“Metaverse Masterclass” is a series of reports, articles and interviews from experts around different topics in Metaverse. This is an article by Doug Thompson, origially published in Out of Scope.

“In Fortnite, you are INSIDE a narrative about the Metaverse. The Rift Tour may make that narrative even more explicit. But let’s not forget about the Bored Apes. Because there’s more than one story being played out.”

I find myself shooting at what I’m told aren’t portals.

Reality is breaking down.

Waves of energy radiate around me, capable of changing anything in the blink of an eye. Jones has turned into a butterfly.

All this is happening after running through a gauntlet of licensed characters. Er, I mean attackers.

Creatures from Aliens and The Terminator, Kratos from God of War and a digital Sigourney Weaver were all part of pitched battles while the blue orb rotated overhead.

But instead of shooting at it, what I really, really want to do is jump through that little tear in the fabric of reality:

Until I remember that while this looks like Fortnite, I’m actually inside a narrative about the Metaverse. And we aren’t ready to make that leap just yet.

Fortnite and The Rift Tour

This week, a ‘superstar’ will hold an event in Fortnite as part of the Rift Tour.

It’s rumoured that Ariana Grande will ‘perform’ based on leaked court documents and the creative winks and nods ahead of the event.

We’ll know more on Monday.

Regardless, the event has the potential scale of the Travis Scott concert which had 12.3 million concurrent ‘attendees’, 27.7 million unique players across 5 showtimes and 45.8 million views.

Those are the kinds of numbers that generated reams of news coverage. We had seen the future of the music industry, live events, and online social activities. And it was bigger than anyone expected.

The Rift Tour might not reach the same scale. But let’s say it does. It promises:

A musical journey into magical new realities where Fortnite and a record-breaking superstar collide.

New realities?

Wasn’t Zuckerberg talking about that?

While other companies have been suddenly talking a lot about the Metaverse, Ariana Grande (or whoever the record-breaking superstar is) might actually show us the way.

A Narrative ABOUT The Metaverse INSIDE The Metaverse

And that’s what’s potentially so profound about what Epic is doing with Fortnite. While Fortnite itself will NOT become the Metaverse on its own, it IS laying down some of the tracks to a time when all of our virtual worlds and galaxies are interconnected.

They’re creating a mythology, a story, a game mechanic and a publishing schedule in support of their stated desire to make the Metaverse happen.

They aren’t just expanding the size of their world, they’re creating a mythology, language, and rationale for why it will happen and what its value will be.

And so the Rift Tour isn’t interesting just because it might be a fun event with potentially millions of concurrent attendees. It’s also interesting because:

• Epic will again have a chance to push the boundaries for the experience of attending an event in a virtual space. Travis Scott shattered many of the conventions of what a virtual performance can be. Think of it like some wild, slightly hallucinogenic Disney ride and you’ll get the idea. It’s all groundwork to answering a more important question than whether the Metaverse will be browser-based or viewed in VR: why will people show up? How do you make online spatial experiences entertaining and fun?
• Second, how does it tie in, if at all, to the larger Fortnite narrative? The fact that it’s called the Rift Tour at least gives a passing nod to the idea. Because this narrative, in my view, doesn’t just support playing the game, it’s actually an uber-narrative about what the Metaverse is, translated in a language digestible to the 18–24 year olds who play.

A Complex Tale of Time, Power and Place

Now, let’s be clear: the Fortnite narrative is complicated. It somehow manages to reconcile Batman (and manage a limited edition comic as a spin-off in the process) and Deadpool.

There are time loops, rifts, shadowy agencies and a ton of branded and licensed content.

At first glance, it mostly seems like a convoluted excuse to change the Island up every now and then, to launch new skins and cosmetic enhancements (their main source of revenue outside of sponsorship), to justify new enemy characters and weapons, and to create partnerships with Ferrari or Marvel.

It’s a story of powerful forces trying to control access, superheroes arriving via rifts in reality, and…well, and YOU, a foot soldier struggling to survive yet another mission loop on a constantly changing island.

The narrative isn’t really needed to play the game, anymore than you need to purchase a custom character.

This isn’t Red Dead Redemption solo play where the story is the main driver of gameplay (I miss you, Dutch, delusional though you might have been!)

We’re here for the fun. We’re here to bash and shoot stuff with our friends. And we’re here for the occassional concert or DJ gig.

The narrative mainly seems to server a larger purpose: it explains why, in spite (or because of) all these secret agents and heroes and mysterious portals, a lot of content can come IN but we can never really leave.

Until, maybe, the day that you can.

The Show Bible for the Metaverse

It’s not like Epic is keeping this a secret.

In an interview with The Verge, creative creative officer Donald Mustard said that all those licensed characters were more than just an excuse to sell more skins:

“But Mustard says that it’s also a critical part of the storyline, nodding to something he and others at Epic have eagerly talked about creating — the Metaverse, comprised of characters and storylines from countless films, shows, and games all in one place.

Creating the Season 6 opener with the Russo Brothers, who know a thing or two about creating property-spanning universes, is another obvious nod in that direction.

Tim Sweeney, CEO of Epic, has been talking about Fortnite as something that transcends gaming, and has explicitly linked it to the Metaverse (the fact that one place he said this was in a court room just adds gravitas).

And so we return to the Rift Tour.

“A musical journey into magical new realities.”

Ariana Grande might not let us go there after the concert is done, but she might hint that our ability to travel between worlds is on its way.

Tools, Film Grammar and Distribution

Movies can extend their ‘film grammar’ in part by changes in technology.

