B (7:35)

Cameron Pick, thank you very much for talking with me about this today.

C (7:39)

Thanks so much for having me here. It's great to be here.

B (7:42)

Let's give kind of a quick kind of basics about NFTs for our listeners who really don't understand what they are. And I've only gotten a better understanding of it by talking to you. So.

A (7:54)

So what are they and can you.

B (7:56)

Give us some examples?

C (7:57)

The easiest way to think about it is that NFTs are essentially a digital receipt or certificate of authenticity that's recorded on a blockchain. So it gets all the benefits of blockchain technology, which means that it's decentralized and it has a security and immutability benefits and it's protected by cryptography. The essential idea behind NFTs is that they're a digital or Online receipt showing proof of the asset that you have. And that asset can be many different things. It can be digital art, so before people own physical art, but there are a lot of online images that could have value, and there just wasn't really a great way to capture that value. NFTs can be used for tickets. Again, they're a digital receipt, and it's a better way to avoid counterfeiting. They can also be used for backstage passes or for fan engagement for different artists. And then they can also be used as video game pieces. So some video games are very popular and they'll actually sell different pieces in the game, like a weapon or a castle or a car, something like that. But the game creator was always in control of who could buy the assets, what they'd be, price that, and whether or not someone could transfer them on the secondary market. But by having this on a blockchain through NFTs, the NFTs are available to anyone, so the creator is no longer in control of these. Another good example of the use of NFTs can be for real property. You can actually sell your house through an nft and that can solve a lot of issues related to title. You can make it more liquid and it can allow for quick and easy sales. And you can actually break up NFTs and sell fractions. So it can allow for people to speculate on real estate that they wouldn't have been able to in the past, where someone can break their NFT up that represents their property into fractions, like let's say 1% and other people can purchase those and kind of speculate on, on a home or on commercial real estate.

B (10:12)

Can we talk about ownership rights? So you talked about the underlying assets a bit. How, how can a creator of an NFT retain certain rights like copyrights and others?

C (10:24)

So kind of the default is that the creator does retain the copyright and other IP rights, like trademark or any patent rights, but certain NFTs can have it baked into them that when you do transfer the nft, that you transfer the, the copyright along with it. But that's, that's not really the, the default. The default is that when you buy the nft, you would own the, the asset. So if I'm buying digital art, I would own that, that image and I'd have the right to resell that image, but I wouldn't necessarily be able to reproduce that image or make derivative works off of it.

B (11:06)

How do you know? Trace the authenticity or provenance of NFTs? How can the ownership be verified?

C (11:14)

So NFTS are verified on a blockchain and the blockchain is essentially a public ledger. There's a few different blockchains. I think the most popular ones are Ethereum and then Solana. And this public ledger is maintained by thousands of computers or nodes that each store a copy of the blockchain. And so the way the verification works is that if each of them store that copy and have a consensus essentially that you're the owner of the nft, then it's recorded in the ledger and anybody can see.

B (11:55)

Seems like from what you're describing that it's, it's pretty hard to counterfeit or to commit fraud here, but like it's almost uncrackable. But, but nothing, nothing is. Are there additional security measures you would Recommend to protect NFTs?

C (12:12)

So far nobody's ever been able to change what's stored in these public blockchains. No one's been able to like hack a blockchain in a similar way that people have hacked servers in the past. But the vulnerabilities aren't really on the blockchain itself. The vulnerabilities are on the users that are maintaining these. The users have to maintain their keys and if anybody has access to those keys, then they can take the NFT and there's no way to really undo the operations on a, on a blockchain in a similar way that like a bank can undo transactions that are just stored on, on their server. So if someone tricks you, causes you to give them access to their keys, they can, they can steal the nft. There wouldn't really be any way to, to get them back.

A (13:04)

So it sounds just like a lot.

