
But then, within the game,
gamers are having to make payments to access special benefits. Whether those are powers or certain you know weapons, etcetera.
(21:04):
And you know gaming companies have learned pretty quickly that the freemium model where you have you know micro transactions in the game in the long term yield better returns than just doing an upfront sale,
right?
And so, the flip side of that is that gamers have become quite wary of publishers who are moving from the sort of traditional constable concept to in game micro transaction games because they realize that they're going to be the losing, on the losing end of the stick on that one and they're going to end up paying more to the publishers than they otherwise would have.
(21:39):
And it's against this backdrop that N
F
Ts
are arriving.
And I think a lot of gamers are wary of the up of potential,
another layer of cash grab and an aggressive commodification within the gaming experience so that they can continue to pursue the game and an unadulterated and non-monetized way,
(22:05):
That makes sense.
And I understand the gamers concerns...
Yeah.
You know,
I think that the the legal considerations are um quite similar to the legal considerations you have for any user generated content,
right?
When you're bringing in licensed content,
you know,
making sure the license or whoever that may be has the rights to grant to the publisher or to the users,
(22:30):
the right to use the content or IP
that they are bringing into the ecosystem, right?
If you have like a marketplace for N
F
T
assets,
making sure that the sellers on the marketplace have sufficient rights in what they're selling, right?
So you obviously can't sell a counterfeit piece of content,
um,
(22:51):
and also,
if you're selling your own content,
that the,
the license rights that you're granting,
or maybe you're assigning the rights of the domain,
um,
match the kinds of rights your users need to be able to exercise
the rights you're telling them they're going to have with respect to those N
F
Ts
And, I know there's been some recent court cases that have arrived,
(23:15):
um,
about N
F
Ts
and whether they're deemed securities,
like would you recommend that gaming founders who are considering N
F
Ts
consult with a securities lawyer.
I would always recommend you consult with a securities lawyer.
I think that in this space if you're going to be creating anything around,
(23:38):
you know,
cryptocurrencies,
cryptographic hashes, DAOs, N
F
Ts
It's very prudent.
Even if you're a securities lawyer says not a concern,
But let's talk later.
Kind of,
at least you have that peace of mind.
There is as far as I know,
a court case that's going through the Seventh District of New York.
(23:59):
Currently,
I think there's a consumer that's suing Dapper Labs who's best known for cryptokitties and NBA Top Shot,
uh,
alleging that the N
F
Ts
they purchased were a security, and should have been registered as a security.
I think that's still a pending lawsuit.
(24:21):
It will be very interesting to see how that goes.
I think, as far as I can tell,
you know,
that there's,
it feels like a long shot suit from the plaintiff,
but also,
you know,
you never know what could happen and that, and that could certainly shake up the industry,
but you know,
at this point in time I wouldn't expect the shake up,
(24:43):
That's fair.
And as a closing thought,
I was hoping you'd be able to leave the listeners with the biggest piece of advice you could give to founders who may be considering adding N
F
Ts
or want to learn more about N
F
Ts
Yeah.
You know,
I'll say this is an investment advice.
Um,
but I think the best way to learn about N
(25:06):
F
Ts
And, and understand the potential for them is to to get involved to go look at the marketplace is maybe, maybe uby a little,
you know,
a very inexpensive N
F
T
to see what the transaction experience is.
Like,
you know,
having a wallet that can hold your N
(25:27):
F
Ts
And you know,
other cryptocurrencies and sort of,
you know,
getting on Twitter or on Discord servers for,
you know,
an NFT enthusiasts and just getting a scope of how people are transacting how people are communicating what the general feel is because ultimately,
(25:47):
you know,
technology aside,
you know,
N
F
T
Is simply a new new way for people to gather in communities around things,
you know,
shared interests,
right?
Those could be cultural interests around certain art or memes or you know,
(26:09):
cartoon characters.
It could be shared interest in music or a film director.
There are all these different ways in which we as people collect in communities.
And this is just giving us a new venue and a new technology platform to gather together and share our excitements and share our stoke and share our displeasure and and sort of create a culture around things that other humans are creating.