James Cameron is perhaps the most famous for this: Avatar, for example, was using Mandalorian-style technologies long before music stars were filming on LED stages. With real-time compositing, Cameron was able to see his actors ON the CGI sets during filming.

More profound shifts in the grammar of storytelling occur when we shift media. From radio to screen, from silent films to ‘talkies’, from network television to cable, and from TV to taped and streamed.

The transition to virtual worlds has resulted in a similar and profound shift in the ‘grammar’ of storytelling. This shift builds off of the profound advancements in game-based storytelling and other immersive arts. And it translates it through the lens of highly concurrent experiences.

These shifts in media create a cascade: changes in media are the results of advances in technology. More advances in technology provide new tools to storytellers. The storytellers get better at their craft, which attracts wider attention from the distributers, (whether movie theatres, cable channels or Playstation).

What Happens When You Own The Full Pipeline?

But what happens when one company is the company that builds the cameras and tells the stories and has the capacity to distribute them?

You now have the perfect virtuous circle: they can test the ‘film grammar’ of the new medium, refine gameplay, figure out how to hold a virtual concert, get data on user-generated content (through its Creative mode), and find out which licensed content ‘pulls’ more than others.

By providing the Unreal tools and the Epic marketplace to other developers they can both help to guide a shared library of best practices and learn from others.

They’re not constrained to a particular film type like a movie studio would be. Because they’re the ones making the film.

Oh, and they can also distribute the experience.

Epic’s fight to get Fortnite on consoles was a genius-level achievement on par with what Steve Jobs did with the record companies for the iPod.

Launching their own app store helps to insulate them against — well, against things like Apple booting Fortnite from iOS.

A Story Built on a Road Map

And so Epic has a great deal of control over its product road map.

It knows how quickly it can develop new features for Unreal, it knows what pieces it’s missing (and can acquire some of those pieces), and it can sequence changes to its payment systems, identity and log-in and marketplaces.

Fortnite is creating a mythology of a future Metaverse. Fortnite uses all of the technology that Epic creates. Fortnite therefore can ‘attach’ its storylines to that road map.

Tim Sweeney has made it clear, for example, that Fortnite is being transitioned to UE5. Will Fortnite take advantage of the advanced rendering and realism offered by Lumen and Nanite?

Would YOU?

Maybe you’d leave Fortnite Island alone and preserve the cartoon-ish gameplay. But maybe you’d create a storyline about how certain ‘rifts’ actually lead to highly realistic worlds.

Imagine jumping through a rift in Fortnite and landing in a “Thor World” spin-off: a highly detailed and rendered version of Asgard.

Myths and Stories Make The Metaverse

My nephew really doesn’t care about the finer points of “what is the Metaverse”.

By the time the Metaverse is actually here, we won’t even need the name. We’ll just be “in” the space which is online:

But imagine a 12 year old today spending time in Fortnite. Coupled with the dense cinematic universes of Marvel and Star Wars, these are the mythologies with which they’re growing up (I’ll leave aside cultural commentary).

They’ll probably remember that they went to their first concert in Fortnite or Roblox the same way I remember seeing Supertramp. They’ll probably remember interacting with their favourite characters or the month they ran around dressed as Deadpool.

The breadcrumbs and Easter Eggs were all there. They were participating in a story about the how and why worlds existed and how they became interconnected.

And if all of those worlds interconnect in a seamless way….then they’ll have arrived in the Metaverse.

We just won’t call it that. It will just appear.

One day you’re hanging out with friends at an Ariana Grande concert and the next you’re teleporting through the ‘Rift’ to visit Batman or to kill Aliens next to a digital Sigourney Weaver.

The only thing missing are the Bored Apes.

Stories from the Ground Up

There’s another storyline. And it has nothing to do with Disney/Epic cross-licensing, Sony Music or using Unreal to recreate Mandalorian in your living room.

And it starts with the Bored Ape Yacht club:

Instead of Marvel characters and Kratos it has…well, it has bored apes:

(Maybe the only cross-over thing here is the banana skin in Fortnite. I toyed with some sort of analogy about the Bored Apes eating Fortnite for lunch).

Now, at first glance, the Bored Apes seem like edgy cartoon characters. Much like the narrative in Fortnite, they don’t seem like much more than an excuse for something else: to sell art work or t-shirts or craft beer.

In fact, they really aren’t anything more than the above images. 10,000 of them.

But there has been almost $100 million in trading value for those images.

Sure, it’s not quite the same money that Fortnite has pulled in.

And the Bored Apes don’t really exist anywhere in particular.

You can’t wear them like a skin in a virtual world. You pretty much just throw one up as your Twitter profile photo.

But scratch the surface and there’s more to it. First, you’re joining a ‘club’, a sort of fan community with its own benefits.

As the New Yorker explains:

When a buyer makes his Twitter avatar an image…it’s a sign of allegiance, and also a signal to other buyers in the club to follow him on social media. (“I changed my picture to the ape and I got hundreds of Twitter followers the first day,” Swenson said.) The center of most clubs is Discord, the real-time chat app. Bored Ape Yacht Club’s Discord server has more than thirteen thousand members…The mutual investment, both social and financial, forms a kind of bond among club members within the wider Internet bedlam.

The creators of the Bored Apes had identified an opportunity: instead of simply creating limited series artworks and selling them “We were seeing the opportunities to make something with a larger story arc”. (Emphasis added).