B (13:05)

Of, a lot of data breaches and things like that. It seems like the humans are the, are the vulnerability which leads to kind of old school crime where you get people to sign things or you scam them. So old school criminals are going to have a future still staying on intellectual property rights, how are they protected in secondary market transactions?

C (13:25)

NFTs don't necessarily have to transfer over IP rights, but they can. And there's certain examples of NFT projects where they have transferred them over. One example is Bored Apes. So Bored Apes is some project where they sold different cartoon images of, of abes that actually became very popular. It kind of went viral for a bit of a time. And when you transferred the Bored ape itself, you also received the, the copyright to do whatever you want with it. And I think actually Seth Green was gonna make a TV show off the board ape that, that he bought because he had the copyrights to it, but something went wrong with that. He never, I don't think he ever ended up making that show. But there are different ways to transfer the copyright with the NFTs. And so Andreessen Horowitz, for example, proposed this idea of can't be evil licenses that can be tied with NFTs. And these licenses hand over different rights. There's essentially, I think, six different licenses with different flavors of what types of rights are being transferred, whether they're display rights, distribution rights, making derivative works. And users can pick and choose what they want to be able to transfer and then include that in the. What's called a smart contract, which sets out the terms for the nft and those terms are stored on the blockchain. So when the NFTs transfer, those terms are automatically transferred and everyone can see exactly what those. Those terms are.

B (15:14)

And then the can't be evil licenses.

A (15:16)

They are what they sound like.

C (15:18)

Yeah. So this came from Creative Commons licenses, which are open source licenses that were referred to as don't be evil licenses, basically allowing people to have open source access to different software, but in exchange that they would attribute it to the original creator or they would follow the terms that that creator wanted to have them follow. This was changed to can't be evil for blockchain technology because it's placed in code. And because it's placed in code, someone can't ignore the terms in the same way that they could with a physical contract.

A (16:02)

Is there anything else you would say.

B (16:04)

About what should be included in NFT contracts?

C (16:07)

I think it's just important to have the terms included in the smart contract. So that way it is on the blockchain and it's not in some kind of private communication that doesn't necessarily get followed through. But having the terms in a smart contract on the blockchain keeps them on this ledger forever.

B (16:31)

Can you talk a little bit about how these things are valued and pricing? How is that done? Is that strictly kind of a free market issue?

C (16:39)

Yeah, it's a free market issue. I think it's similar to trying to value physical artwork, which can be very difficult to do. I mean, I know I don't really have a good understanding of why certain art is very valuable and others are not. I think that's. That's similar for NFTs. It's just about how popular they are when it comes to digital art and how excited people get about the project. But then for things like if it is an NFT representing physical property like a car or a house or something like that. I would think the values would just be the, the same values.

B (17:20)

What can you tell people about the size of this market? This, this is big business. There's some big players in it. We had chatted before about recent developments with OpenSea. What, what can you tell us about the market size and what happened with, with them?

C (17:34)

The market got really hot for a little while in 2021, and that's when a lot of these kind of digital art NFT projects launched. The markets really cooled down recently, but it's very cyclical, so it, it might heat up again in, in the 2021 market, NFTs were mostly digital art, but they can be all these different things. And so the market might move towards tickets or video game assets or other types of NFTs like backstage passes, are having VIP access with certain celebrities or influencers. I could see the market moving towards something like that, but right now the market's really cooled off substantially.

A (18:24)

Well, Cameron, thank you very much. That concludes this episode of the Emerging Litigation Podcast, a co production of HP Litigation, Critical Legal Content, Velec's Fastcase and our friends at lawstreet Media. I'm Tom Hagee, your host, which would explain why I'm talking. Please feel free to reach out to me if you have ideas for a future episode. And don't hesitate to share this with clients, colleagues, friends, animals you may have left at home, teenagers you've irresponsibly left unsupervised, and certain classifications of fruits and vegetables. And if you feel so moved, please give us a rating. Those always help. Thank you for listening. It.