(26:44):
And so, I think to me that feels like a really interesting social experiment that we're going through right now at a different level.
It's not novel.
We've done it probably since you know,
humans have you know,
crawled out of the caves.
But it's really interesting experiments happening in real time right now.
(27:06):
And it's an awesome opportunity to have a front row seat and and to see it sort of from the inception of the industry,
an inception of these markets to see how things go.
And I'll just say be careful,
you know,
they're there.
It's it's it's easy to get burned out there and just sort of play it safe and it should be a very interesting ride.
(27:30):
Great note to end on.
Thank you so much for your time today,
Adam. Wilson Sonsini advises a wide variety of clients in this gaming industry if you'd like more information or if you have any questions about legal issues arising in the gaming space,
please don't hesitate to reach out to any member of our Electronic Gaming Group.
Thanks for tuning in everyone.
Hi, everyone.
Thank you for joining Wilson Sonsini's Electronic Gaming Group podcast.
I'm Mary O'brien, an associate at Wilson based out of the Palo Alto office.
I'm thrilled to have you join me as I interview several of my colleagues and dig into key topics surrounding early-stage companies with a focus on gaming specific issues.
The information in this podcast episode is for general information purposes only and may not reflect current law in your jurisdiction.
(00:26):
Nothing in this podcast should be taken as legal advice for any individual case or situation and this information is not intended to create and receipt or listening does not constitute an attorney client relationship.
No listener of this episode should act or refrain from acting on the basis of any information included in or accessible through this episode without seeking legal or other professional advice from an appropriately licensed professional in your state, country, or other appropriate jurisdiction.
(00:52):
Today, I have with me Adam Shevell,
a partner in our technology transactions group.
Adam,
would you mind telling me a little bit about yourself and your experience in the gaming space?
Sure,
happy to.
So I'm a partner in our technology transactions group based in San Francisco and we work with companies across many industries focusing on commercial contracts,
(01:14):
intellectual property strategy, and other intellectual property related matters.
I really like working in the gaming space for a number of reasons,
you know,
as a,
as a kid, I remember playing games on the original Nintendo system and and kind of grew up as the consoles started to be a,
(01:35):
you know,
a feature of at home life and and would love to go to video game arcades.
And, I'll say I don't get a chance that often anymore to play games because of my busy schedule.
But I, as an intellectual matter,
I still love how e-gaming and video games combined facets of technology and content and storytelling and adventure and to create magical, immersive worlds.
(02:03):
So, I love the creativity and I love how it intersects with technology itself and how we are creating more interesting faster computing and new facets to how we can interact with a world
that's really the creation of a team,
which is which is pretty cool.
Yeah,
it sounds like you have a lot of experience and because of that experience,
(02:26):
I know you know that N.
F
Ts
have been at the top of everyone's mind and into the news.
So, I was kind of hoping on a high level,
could you walk me through what Blockchain based technologies such as these N
F
Ts
actually are, and how they work and what forms they can actually be.
Sure.
Sure.
So,
you know,
at a high level,
(02:47):
taking a step back,
you know,
a blockchain,
if we start there is what we call distributed ledger,
which is a network of many computers.
Right?
So, the computers are located potentially anywhere in the world and they're connected through a network and each of the computers or nodes as we call them,
(03:07):
runs the same computer code and communicates in concert with the rest of the network.
And, each of the nodes on the network is tracking the transactions that occur on the blockchain.
So, any time there's a transaction from one person or wallet to another,
(03:28):
all of the different nodes,
all the different computers track that together,
you know,
and you know,
so, so assuming it's a permissionless blockchain,
which means it's a public and openly available blockchain,
all of these transactions are open and transparent to anyone who wants to inquire.
So, you imagine you have,
you know,
a wide network of computers running the same code.
(03:51):
Every computer has the exact same ledger tracking the transactions. And anyone who is interested and curious can see exactly what's happening on the ledger.
So, in theory, if one computer goes down, or gets unplugged, or loses its access to the network,
that shouldn't impact the rest of the network.