As the New Yorker outlines it, these types of works :

…whether of people or monkeys or ghosts…were fairly generic. Bored Ape Yacht Club, by comparison, created rich and detailed iconography drawn from its founders’ personal tastes. The setting of an Everglades “yacht club” (an ironic appellation) was meant to evoke places like Churchill’s Pub, a well-worn Miami music venue that Gargamel and Goner frequented. “We were deeply inspired by eighties hardcore, punk rock, nineties hip-hop,” Goner said…From the scenes of an apocalyptic tiki bar on its Web site to the jaunty style of the apes themselves, Bored Ape Yacht Club felt more like the plans for a triple-A video game… The combination of sophisticated visuals, subcultural fashion accessories (shades of Hot Topic), and literary pretension made the Bored Ape universe catnip to a certain crypto-bro demographic.”

And that crypto-bro demographic is important because the Bored Ape images are NFTs (non-fungible tokens).

Your ownership of one of the 10,000 apes is memorialized on the blockchain. There is one token per ape, and therefore only one person can “own” it at a time.

You can sell your NFT (your ape) off. Although be warned: the price keeps climbing. Digital scarcity has been created. You’re joining an exclusive club….and it’s a club of Bored Apes but it’s a club nonetheless.

Membership has its privileges.

But aside from digital scarcity (which frankly can have echoes of the scarcity of Beanie Babies), there’s something else that drives the success of Bored Apes.

Because by owning one, you can commercialize the asset:

(Bored Apes) was also one of the first clubs to offer individual buyers the commercial rights to the apes they own: each member is allowed to brand his own projects or products and sell them independently. In the three months since the club launched, Bored Ape owners have put the cartoon primates on lines of craft beer and created animated YouTube series, made painted replicas, and designed skateboard decks. Kyle Swenson, the clothing reseller, launched a publication called the Bored Ape Gazette, to cover the community.

The Primitives of the Metaverse

And so we start to see the other way that the story of the Metaverse unfolds.

At the level of Fortnite, a large-scale world is the backdrop for complex stories that unfold on a pre-determined schedule of chapters and seasons. The stories get bigger and bolder, the stars get bigger, the world changes…until other worlds are added, and we follow along, tracking the mythology of the Metaverse as it materializes around us.

At the level of Bored Apes, the Internet is rebuilt from the ground up with the primitives of story.

The story isn’t preassembled. Instead, the components of the show bible are created, and instead of passing a copy off to a show runner or writer, they are auctioned off.

The only thing that was created were a bunch of primitives. How people assemble these primitives is an exercise in community building, commerce, collaboration and imagination.

This idea: that NFTs represent creative primitives, is comparable to the ‘prims’ of Second Life:

In Second Life the entire world was built from the prim up.

A cube could be shaped and connected to another cube. The resulting shape could have a texture thrown on top. Suddenly, you have a chair or table or dress.

The genius of the prim, however, lay in what Philip points out above: the permission system and the “For Sale” field.

Because once you’ve used your prims to create a dress, you can now sell it. And the next person has permissions for whether they can copy, modify or transfer that dress, and more importantly, they can include it in their own personal story.

They wear the dress to a wedding, they put the chair in their virtual house, they have dinner at the table with their family (other people, represented by avatars, living an often full second life).

NFTs As Creative Prims

NFTs have a bit of a definition problem, in the same way that the word ‘Metaverse’ can elicit strong reactions.

It’s a technological affordance and a bunch of things can spin out of that affordance: from providing a trustworthy ledger for real-world art, for example, to creating speculative buying clubs for fancy JPEG art works through DAOs.

But let’s focus on the Bored Apes (which, by the way, have inspired dozens of similar storylines).

The images at the heart of Bored Apes are just little granular pieces of content. They’re not unlike prims.

They contain contracts for how they can be used. Their elements can be remixed, combined, and repurposed. They can be spun off into separate stories. They can be the basis of a new line of t-shirts or can be used like a high-signal version of the skins in Fortnite.

The promise of NFTs (and the blockchain) therefore is that we can create the primitives for large-scale storytelling.

And that the stories can travel further and reach more people. This is facilitated, first, because we can have ‘skin in the game’ (there’s a financial upside, similar to how the dress maker in Second Life can sell the creation); and second because right now you don’t need a particular skill set to change your Twitter profile in order to participate in the narrative.

The Road Map for NFTs

But just like Epic has a road map for its technology, there’s a presumed/collective road map for the Bored Apes (and similar ventures).

Namely, that eventually, we’ll move beyond remixing GIFs and JPEGs and start remixing larger and larger chunks of story.

The Bored Apes represent the ultimate unbundling of IP (think of all of those characters running around Fortnite) into its smallest components.

Eventually, those little chunks of story content will be easier to reassemble, view, display, remix and turn into story.

In the Bored Apes narrative of the future Metaverse, a demand will be created by the distributed nature of all of those little chunks of story.

As the pool of primitives grows and as more people own those primitives (whether unbundled IP from a big brand like Coke or a Bored Ape), we’ll want a place to play, to create and to share.

The owners of all of those Bored Apes and digital paintings and creative prims are going to demand a home. And the creators are going to demand better and more distributed tools to remix their primitives.

The Convergence of Story

This probably sounds like a showdown between Fortnite and the Bored Apes.

I don’t believe it is.

It might be a showdown, of sorts, between different narratives. My recent post about the Metaverse generated — well, it generated a lot of discussion.

And aside from the highly technical reasons why it’s important to ‘get granular’ about what we mean when we use the word “metaverse”, it’s an indicator that we all want a voice in our shared future.

Interconnected worlds are coming. Stories are being told about what those worlds will be, how they’ll connect, and who will own the gates, experiences, and myths.

As I was writing this post, Tim Sweeney had this to say:

And I personally believe Tim when he says that we all benefit from a Metaverse that is open (which has has said many times). That it can’t be owned by any one person.

