Gamechanger: How NFTs Will Revolutionize Video Games
If you walked through Penn Station recently, you may have seen QR codes scattered throughout the facility. These QR codes are linked to digital artwork as part of “Art in Motion,” the largest public NFT art exhibition to date.[1] The exhibition showcases the rising popularity of NFTs, which are exploding across the world and have generated billions of dollars in 2021 alone.[2] Although originating in 2014, NFTs have gained traction exponentially this year.[3] NFTs (short for “non-fungible tokens”) are digital certificates of authenticity for physical and digital items, recognized via a decentralized ledger through blockchain technology.[4] They allow an unprecedented level of digital ownership and transform the way intellectual property may be valued and exploited, especially in the entertainment industry.[5] As NFTs continue to become widespread, one industry is particularly suited to adopt this radical technology: video games.
From Red Dead Redemption II’s record-breaking opening weekend[6] to Minecraft achieving 126 million monthly active players,[7] video games have proved to be a vital component of contemporary entertainment. In 2020, the global video game market was valued between USD $173.7 billion[8] and $179.7 billion[9] and outweighed the film and North American sports industries combined.[10] Given the digital nature of video games, NFTs are naturally compatible. The use cases[11] for NFTs in the video game industry are already producing millions of dollars in profits for developers and players.[12] However, they have not yet cemented their place.[13]
NFTs could strengthen their value in the video games industry through rare, one-of-a-kind bonus content. Currently, bonus content is primarily introduced into a game through three methods: an expensive, limited edition featuring extra content,[14] the sale of downloadable content (“DLC”) released subsequently,[15] or microtransactions.[16] A significant portion of revenue is generated through bonus content that is exclusive to a single game.[17] The value of bonus content (e.g., a limited-edition character “skin”[18]) exists only when a purchaser plays that game[19]; when the purchaser stops playing, the content remains unused and unsellable.[20] If the bonus content is based in an online multiplayer game, it could permanently disappear once the game’s lifecycle expires and the servers are shut down.[21] Over 75% of players desire the ability to sell the virtual assets they bought for currency with real value.[22] While some games offer peer-to-peer markets where a player can exchange content with other players with real value, most games do not; these markets must be permitted by the game’s publisher or developer, are often locked to a single game or platform, and may be viewed unfavorably due to the erosion of equal opportunity gameplay and revenue generated by new content.[23]
Introducing bonus content as NFTs changes all of this. NFT-transactions utilize both real and cryptocurrency, permitting transactions with real value across platforms and decentralizing the options available to sellers and purchasers.[24] Publishers could take advantage of this by creating a limited NFT available through sale or gameplay.[25] For example, a limited-edition item[26] or a character “skin” made solely from a professional eSports champion[27] could be sold at a high price or gifted when a player obtains a significant gameplay achievement. Many gamers may be willing to play the game extensively or pay top dollar to obtain content that few or no other players can acquire, and NFT-technology tracks the authenticity behind the content.[28]
In addition to the NFT itself, smart contract technology within an NFT could track future dealings to third parties and allow creators to earn royalties on resales.[29] Smart contracts are programs stored within a blockchain that automatically execute an action when specific, predetermined conditions or events are met and verified through third-parties called “oracles.”[30] Thus, a smart contract within an NFT could be designed to pay a royalty every time the NFT is sold on. This use of smart contracts already exists in other entertainment-related contexts, such as original owners of “EulerBeats Originals” earning an 8% royalty every time their NFTs are sold on the blockchain network.[31] This feature would be especially valuable to indie games, where the developers often lack capital from publishers in exchange for retaining creative control and intellectual property rights.[32]
Once there are enough players, NFTs will permit wide-spread, true player-run economies with real value. Players can keep or gift NFTs, showcase them to display reputation or experience, and resell them to other players for premium prices.[33] Once a game expires, NFTs could be treated as digital memorabilia bearing emotional and/or cultural significance.[34] With smart contract technology, the creator could profit from every resale at any point in time.[35] Incorporating NFTs transforms the status of bonus content from a one-time transaction into a long-term investment.[36]
NFTs raise legal questions regarding intellectual property and ownership. Like other creations, NFTs are subject to copyright and (in some cases) trademark laws.[37] This may not be a major issue where the creator owns the underlying property,[38] but a developer could produce content that is too similar to another creation and be subject to infringement.[39] Many contemporary games also feature “modding communities” where tech-savvy players create their own unique content within the base game[40]; transactions involving “mods” as NFTs may create liability for participants if done without the rights holder’s permission.[41] An NFT transaction can also be non-exclusive, thus allowing third parties to modify or reproduce the NFT exponentially and reduce its value.[42] Additionally, an NFT could implicate rights of publicity where it might be based on a real person without his or her permission, especially if the NFT was already transacted.[43]
To further complicate matters, creators should be concerned with how their NFTs are used. NFT transactions often grant a license to certain rights to the underlying asset, such as limited rights to use, display, or reproduce the NFT.[44] However, a creator may want to further restrict the use of the NFT, such as preventing public display or video reproductions on channels like YouTube or Twitch.[45] Moreover, situations could arise where an NFT is displayed in a public manner that the creator disagrees with, such as disparaging a game and its developer or publisher,[46] or in a hostile environment with ideological messages.[47] Situations like these may have reputational effects that could further depreciate an NFT.
One method to clarify the rights associated with an NFT could be found in generating more comprehensive license agreements. NFT-transactions most often involve license agreements that keep ownership of the NFT with the creator.[48] Nevertheless, both creators and purchasers should seek to add depth to a licensing agreement when possible.[49] A purchaser would want a creator to warrant and represent that an NFT produced is original content.[50] Conversely, a creator would want to clearly indicate whether the copyright behind an NFT remains in the creator’s possession.[51] Furthermore, a creator could seek to negotiate the limits as to what a purchaser could or could not do with the NFT with respect to use, reproduction, display, performance, and resale.[52] As a result, both creators and purchasers should review the terms of their license agreements and comprehend or negotiate the rights involved with a particular license agreement.[53]
Additionally, a creator should consider the costs and benefits of deciding whether a license agreement should be exclusive or non-exclusive. A non-exclusive NFT could bring exposure and awareness to the creator by permitting multiple copies spread among different third parties but depreciates its value by subtracting its rarity.[54] However, a non-exclusive license could also generate a high degree of creativity through those third parties; an example of this could be seen in Loot, a project consisting of text-based NFTs whose sole purpose is to act as a building blocks for purchasers to create their own adventures and communities around it.[55] On the other hand, licensing an NFT on an exclusive basis allows a creator to limit third-party exposure and increase profits through scarcity, sublicensing, and royalties.[56] This may be especially useful for independent game developers who might have to rely on third parties to develop their games.[57]
As NFTs grow in popularity and presence, creators will want to exert more control over their creations. Through comprehensive licenses, developers and publishers can influence every aspect to achieve the best result for their games. NFTs require work and skill to create, and the legal involvement over the intellectual property and ownership rights should reflect the same level of care devoted to generating these extraordinary items. Given the rapid developments in the industry and the suitability of the mediums, perhaps one day there will be more QR codes offering exclusive video game content in unique locations.
Footnotes