(04:12):
And similarly,
if one computer gets hacked and is manipulated,
it wouldn't track with all the others.
So, it's easy to to find any errors compared to the rest of the network.
So, essentially think of blockchain as a as a,
you know,
a record of transactions.
(04:34):
And so um the N
F
T
And how the N
F
Ts
And, how they come into play with with blockchains as you know,
think of an N
F
T
as a thing.
It's a cryptographic hash that's unique and can be transacted over a blockchain from one user to another.
And that would go,
let's say from one user's wallet to another user's wallet.
(04:57):
And that hash,
that cryptographic hash, is linked uniquely to a digital asset.
Right?
And that digital asset can be a picture,
it can be a small video that loops,
it can be a longer video.
It can be a work of music. Really,
you know,
the imagination is our only limit to what kind of digital content can be linked to the N
(05:22):
F
T
Itself.
But essentially the N
F
T
Acts as the um,
you know,
chain of,
you know,
there's a record of who owns the N
F
T
And it can prove authenticity and originality of the asset.
So that if I have,
let's say one of the CryptoPunks for instance,
(05:45):
I can show you because of the,
the open nature of the ledger and the transaction history of who owns this CryptoPunk, since it was minted or created by Larva Labs,
I can show you that,
hey,
this is an actual original official CryptoPunk.
And, and that's where I think the unique facet of the N
(06:10):
F
T
technology comes in is because, suddenly we're creating an environment where authenticity and origin can be verified with respect to digital assets,
which was challenging before,
right?
In the real world if you have a real Louis Vuitton bag,
you know,
there's a way to show that hey,
(06:30):
I bought the set,
the LVMH store.
It was made by this company and therefore I own this asset,
right.
It was hard to do that with digital goods because of the medium and because how easy it is to say copy and paste a digital file,
whether you find it online or elsewhere.
(06:51):
So, what I'm hearing from you,
is that, is there a concern with simply people copying and pasting to claim ownership?
Or, are you saying that the cryptographic hash and the ownership ledger removes that?
Well,
it doesn't remove people's ability to right-click copy and reuse digital content,
(07:13):
whether or not they have the right to do that under license from the copyright owner.
What it does do is give the owner of the original asset,
the ability to signal to the market that they are the true owner.
And that's the difference,
right?
There can be millions of copies of an N
(07:33):
F
T.
But only one real owner of that N
F
T.
at one time.
So, think about a Picasso,
right?
Uh,
a Picasso is a unique asset.
That is that it can only be owned well,
it can it can be possessed by one owner.
Um,
but there can also be thousands or millions of posters of the photo image of that painting,
(08:00):
right?
The fact that there are many copies doesn't really denude the value of the original.
Is there a concern about people taking these copies and scamming or ripping off people that are seeking to buy NFTs.
Absolutely,
(08:20):
and that's one of the biggest challenges of the N
F
T
marketplace.
And and and a sort of cryptocurrency in general and and and sort of the online world here where users are anonymous.
There are a lot of scammers out there trying to look like the original projects.
Trying to put themselves off as the creator of a of a well-known project and trying to sell copies of well-known NFTs to dupe the public.
(08:51):
And and the fact that they're so prolific suggest that they're having some success.
So,
you know,
like in many areas, it's important if you if you're actually looking at the market, to understand the different ways in which sellers and projects are verified through the marketplaces.
(09:13):
It can almost be seen as a badge of honor when you finally get scammed because it happens to a lot of people.
And you know,
I think there's some well-known,
very sophisticated people who have been scammed and it's just something to be very wary of.
(09:33):
So, in a, in real, in the real world,
when someone sells you a counterfeit good or someone doesn't deliver a service that they've promised,
we can go to court and get restitution.
Is that the case here?
Yeah,
that's a good question,
you know,
so as a practical matter as far as the technology goes,
(09:54):
there's no way to unwind a transaction. Other than sort of putting on like the white hat hackers to go and try to steal it back by brute force of you know,
very good sophisticated hacking. As a legal matter,
you know,
I suppose if you were sold a counterfeit good being told that it was something that it wasn't,
(10:21):
I think, in theory, you have a breach of contract claim or some some form of potential legal claim against the seller.