The Primitives of Scans and 3D Content

I also believe that Fortnite isn’t the only narrative that Epic is building. Yes, it’s creating a particular mythology and storyline that leads us to a future in which worlds interconnect.

But so is Sketchfab, which Epic just purchased.

As I outlined in my post at the time, Sketchfab represents something more than just a marketplace for 3D content.

The photogrammetry that it hosts, for example, is another form of storytelling primitive. They are digital Polaroids which we’ll eventually be able to collect, place, and co-create. They also represent the blurring of the lines between physical and digital realities.

Interconnected worlds won’t just exist when you log in: they’ll exist when you walk around the very real neighborhoods on the other side of your front door.

I actually believe that the narrative for Sketchfab and the narrative for Fortnite will converge: at some point, Epic will open everything up, and you’ll be able to spin up your own island, or collect your own Sketchfab photo album, and you won’t be locked into a proprietary “Unreal/Epic” model.

Epic will still make money entertaining and creating games (and helping other developers to do the same) but they will ‘release’ the ‘kernels’ for the Metaverse itself.

This Is The Moment The Story Changed

Today, we’re seeing something that may, in the course of time, be more important than the emergence of edge networks or Lumen real-time rendering: we’re all co-creating a shared mythology of what the Metaverse will be.

The narratives have “legs”. We seem to have a hit or two on our hands.

We’re collecting the creative primitives that will be used to build it while at the same time we’re participating INSIDE a narrative about the interconnection of worlds.

And most of us are having a really, really fun time along the way.

Let’s set a date for after the Rift has occurred and the worlds started to metastasize, grow and connect.

We’ll share some stories about how we were there, back when the narrative of the Metaverse left behind the old tropes of 1990s science fiction (some of us got there sooner) and became something bigger, and more generous, and more fun.

Let’s remember back to that time we saw Ariana Grande together and it made us feel like kids again. Let’s remember how big the possibilities felt, whether we were hanging out in the virtual world of Discord at the Bored Apes Yacht Club, or were on an island dressed as a banana and we danced together.

Because really, there will be so many stories we’ll be able to tell.

“Metaverse Masterclass” is a series of reports, articles and interviews from experts around different topics in Metaverse. This is an article by Jamie Burke, CEO and Founder Outlier Ventures, originally appeared on Ourlier Ventures Blog.

Science fiction like Ready Player One describes ‘the Metaverse’ both as a destination and dystopic process of capture and control.

In RP One: IOI, a single corporation, wants to own and control the OASIS’ servers and databases, enabling them to: delete people, access any information, change the rules of the world, and print themselves infinite currency

The parallels in the first virtual worlds we experience in gaming today and ‘The Web’ more generally are striking: centralised, closed, proprietary, and extractive, with shareholder supremacy elevated over user centricity. A state where giving away your time and data in return for ‘free’ access to platforms has somehow become normalised.

As we invest more time, data, and wealth into digital platforms ($10bn and 4bn hours per month in virtual worlds and gaming environments since 2020 COVID lockdown) it is critical to interrogate their design principles, business models, and terms of service so we as responsible online citizens can decide if we wish to continue to opt-in or divest into alternatives.

By now you’ve heard the term ‘the Metaverse’ thrown around a lot. I know I’ve been interviewed pretty much back-to-back in the media about it ever since the Facebook Meta rebrand. At my investment firm, we’ve been developing a thesis for the Metaverse over several years, publishing a paper called The Open Metaverse OS back in January 2021, pre-empting the hype-cycle that is now unfolding.

Because 12 months is a long time in an exponential technology class we wanted to share a primer and summary of our paper to update and reflect on what we got right, what we’ve learnt since and what might come next. So here it is…

Background context

Inspired by Bitcoin back in 2014, I founded Outlier Ventures, what was then Europe’s first venture capital firm dedicated to blockchain, something we began to understand as a new web paradigm, colloquially called Web 3. A paradigm based on the sovereignty of the user, their data, and digital wealth. For us, very early on, it was clear blockchain could not be looked at in isolation because it represented more than just a single technology but a new open economic system that would enable, and be convergent with, other technology trends. It would fundamentally change the business model of The Web and bleed into almost every industry, well beyond narrow pure financial use cases. More recently, through the innovation of NFTs (Non-Fungible Tokens), blockchains allow for new types of unique digital assets that go well beyond crypto-currencies extending into gaming, virtual worlds, and the wider Creator Economy, what you might now refer to as the Metaverse.

Today, through our virtual accelerator, we have invested in 100+ startups, a number we will at least double in the next 12 months and have helped them raise over $250million in seed capital in the last seven months alone. And by now, we have helped launch several billion-dollar crypto networks into the world. This activity, by any measure, makes us one of the most active investment firms (by volume) in our industry, and we believe is quickly cementing us as ‘the Y Combinator of the Metaverse’, a reference to the accelerator that came to dominate two decades of the Web 2 era.

The powerful thing about our accelerator and this volume of investments is it gives us access to a growing brain trust of startups at the very bleeding edge of the Metaverse. And by virtue, we have had over 3,500+ pre-seed / seed startups apply to our accelerator in the last year, giving us a unique perspective on the market. Typically with a 6–12 month window of advantage on seeing what’s next before it hits a wider venture, which is usually probably one to two years before there may be listed crypto assets, and ten years for publicly tradable stock… if that’s even a thing anymore. It’s not rocket science; it’s just the straight-up size of the data set we enjoy, basic pattern recognition, and a refined intuition for the narratives that are forming.

