If you’ve been on the Internet in the last year or two, you’ve probably heard the term “NFT” or “non-fungible token.”
What the heck are they, though? And how are they used in games?
In this post, we’ll take a deep dive into what NFTs are, look at some famous ones, and understand how they’re being used in the video games industry.
What's a "non-fungible token"?
A non-fungible token (NFT) is a unique identifier that can cryptographically assign and prove ownership of digital goods. NFTs can be considered modern-day collectibles.
These digital goods may be art, items in a game, stills, video from a live broadcast, or anything that can be “tokenized.”
Other people may be able to make copies of the image, video, or digital item that you own when you buy an NFT. But, similar to buying a unique piece of art or limited-series print, the original may be more valuable.
How do you define "fungible"?
Fungibility is the ability of a good or asset to be readily interchanged for another of like kind.
“Fungible” means that there’s equal value between different assets – they are interchangeable, essentially.
Money is a key example of something fungible – a $1 bill is easily convertible into four quarters or twenty nickels. You can easily exchange $1 bills with other $1 bills as their value is not tied to their uniqueness.
“Non-fungible” more or less means that it’s unique and can’t be replaced with something else.
A one-of-a-kind trading card is non-fungible. If you traded it for a different card, you’d have something completely different.
Are NFTs a type of "crypto"?
A NFT is a unique digital asset that represents ownership of real-world items like art, video clips, music, and more. NFTs use the same blockchain technology that powers cryptocurrencies, but they’re not a currency.
Cryptocurrencies aim to act as currencies by storing value that enables you to buy or sell goods. Cryptocurrency tokens are fungible tokens, like a dollar.
NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods. NFTs are not interchangeable – they’re more like one-of-a-kind trading cards.
Some popular Non-Fungible Tokens
- Bored Ape Yacht Club
- CryptoPunks
- Cool Cats
- Azuki
- Invisible Friends
- Axies
- Pudgy Penguins
- Decentraland
- Meebits
- Matrix
- Shiboshi
More info on these coming soon!
How are NFTs used in games?
NFTs can take the form of cosmetics in games such as in-game skins, drops, or items that you could purchase and own. It could then be possible to sell those items to other players or even carry them between games.
Additionally, some game publishers have been exploring “play-to-earn” gaming. This NFT model enables players to earn NFTs while playing their games that can then be sold on the market. One example is Axie Infinity, which some argue has allowed many to lift themselves out of poverty by playing the game and earning money while doing so.
The key distinction between an NFT and the kind of downloadable content we’ve been buying in games for years is the blockchain.
The blockchain gives NFT owners real digital “ownership” that can then be sold to another user on third-party marketplaces. Essentially, the blockchain acts as a decentralized ledger, tracking ownership and transaction history, each time an NFT is bought and sold.
The blockchain’s ledger-like quality works as a built-in authenticator allowing users to more confidently buy and sell digital assets. Game developers are hoping to entice players with this true ownership of the valuable in-game items that have become so sought after.
Of course, the claims about ownership and transferability are debatable – many argue that since an NFT is basically just a license to use the underlying asset, it’s not really “ownership” in any traditional sense. With NFTs, the author of the underlying asset will still generally retain ownership of the copyright, so many wonder what is actually “owned” with an NFT.
If you’re interested in a lengthy, but nonetheless informative, video on NFTs and the inherent problems with them, check out this excellent video from Folding Ideas.
What rights do you have in game NFTs?
Despite its ubiquity, the term “NFT” does not have a universally accepted meaning. In fact, all U.S. regulatory bodies have yet to define NFTs or offer guidance on their legal implications
From a legal standpoint, an NFT should be thought of as a basket of rights granted upon the NFT holder, rather than a particular piece of acquired property. The NFT developer determines the scope of granted rights as well as how the NFTs will be transferred or sold.
Purchasing or acquiring an NFT in a video game can mean different things for different games. Video game developers should define the rights associated with NFTs to meet their needs, whether that means limiting or expanding the bundle of rights.
Oftentimes in video games, players, via the game’s functionality, “purchase” or “own” an NFT. However, the player has not acquired any rights to the underlying intellectual property.
Their ownership really means that the player has only acquired a right or non-exclusive license to sell the NFT on third-party marketplaces or use the underlying digital asset in the game. Thus, while NFT holders can say that an NFT is theirs and point to their name on a blockchain as proof, in actuality, the rights they “own” in the NFT are generally much less than the conventional idea of ownership.
In the ambiguous world of NFTs, one point is certain – developers and purchasers should be careful to understand the scope of rights being transferred or reserved when buying and selling NFTS.
Look – this whole NFT thing is controversial, to say the least. Half of the industry seems to think it’s a real innovation that will change how games work in the future, while the other half thinks they’re the worst thing ever. I’m just the lawyer trying to figure out how to best represent people on either side!
What kind of intellectual property issues do NFTs have?
Anything can be tokenized, including goods with existing intellectual property rights and implications. Therefore, developers must consider what intellectual property rights they have in the underlying digital asset and any rights they need to procure before creating any NFTs.
Before video game developers integrate NFTs into their games, they should carefully consider what rights they want to grant to players who acquire in-game NFTs. If an NFT contains any of the game developer’s own intellectual property, such as characters, the developer must determine to what extent it wants to license out or retain those rights.
To avoid confusion, developers should clearly define exactly what rights players do and do not get when they purchase or obtain an in-game NFT.
Additionally, developers will need to determine if players acquiring NFTs may need certain rights in the NFT’s underlying intellectual property to make use of the digital asset.
For example, if a player buys an in-game item NFT, that player will need to be granted the right to actually use the item in the game. This includes any intellectual property rights in the underlying NFT digital asset.
To avoid intellectual property disputes, video game developers should include NFT-specific terms in their games’ terms of use that users must agree to before acquiring NFTs. Terms should set forth the rights granted with the NFTs, restrictions on using the NFT, and penalties for violations.
What now?
If you’re wondering how to best implement NFTs into your games and want the legal documents to reflect that, why not contact me to set up a call and discuss? We can talk through your plans and see how I can help add NFTs to your game’s Terms of Use, EULA, or license agreements to make sure you’re legally covered.
Big shout out to my law clerk, Jillian Fries, for her research and her huge help putting this post together!