But, we haven't seen people going to court yet to enforce contract claims like this or other claims relating to forgeries in the empty spaces. Possible that they'll start popping up now that the medium seems to becoming more and more popular and used.
(10:51):
And I imagine that we may see some cases,
but you know,
given the fact that the owners of wallets can hide behind a good deal of anonymity,
I think it would be challenging to find the right person to serve process, for instance, on for a claim if you wanted to take a seller to court.
(11:13):
Indeed,
you would need a lot of you need a lot of digging in and sleuthing in the background to find out who exactly that was.
So, it sounds like everyone really needs to do their research before diving into the NFT realm just to confirm authenticity here.
100%.
I can't, I can't emphasize that enough.
These N
(11:35):
F
Ts
as I'm reading and researching,
they really tell being these one of a kind assets which are bought and sold just like physical property but they exist only in the digital realm.
So, I was hoping you could kind of discuss the considerations around purchasing and selling beyond just establishing authenticity,
such as things like royalties.
(11:56):
Sure, sure.
I think you know the technology of N
F
Ts
reflects an interesting I'll say springboard innovation around the rights of artists.
And, if you think about it we can take the painting analogy too, you know very few painters who are famous now, sold their paintings in their lifetimes for the amount of money that is now being exchanged for those paintings. With N
(12:29):
F
Ts
You can build into the smart contract which governs their sale on the blockchain
a continuing residual or royalty that gets paid to the original author.
So if you sell an N
F
T
today for one ETH, with the, you know, the cryptocurrency on the ethereum blockchain.
(12:54):
If you sell it for one ETH today,
that's one in your pocket.
But, if the person who buys it turns around a year from now and sells it for 10 ETH, you can build into your smart contract that every time there's a transaction relating to that N
F
T
the original author gets 5% cut, 10% cut, to an 8% cut, so that the author participates in the market is being created for their art,
(13:19):
right?
And think about Van Gogh or Picasso could or even their estates could get a cut of the types of quantums that are being paid for their paintings.
Now, that would be a significant improvement in the capturing of value that are to see to their artwork.
So, you mentioned this when you were explaining um your answer before what is a smart contract here,
(13:45):
what what kind of terms are built into these N
F
Ts
as people are buying and selling them.
Think of a smart contract as a contract that self-executes.
So, it doesn't need a third party to come in and perform.
It performs based on the conditions that are written to the contract.
So you know,
(14:05):
you know if this, then that, right?
So if this is if this N
F
T
is sold, then, you know, 10% of the transaction value gets sent to this wallet, which be the wallet of the original artist.
So like drafting a legal contract,
it's, it's a very flexible and and creative format in which to create a sort of a logical set of nesting terms.
(14:33):
But, the difference with the smart contract is because it's running on and ethereum,
you know, computer node it can execute itself. If the conditions can be confirmed within the blockchain,
I'm assuming the smart contracts may contain things like ownership right which I know now with these N
(14:55):
FTs have kind of started to deviate what from what people may consider a traditional ownership
right.
So, I was hoping you could kind of touch on a general sense,
how is ownership determines is it a license to the purchaser from the original artist?
Right.
So this,
this gets to a really interesting question around NFTs.
And, that is when we talk about owning an NFT,
(15:18):
there are two different things to consider.
One is the actual cryptographic hash itself.
Right?
So the,
the hash on the blockchain is what's transferred from one owner to another.
Right?
Um,
so in a sense,
when you say you own an NFT,
it's proper to say you you own the cryptographic hash that the NFT is linked to.
(15:40):
Right?
But the content itself,
I mean,
there there are many different ways in which we either,
sell ownership to content, or license content.
You think of all the different creative commons variety of licenses,
for instance.
And so, there isn't a unified way in which content gets licensed or or transferred as part of NFTs.
(16:07):
And so,
um,
a lot of very popular NFT projects are licensed under creative commons zero license,
which is essentially the public domain.