That’s how we spotted crypto nearly eight years ago, NFTs twenty months ago, and now the Metaverse some twelve months ago before it’s going mainstream. Based on these kinds of insights, I’m going to break down how to understand the Metaverse as an investment opportunity. What’s bullshit, and where alpha can be found for what I believe will very quickly simultaneously become the greatest global wealth distribution and wealth creation event humanity has ever known. At least 10 x what China has been for global GDP over the last two decades.

Foreword

Now firstly, I know many are sceptical of seemingly new buzzwords, and especially ones as ethereal as the Metaverse. But I want to stress that narratives are powerful at mobilising capital and economic activity, and the Metaverse has shown it can cut through and stand the test of time.

Before we get into technical analysis of what the Metaverse is, I think it’s important to say it is first and foremost a contact language for Tech, Finance & Culture to converge and collaborate around a shared vision for the future. Both the future we do and don’t want.

Like the film Ready Player One, science fiction has described ‘the Metaverse’ both as a destination and a dystopic process of capture and control. In Ready Player One, IOI, a single corporation, wanted to own and control the OASIS’ servers and databases, where they could: delete people, access any information, change the rules of the world, and print themselves infinite currency.

The parallels in the first virtual worlds we experience in gaming today and The Web more generally are striking: centralised, closed, proprietary and extractive, with shareholder supremacy (that is structurally prioritised and rewarded) over user-centricity. A place where giving away your time and data in return for ‘free’ access to platforms has become normalised.

This post summarizes the key themes we laid out in a more technical Open Metaverse OS paper, which can be downloaded (for free) from our website, and serves as both an antidote, framework, and thesis for how we can achieve a more open alternative. But it is also a reflection on its success at predicting the world we now find emerging, at an exponential rate, just several months on.

Defining the Metaverse

Technically, the original vision and definition of the Metaverse was a point in time when a user interface made up of both hardware and software blurs the distinction between the physical and digital. This has typically been thought of in the context of advances in AR (Augmented Reality) and VR (Virtual Reality), together known as Mixed Reality, becoming ubiquitous.

However, we believe it’s important we think of it not as a destination, but as a journey or process. This is because it’s important to acknowledge the beginnings of the Metaverse are already here; we are just experiencing it largely in 2D. This is also critical to understand because if we think of the Metaverse as a far off destination, we will almost definitely sleepwalk into not addressing some fundamental design choices about the principles of how we want it to operate, and potentially replicate or deepen what is broken about the Web today.

When you think that with wonderfully immersive devices like the Oculus VR headset Facebook can now track your retinal response to visual stimuli (literally going inside your body to capture biometric data, emotions and feelings you aren’t even aware of) or is actively mapping the floorplan of your home, and the objects in it, given their track record with a pervasive and proven abusive form of what has been called Surveillance Capitalism one can’t help but be sceptical and concerned we are potentially extending a dystopia real-time. This makes it all the more imperative we properly interrogate any Metaverse propositions privacy paradigm, especially Big Tech like Facebook’s, something I wrote about recently.

As I will outline, the process of the Metaverse is multi-dimensional and has already begun through the creation of new virtual worlds, both in the context of gaming with MMORPG (Massively Multiplayer Online Role-Playing Games), and other social venues and experiences. Each exists on a spectrum with often several conflicting characteristics; where the production of content is both by studios and independent creators, value transfer is bi-directional (from digital to physical and physical to digital), and where it is both transformed entirely or just represented to be passively and/or actively consumed. Much of this process is bottom-up and driven by market forces and the general direction of technical innovation. However, we also believe it will increasingly begin to interplay and be informed by top-down government policy around data rights, privacy, antitrust and, most importantly, financial legislation, all of which of course vary wildly around the globe.

Furthermore, people today still make a distinction between the physical and digital economy, even though in reality a company like Amazon is a hybrid of the two. On the one hand, direct-to-consumer has dematerialized much of the retail supply chain, but it’s still both a virtual mall and network of physical fulfilment centres moving around physical goods, as well as a business with a growing number of virtual goods and services like ebooks, music, and video streaming, all of which are consumed entirely on its proprietary devices and platform. So is a company like Amazon or Facebook part of the Metaverse? Let’s take a look..

Furthermore, people today still make a distinction between the physical and digital economy, even though in reality a company like Amazon is a hybrid of the two. On the one hand, direct-to-consumer has dematerialized much of the retail supply chain, but it’s still both a virtual mall and network of physical fulfilment centres moving around physical goods, as well as a business with a growing number of virtual goods and services like ebooks, music, and video streaming, all of which are consumed entirely on its proprietary devices and platform. So is a company like Amazon or Facebook part of the Metaverse? Let’s take a look..

It seems one of the defining characteristics of a metaverse in sci-fi was that somehow it was an economic system independent of, and enjoyed supremacy to, old fiat-based economies controlled by nation-states. This is not true for a platform like Amazon, primarily a US-based company, that uses the local fiat currencies for customers and staff and is increasingly entwined with the US state and its various agencies, but still ultimately at the mercy of central banks and various government policies. And if we look at Facebook’s efforts to launch its own digital currency with Libra (which presumably just like its Universal Login would have extended into its VR platform, Oculus), but because it is a highly centralised and fiat-based company, it has been aggressively constrained and in effect neutered as a genuine disruptive and sovereign cryptocurrency.

