NFTs, Smart Contracts, & Entertainment Industries
What do you get when buying an NFT? The typical answer to that question is either a speculative item, something that is worth what the community values it, or even absolutely nothing.
A Screenshot with Extra Steps
A Non-Fungible Token (“NFT”) is a unique digital asset.[1] It can be differentiated from standard cryptocurrency because it is non-fungible.[2] That means it is one-of-a-kind, in contrast to a fungible currency – like a dollar or a bitcoin.[3] In other words, an NFT is the digital equivalent of the ownership title of an item.[4] It conveys a certificate establishing the ownership of whatever item, good, real-estate, or picture is linked to the NFT.[5] According to Arry Yu, “Essentially, NFTs create digital scarcity.”[6]
However, that does not mean that intellectual property rights will necessarily be transferred with the NFT.[7] Surely, NFTs were used to scam people or to seduce investors who paid for products that were never ultimately released.[8] This is how 798 ethers (approximately $1 million, and not less than $2.7 million in October 2021) were invested and lost in a future “much-hyped fighting game.”[9] To attract investors, all it took was to promise that the game would provide currency rewards to the game winners.[10]
A Financing Tool to Finance Scams?
However, in many instances, NFTs are an amazing medium for financing projects innovatively.[11] For example, the musician 3LAU has sold thirty-three NFTs, which add up to $11 million, giving its buyers some royalties and other rights over his album.[12] Some of the album’s investors can participate in choosing a song name and can collaborate with the musician in a future project.[13] More interestingly, an artist could use NFTs to leverage the investment to finance the album production, where they would not have had the money to do so otherwise.[14]
A Smart Contract for Smart Ones
The short history of NFTs, all the buzz, successes, and scandals show that it is not all scams nor are they all good.[15] In the end, it all comes down to what is embedded within the token.[16] Just like in a regular licensing contract, one interested in buying NFTs needs to know whether intellectual property rights are effectively embedded within the NFTs and, if any, which ones and under which conditions.[17] Indeed, as minting (or creating) an NFT does not technically vest any intellectual property rights by default, one should initially assume that no intellectual property rights are associated with the NFT.[18]
This is where the smart contract comes in and why it is blooming in various entertainment industries.[19] It allows its parties to agree upon terms and conditions without any need for interpretation.[20] The smart contract enforces itself automatically according to the technical instructions chosen by the parties and coded within the contract.[21] For example, “if license fee is not paid for 3 months, the contract is automatically terminated.”[22] This not only provides an opportunity to improve license contract performance, but it also opens the door to new web3 contracts, wherein a party may bid for an NFT that gives her the IP rights of a sponsor.[23] For example, a professional tennis player created NFTs that represented the rights to place an advertisement on her arm and shoulder during certain tennis games.[24] This would open sponsorship opportunities to athletes who were not even considered by the brands before because they were too young or not ranked highly enough,[25] More surprisingly, smart contracts may be used to develop amateurs’ and professionals’ “animated series curated entirely on the blockchain.”[26]
As a policy matter, smart contracts open entertainment markets to new players.[27] Smart contracts are a decentralized wealth creation instrument that could give artists and creators even more value than regular licenses.[28] That dramatically increases the level of popularity and democracy in creative and entertainment industries.[29] In fact, one could argue that the web3 evolution is a democratic revolution.[30]
A Not-So-Smart Jurisdiction?
Smart contracts could also provide litigation rules.[31] Indeed, as the smart contract is located on a blockchain, potentially between two parties located in two different countries, it may be “smart” to include an arbitration clause, or at least a mediation provision in the smart contract itself.[32] Fortunately enough for attorneys, their services will still be needed to argue, negotiate, reach agreements, and draft the smart contracts.[33]
Footnotes