Right?
And,
and that's seen by some as a pure spirited NFT project because the actual content itself is free for all to do whatever they want,
make derivatives modify it copy it.
(16:29):
It's fine.
And you know those projects rely on the fact that the the content is linked to the cryptographic hash as being the driver of value.
And, in fact, they probably get extra cultural value and and attention if they're um if their I
P,
if their content gets spread by imitators and and and supporters who like it.
(16:52):
But, when you get to the more traditional kind of say private enterprise world,
you know, companies where controlling their I
P
and content has it drives their value.
Right?
Think about record labels.
Think about you know gaming companies or other you know think about Disney, for instance, right that the value of their I
(17:13):
P
has been built up by protecting it and having exclusive rights to monetize and to exploit it.
So, you know, coming up with ways to ensure that if you buy let's say an N
F
T
you know the the license rights you're getting um might not be public domain rights,
they might be the right to use it non-commercially.
(17:36):
But if you want a commercial use of the N
F
T
content you need a separate license from the the owner of the content.
So, all of to say is it can vary quite significantly, and will really depend on the project.
Yeah, it sounds like we're kind of in the forefront the beginning of this introduction and revolutionize of cryptocurrency and I wanted to talk about how we're now beginning to see the actual diversion from traditional gaming with the introduction of N
(18:05):
F
Ts
into these games.
So, could you touch on what role N
F
Ts
playing games as they are right now, and what role they may play or trending to play in the future?
Sure.
Given that N
F
Ts
can be used to create traceable,
verifiable digital assets.
(18:26):
I think there's a natural potential for it being introduced into virtual worlds.
Whether that's something that's more of like a decentralized universe,
like Decentraland or metaverses as people are calling them now where you can,
you know,
have the digital assets,
(18:48):
maybe that's a set of clothes,
maybe that's a special hairdo or avatar in the game itself as your avatar. Or you know,
in more traditional gaming environments,
you know,
like think, think of things like in Fortnite having different skins for your character,
Different weapons you can buy.
You know,
creating an N
(19:10):
F
T
enabled game would permit a gamer to take assets from one game and transfer over to other games or even within the same game,
create assets that you wouldn't lose if your game was up right there there be persistent and continued because most in-game assets and virtual items are licensed to the gamers to the users by the, by the companies that that that are publishing the games.
(19:39):
They're not you don't have an ownership right in in your your the different in-game items that you might buy in Fortnite.
But if it was an N
F
T
I think you would have an ownership right and ownership interest that you couldn't be revoked like a license can be revoked.
So, I think it creates an interesting potential for a new ecosystem but it's also been very contentious within the gaming community. And, you know I think there's there's a bit of history there which predates N
(20:12):
F
Ts
Which, is you know, if you go back console games were bought you know up front for whatever the publisher was charging.
And then, once you own the game you could go and go on and play it and play as much as you want.
And then, it was sort of a pay once and and and play forever type scenario,
(20:35):
right?
And then every now and then you'll have you know,
add-on packs,
things like that.
But the concept wasn't where gaming has has sort of evolved which is into more of a freemium or micro transaction environment where it's largely free up front.
But then, within the game,
gamers are having to make payments to access special benefits. Whether those are powers or certain you know weapons, etcetera.
(21:04):
And you know gaming companies have learned pretty quickly that the freemium model where you have you know micro transactions in the game in the long term yield better returns than just doing an upfront sale,
right?
And so, the flip side of that is that gamers have become quite wary of publishers who are moving from the sort of traditional constable concept to in game micro transaction games because they realize that they're going to be the losing, on the losing end of the stick on that one and they're going to end up paying more to the publishers than they otherwise would have.
(21:39):
And it's against this backdrop that N
F
Ts
are arriving.
And I think a lot of gamers are wary of the up of potential,
another layer of cash grab and an aggressive commodification within the gaming experience so that they can continue to pursue the game and an unadulterated and non-monetized way,
(22:05):
That makes sense.
And I understand the gamers concerns...
Yeah.