Now it could be considered partially true that some games platforms like Roblox or Fortnite are so big they are closed micro-economies, with their own currencies which they control centrally and value systems, like experience points systems, in-game items (skins) and marketplaces, where significant amounts of the wealth are held and traded. This is even more substantial when you think of that as a proportion of a person’s wealth, especially when seen in younger generations. But the reality is only a few games even let you transact in and out of their closed platform using fiat in order to interact with the ‘real’ world because of limitations imposed by governments around fears of money laundering. But even more importantly, wealth is not directly transferable between these microeconomics into a virtual meta economy, or metaverse, with its own sovereign currencies. And you can’t generally borrow against virtual wealth, what you might call MetaFi, to buy physical assets, putting a growing class of digital natives at an economic disadvantage, where 63% of gamers said they would actually spend more on skins if they had ‘real world value’.

Earlier in the year, it was reported users spend 5 times more money in blockchain games than traditional ones, but the sample size was reported as too small and not comparable to the wider gaming industry. However, the recent breakout success of a blockchain-based game Axie Infinity has now proven beyond reasonable doubt what many suspected; that players will spend more money in-game when that value is freely transferable off-platform and value earnt or bought is easily convertible into cryptocurrencies like Bitcoin or Ethereum. A process their co-founder Jiho describes as; ‘what happens when you give users digital property rights’.

It’s what’s helped Axies achieve a record $1.2 billion USD in sales, growing exponentially from just over 108,000 daily active users in June to more than a million daily active users today — now reporting sales of nearly $780 million in the last 30 days alone and more than 1.4 million individual transactions. To give you context, this outperforms every game in every category from AAA to free-to-play globally. And in the process, popularises a new category of gaming, ‘play to earn’.

As you will learn throughout this article this is why I propose perhaps the defining characteristic of a true Metaverse is that it is in fact, rather than necessarily a particular kind of virtual experience, a meta-economy with currencies native to it; where value can be earnt, spent, lent, borrowed, or invested interchangeably in both a physical or virtual sense permissionlessly, importantly without the need for a government or platform.

Competing Multiverses

Now of course it is also true there are competing visions for the Metaverse, a tension which seemed to be present even in Mark Zuckerberg’s own recent musings on what Facebook as a Metaverse company looks like. And it is not yet clear if they can and will co-exist or must be in competition. But to put it simply, there are at least two versions of the Metaverse we observe emerging: one dominated by closed platforms and Big Tech like Facebook / Oculus and the other built on open protocols leveraging blockchains, such as the decentralised virtual land Decentraland and Sandbox.

The distinction of open and closed isn’t just limited to technology choices and the extent to which platforms embrace open source principles with their code and data, but importantly whether they have a closed economy, within or across their own proprietary games, or whether they allow transferability of value outside their ecosystem, how that interacts with fiat-based systems, and to what extent they do or don’t control the monetary and fiscal policy of the underlying economy itself.

It is interesting to see Tim Sweeny himself, CEO of Epic Games and the Unreal gaming engine, which currently enjoys a market duopoly, has chosen to raise a billion dollars to both support the Open Metaverse alternative through grants and investments into startups, including several startups that have been through our accelerator, but also to transition his company and properties into its direction. However, since Steem said they would block NFT enabled games Epic have come out and given more nuance to their approach saying they would explore a more permissioned / curated version of NFTs, presumably akin to an App Store, something echoed by Zuckerberg in his Meta interviews.

Furthermore, there is also another technical and philosophical distinction between visions and emergent actualities of the Metaverse which could be described as “low-fi to hi-fi.” There are platforms that deliberately push the technical boundaries of the experience through both software and the expensive hardware requirements like Oculus and those that design for the lowest possible device and bandwidth requirements for universal accessibility like blockchain-based Cryptovoxels, which is more akin to blockchain based Minecraft. This is critical when you think about these as an economic system and their requirement to not just be immersive but inclusive. However, it must be said, to our knowledge, all of these virtual worlds still require at least a smartphone, which currently excludes 60% of the global population.

As you can see above you can take these as a form of axes that allow for a crude classification of metaverse platforms and virtual worlds that emerge. We believe these two axes are the most important to consider because, when combined, they represent the cost to enter the economic system and the ability to offset that cost by earning value for as broad a range of demographics as possible.

It could be said there is a third classification about whether the platform allows for user-generated content or not, but we think this difference will fade away with time. Most platforms, to varying degrees, will allow for UGC like Roblox or Minecraft and will fall under the degree to which the virtual world is generally ‘open.’ Hence, UGC is not important as a separate dimension when looking to project into the future of the Metaverse. However, the degree of 3rd party developer freedom (whether a professional or user), especially the ability to integrate into crypto and NFTs, will become an important distinction as well as how the economics are split and the degree of data that can be collected from apps to be monetised for the purpose of advertising. As we have seen with Apple’s recent App Tracking Transparency (ATT) features it has become a battle line between platforms and developers costing Facebook’s mobile app business billions in lost advertising revenue making them more intent on controlling the stack down to the hardware level.

It is our belief, and thesis, that with time an open metaverse built on shared open-source protocols, open infrastructure, and a single unifying yet open financial system will erode, or ‘eat,’ and potentially replace closed platforms due to powerful network effects. Today, for many, it’s almost impossible to see how a ragtag of decentralised protocols that make up the Open Metaverse could ever compete with Facebook. But I circle back to my earlier point; whilst they have shown they can build great VR hardware and addictive digital experience, the failure of Facebook’s Libra has shown no private company, no matter their scale, will ever be allowed to create a meta-economy independent of fiat and nation-states.

