What are NFTs? A quick reminder

Non-fungible tokens (NFTs) are unique digital assets (digital art is a common example, but it could be anything which is capable of being stored digitally). The data which records their origin and chain of ownership is stored using blockchain technology or other distributed ledger technology. Put simply, a blockchain is a decentralised digital database which cannot be edited.

Web 3.0

The market value of NFTs is forecast to exceed $35 billion this year and $80 billion by 2025.

These figures are often used as evidence of a maturing NFT market, but it is worth pointing out that – even with an $80 billion valuation – the NFT market would still be in its infancy. As a point of comparison, Facebook's parent company, Meta, lost more than $230 billion in a single day earlier this year.

Nevertheless, this early-stage market has obvious appeal for developers and investors alike, who speculate that these market conditions are analogous to the growth of the internet in the 1990s. The comparison may seem difficult to justify, but it is true that the power of the internet was not realised until many years after its creation.

Similarly, as the power of blockchain technology begins to disrupt various industries with use cases far beyond digital artwork, NFT enthusiasts anticipate an internet-like revolution over the next 10 years.

Play to earn – the future of gaming?

One NFT application which has gained traction in recent years is play-to-earn (P2E) gaming. As the name suggests, P2E games are games in which players can earn NFTs and other crypto assets as a reward for playing.

These in-game digital assets can be stored, traded, and transferred on the blockchain for money. There is nothing new about prize-gaming with e-sports tournaments becoming increasingly popular, but the P2E model has several unique features which distinguish it from the 'winner takes all' approach of e-sports.  

Unlike traditional prize gaming, P2E games build the earning and creation of digital assets into the gameplay. The NFTs accumulated will often have value as in-game assets which offer a competitive advantage, as well as being collectable assets in real-world terms.

For example, CryptoKitties (widely acknowledged as the first game of this kind) allowed players to earn, buy, collect, breed and sell digital cats. The resulting CryptoKitty NFTs have sold for as much as $1.3 million. This integration between the gameplay and the reward is a unique development and flips the common in-game purchase model on its head. Gamers spend on average the equivalent of one working day per week gaming, and so the opportunity to monetise this time has obvious appeal.

These lucrative P2E games are an exception, but the P2E model offers a new entry point for aspiring professional gamers as well as access to a new market of incentivised gamers for developers.

IP infringement and beyond

The IP subsisting in the codebase of games has long been considered the most valuable asset of game developers. There are obvious reasons for this; if a developer is unable to prevent third parties from freely accessing and distributing the game, how can it make sales?

The community norms of P2E games have reversed this assumption with an expectation among players that developers should publish the codebase of their game on a permissive opensource basis so that the mechanics of the game and the existence of incentives can be verified on a trustless basis. Consequently, P2E game developers do not enjoy any of the rights ordinarily afforded to IP owners, such as exclusivity and the right to prevent third parties from copying and redistributing the game.

However, since playing is only half the reason players participate in P2E games (earning being the other half), any copied version of a P2E game is unlikely to gain any traction. This is because the value of the NFTs earned in the game – like traditional artwork – is intrinsically linked to their origin. Information about the origin of an NFT is easily verifiable on the blockchain and so any copycat NFT will have little or no value on the resale market. In addition, because the NFTs earned in P2E games often have in-game applications too, a third-party NFT will have no utility within the original game.

This may turn out to be a surprising answer to the problems of IP infringement and piracy in the gaming sector. Unlike traditional games, where the origin of the game is not a primary concern of the player so long as the gameplay is identical, the P2E model is attempting to create an inextricable link between the origin of the game and its value. The logic goes that even if the game can be made available with little effort by a third party, there is no point playing that version of the game because the digital assets earned will not have the same value or utility as those earned in the original game.

The link between origin and value has been well-established in other sectors such as fashion and art, but the P2E model appears to be leveraging this relationship in gaming for the first time. P2E developers also have an advantage on the fashion and art sectors where counterfeit products remain prolific, because the origin of an NFT is easily verifiable on the blockchain.

What's the catch?

This overlooking of traditional concerns around IP protection is an intrepid gamble for P2E developers and is not without risks. With very few major players and many start-ups in this space, it is difficult to see how new entrants will be able to garner a reputation or build a brand such that players care enough about the origin of the game in the same way consumers care about the origin of luxury fashion or high-end art.

This problem is compounded by the fact that NFTs themselves are not yet directly regulated in the UK, and their treatment under IP law remains uncertain. It may transpire that there is no good way for P2E developers to protect the copyright subsisting in the assets underlying their NFTs, especially because P2E community norms dictate that the IP behind in-game NFTs should be publicly distributed on a permissive, commercial use licence. This is in keeping with the general trustless and transparent philosophy of blockchain technology, which was created in part to eliminate any single point of control.

In addition, in the absence of a trade mark registration, there is currently very little to stop third parties copying a P2E game entirely including the brand name, the mechanics of the game, the codebase and even the in-game NFTs. Consequently, new developers in this space are currently over-reliant on a 'first-mover' advantage and hope that their brand can gain traction and trade marks quickly enough to deter potential copycats.

There are a number of important open questions in this regard: will P2E developers double-down on their disregard for the importance of IP protection or will they attempt to establish new norms around distribution and publication of their IP? As cases regarding NFTs and IP infringement  are starting to reach the courts, what approach will they take in terms of the ability to prevent minting NFTs where there is IP in the underlying asset? These questions are unlikely to have unambiguous answers as outcomes are likely to vary across and within jurisdictions.

Looking to the future

IP protection is just one of many legal issues to navigate as the P2E market evolves; the possibility of financial regulation from the FCA, as well as the application of gambling laws to P2E games also pose existential questions for this new model of gaming.

The major game developers have so far adopted a 'wait and see' approach while these questions are worked through, but it is possible that these ambitious attempts to disrupt the gaming sector may in fact present an opportunity for entrenched brands which have already accrued enough goodwill to swoop in and claim this market for itself when the time is right.

If the internet analogy bears any weight, then we could see P2E versions of Call of Duty and FIFA sooner than we think.