You know,
I think that the the legal considerations are um quite similar to the legal considerations you have for any user generated content,
right?
When you're bringing in licensed content,
you know,
making sure the license or whoever that may be has the rights to grant to the publisher or to the users,
(22:30):
the right to use the content or IP
that they are bringing into the ecosystem, right?
If you have like a marketplace for N
F
T
assets,
making sure that the sellers on the marketplace have sufficient rights in what they're selling, right?
So you obviously can't sell a counterfeit piece of content,
um,
(22:51):
and also,
if you're selling your own content,
that the,
the license rights that you're granting,
or maybe you're assigning the rights of the domain,
um,
match the kinds of rights your users need to be able to exercise
the rights you're telling them they're going to have with respect to those N
F
Ts
And, I know there's been some recent court cases that have arrived,
(23:15):
um,
about N
F
Ts
and whether they're deemed securities,
like would you recommend that gaming founders who are considering N
F
Ts
consult with a securities lawyer.
I would always recommend you consult with a securities lawyer.
I think that in this space if you're going to be creating anything around,
(23:38):
you know,
cryptocurrencies,
cryptographic hashes, DAOs, N
F
Ts
It's very prudent.
Even if you're a securities lawyer says not a concern,
But let's talk later.
Kind of,
at least you have that peace of mind.
There is as far as I know,
a court case that's going through the Seventh District of New York.
(23:59):
Currently,
I think there's a consumer that's suing Dapper Labs who's best known for cryptokitties and NBA Top Shot,
uh,
alleging that the N
F
Ts
they purchased were a security, and should have been registered as a security.
I think that's still a pending lawsuit.
(24:21):
It will be very interesting to see how that goes.
I think, as far as I can tell,
you know,
that there's,
it feels like a long shot suit from the plaintiff,
but also,
you know,
you never know what could happen and that, and that could certainly shake up the industry,
but you know,
at this point in time I wouldn't expect the shake up,
(24:43):
That's fair.
And as a closing thought,
I was hoping you'd be able to leave the listeners with the biggest piece of advice you could give to founders who may be considering adding N
F
Ts
or want to learn more about N
F
Ts
Yeah.
You know,
I'll say this is an investment advice.
Um,
but I think the best way to learn about N
(25:06):
F
Ts
And, and understand the potential for them is to to get involved to go look at the marketplace is maybe, maybe uby a little,
you know,
a very inexpensive N
F
T
to see what the transaction experience is.
Like,
you know,
having a wallet that can hold your N
(25:27):
F
Ts
And you know,
other cryptocurrencies and sort of,
you know,
getting on Twitter or on Discord servers for,
you know,
an NFT enthusiasts and just getting a scope of how people are transacting how people are communicating what the general feel is because ultimately,
(25:47):
you know,
technology aside,
you know,
N
F
T
Is simply a new new way for people to gather in communities around things,
you know,
shared interests,
right?
Those could be cultural interests around certain art or memes or you know,
(26:09):
cartoon characters.
It could be shared interest in music or a film director.
There are all these different ways in which we as people collect in communities.
And this is just giving us a new venue and a new technology platform to gather together and share our excitements and share our stoke and share our displeasure and and sort of create a culture around things that other humans are creating.
(26:44):
And so, I think to me that feels like a really interesting social experiment that we're going through right now at a different level.
It's not novel.
We've done it probably since you know,
humans have you know,
crawled out of the caves.
But it's really interesting experiments happening in real time right now.
(27:06):
And it's an awesome opportunity to have a front row seat and and to see it sort of from the inception of the industry,
an inception of these markets to see how things go.
And I'll just say be careful,
you know,
they're there.
It's it's it's easy to get burned out there and just sort of play it safe and it should be a very interesting ride.
(27:30):
Great note to end on.
Thank you so much for your time today,
Adam. Wilson Sonsini advises a wide variety of clients in this gaming industry if you'd like more information or if you have any questions about legal issues arising in the gaming space,
please don't hesitate to reach out to any member of our Electronic Gaming Group.
Thanks for tuning in everyone.
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