Meanwhile, Bitcoin has shown how some simple code and elegant game theory can be seeded onto The Web and mobilise, bottom-up, trillions of dollars of capital and physical distributed infrastructure all around the world to create an unstoppable economic system.This tells us, whilst you may be good at creating immersive experiences, it very likely makes good business sense to bite the bullet, connect your digital platforms and worlds to crypto and subordinate them to the decentralised and open meta-economy. And perhaps, if, like Oculus, Fortnite, or Roblox, you currently don’t, are you even part of the Metaverse at all? The painful reality is no matter what you tell your shareholders through metaverse drenched press releases, you are in reality just an isolated game, platform, or virtual world that users will see decreasing reasons to invest their time and money in.

Web 3, a stack for an Open Metaverse

So why are we so convinced of this eventuality? Well over the last decade, since the inception of Bitcoin, and the maturation of blockchains like Ethereum, we have seen an open and permissionless Web 3 stack emerge where ‘the user is the platform.’

It is a paradigm ultimately based on blockchains and their atomic units of account becoming the global digital settlement layer and means that value is ‘minted’ (created), stored, or transferred across other technologies as a form of wealth. But digital wealth can be programmable and represent an increasingly complex range of assets from in-game items and virtual land to loan agreements or futures contracts. In aggregate, this represents an entirely new financial system of currencies, exchanges, borrowing and lending, often referred to as DeFi (Decentralised Finance).

Whilst today relatively small, at just over $2 trillion in combined market capitalisation, you can think of this confluence of convergent technologies as both a new financial system and open operating system for a more open metaverse, an Open Metaverse OS, that sits between the hardware, application software, and the user. Due to its open-source characteristics, anything that is born on-chain (on a blockchain) is transferable and its metadata visible. And therefore the DNA of the virtual worlds that get built on top of it, fully or even just partly, is passed on or inherited. In an evolutionary sense, by using the Open Metaverse OS, the virtual world is pregnant with Web 3. And in aggregate everything that flows through this crypto enabled financial system could in aggregate be considered Metaverse GDP (Gross Domestic Product), or at least Open Metaverse GDP.

The Open Metaverse OS

So how ready is The Open Metaverse OS, for prime time? Well, on the one hand, the Web 3 ecosystem is thriving with several nascent technologies that can enable many aspects of an Open Metaverse, and is being deployed in virtual worlds and experiences as we speak, albeit in an incremental fashion. But on the other, it’s still significantly behind on several measures such as performance and cost when compared to Web 2, which has had decades to mature and where the benefits of economies of scale have been achieved by platform monopolies, which allow some like Amazon to be multi-billion dollar ‘loss making’ companies that ruthlessly undercut any and all competition.

Equally, Web 3 technology has instead been optimised primarily for high degrees of decentralisation and transaction security rather than, and sometimes at the expense of, enabling smooth, real-time interactions and its applications for more 2D web based experiences on desktops and mobiles. As a consequence, user experience in Web 3 has to date been relatively poor and required a high degree of technical literacy due to both the radically different security model of self custody and the nascency of the industry. With frictionless user experience of Web 3 technologies within gaming engines even further away. But this is changing as the world of Web 3 and crypto increasingly converges with new environments like gaming and VR, and there is a generational shift away from Web 2 platforms.

Therefore, the Open Metaverse OS is best understood as an evolving collection of highly composable technologies that will increasingly, but pragmatically, be used to make aspects of an Open Metaverse possible as it seeks to serve a greater global population across several use cases and environments. As it stands, The Open Metaverse OS is concentrated on the critical lower layers of the stack, including what should be non-negotiable features such as user-sovereign identity and assets, in world economics and bridges into and out of its economy, and between each themselves leaving the intricacies of gaming engines, 3D modelling toolchains, and rendering stacks to the primarily centralized world. However, over time we expect the Open Metaverse OS to eat further downwards to decentralise those aspects as well.

In summary, the Open Metaverse is emerging, first slowly and then at neck-breaking speeds given their “exponential nature.”

MetaFi and Its Exponential Assets

At the beginning part of the year, when we first wrote our paper, it was fair to say The Open Metaverse, when compared to The Closed Metaverse, was one full of empty worlds. The number of daily active users across all platforms was sub-one hundred thousand and to be frank completely irrelevant when compared to even Fortnite alone, which at the time enjoyed over 350 million monthly users and had generated $5 billion in revenue in 2020, accelerated by a year of COVID. But we rightly believed this to be deceiving. Rather than their models having any kind of long-term superiority, it was simply a decade of a head start and at that time a lack of alternatives. And whose closed nature only served as a temporary form of moat, that frustrates users and creators alike.

As we have already discussed just several months on, due to the exponential nature of the Open Metaverse, Axie Infinity has now likely already overtaken Fortnite in annualised profits. This fact is truly incredible when you think of the time and cost to develop and launch an AAA game is on average between $60–80 million, can take 2–3 years, requiring a team of 150–250 people. This meant in the past, creating content was extremely expensive, and led to a highly concentrated industry difficult for new players to enter and challenge the status quo. And yet somehow Axies, totally outside the gaming system, and in just two years, with just $9 million in funding, overtook them all.

Now Roblox, is often lauded as somehow a more open kind of metaverse and as an example of the power of letting independent creators build games based on a shared but closed technology stack and centralised, permissioned economic layer. Achieving $150 million monthly users and creators and paying out $250 million to developers in 2020. But, importantly through our lens Roblox is barely close to what you could consider a part of the Open Metaverse. For example, you can’t clone and fork the entire platform and it still serves as a closed ecosystem requiring 850 full-time staff to operate it and $530 million of venture capital to continue steady growth. Far from being the future as we will see it could be seen as the walking dead.

So how can open virtual worlds first catch up and then at least equal let alone surpass the content and rich experiences of today’s dominant yet centralised virtual world and gaming platforms? Well, firstly, there are a longtail of millions of creators (in all forms of media production) currently locked out of participating and monetising their work at all in today’s virtual worlds. And in aggregate they dwarf the industry’s staff working for closed platforms. In fact, many of them are already contractors who would prefer to be doing their own thing. So it seems evident that the creatively excluded serfs will be more than willing to migrate their time, energy and ultimately careers to experiment in our open and permissionless economic systems, especially when they can derive a greater return on their time not just in the initial creation of work but in perpetuity through secondary sales through ‘on-chain royalties’.

Now, several months on from our paper, this is no longer just conceptual. It is abundantly evidenced in the successes of a growing ecosystem of diverse NFT minting platforms and marketplaces such as SuperRare, who achieved their highest monthly sale of $31m in October 2021, set against 2020’s high of $147,000 in December. Let alone Nifty Gateway (owned by Gemini), achieving an average of 50% monthly growth since its launch in March 2020 and OpenSea’s mega $1 billion in trading volume in August of 2021 alone. It has become clear creators when given the option, will overwhelmingly join The Open Metaverse, and people will value their digital works more when they can transfer it off any one platform and trade freely in open secondary markets. And we have only just got started; if you think of the growth curves enjoyed by fungible crypto exchanges like Binance and Coinbase who have onboarded millions of new users into crypto-currency imagine what happens when every possible non-fungible digital asset can be bought and sold freely. And in fact, they have both now launched NFT product offerings and Coinbase CEO Brian Armstrong announced he believed it would quickly become their primary driver of revenue and growth.

Furthermore, saw Beeple (Mike Winkelmann), a digital artist leveraging NFTs and a friend of mine, break art auction records selling a single NFT, Everydays: The First 5000 Days, for nearly $70 million almost immediately after we published our paper, and global franchises such as the NBA Top Shot NFTs generating a high of $231 million in sales in February of 2021, and reported $700m in total sales earlier this year from digital trading cards. But perhaps even more interestingly, rather than existing IP being translated into the Open Metaverse we are beginning to see what you might regard as entirely new ‘metaverse native brands’ emerge on top of blockchains, bottom-up.

A recent example is The Bored Ape Yacht Club (BAYC), a collection of 10,000 unique 8-bit 2D avatars released by an anonymous collective. It has now become a non-fungible token franchise and economy to rival those of crypto-currencies, now at the time of writing worth over a billion dollars. With someone recently paying a total of $3.4 million at Sotheby’s Natively Digital 1.2 online auction for Bored Ape Yacht Club #8817, which, like the rest of the collection, possesses unique traits and characteristics. In early September, Sotheby’s sold 101 NFTs from BAYC for around $24m, to put this into perspective the last 7 days trading volume has hit $23m where the majority of revenue goes to its early collectors and supporters making many millionaires in the process.

What’s truly remarkable and unusual here is whilst a user owns an ape they hold the rights to exploit their individual ape’s IP commercially either permanently if they continue hold it or just momentarily leading to whole ecosystems of BAYC derivatives from 3D avatars, clothing lines, wine, and even sports merchandise, becoming a truly global transmedia brand in just four months.

But it doesn’t stop here! In the closed virtual worlds of platforms like Fortnite, because of their sheer reach, they became powerful ways for entertainers like Travis Scott to reach new audiences. However, very quickly artists, like electronic music producer and recent member of the Outlier partnership Deadmau5, have come to realise rather than momentarily playing in our people’s platforms he can retain direct and full creative and financial control of the experience through what could be considered new kinds of ‘Direct-to-Creator economies’ in his own virtual world, called Oberhasli.

Furthermore, with LiDAR technology now available to anybody with the latest iPhone, the physical world can be mass rendered, translated into machine-readable 3D models, and can in theory be converted into tradable NFTs. These NFTs will be uploaded quickly into open virtual worlds, populating them with avatars, wearables, furniture, and even whole buildings and streets. And because they are machine-readable, leveraging open source standards like Pixar’s USD, NVIDIA’s MDL, Khronos Group and NVIDIA’s Omniverse, they can be fed into AI to spit out infinite variations which again can be better monetised in global and open markets than any one closed platform.

Just as we predicted projects like Mark Cuban backed Alethea AI project are now taking advantage of innovations AI, in the form of GPT-3 from Open AI, to use deep learning to produce human-like text and speech to bring to life otherwise dumb NFT avatars into characters imbuing them with ‘interactive superpowers’. And one can imagine when it extends to other forms of media, virtual worlds and their content will be able to be automatically produced infinitely.

This all means we can expect to dramatically reduce the time and cost to produce games or whole virtual worlds and economies whilst also tapping into a global workforce of millions of creators allowing seamless and decentralised collaboration well beyond the capabilities of a single gaming studio, record label or virtual platform.

Humanity’s greatest socio-economic experiment

One of the most exciting and intellectually interesting things about an Open Metaverse, pregnant with Web 3 principles, is that you can openly (and in a permissionless way) experiment with its underlying economics. Where the same level of experimentation applies to rules of the game that underpin it both at the protocol layer and within each virtual world itself. And each experiment can be done in parallel to the other, in concert and/or direct competition.

For example, a project like Axie Infinity by design makes sure you can not derive value in the system through pure speculation only by buying and holding Axies (playing cards). To earn a yield or at the very least not see your investment decay, you must put them to use regularly in play. If you don’t want to or lack the skill to do that yourself, you must create jobs by lending your NFTs to players to put them to work. This means you can participate in the system by productive capital or through the work itself. The consequence is there are whole villages in Southeast Asian countries like the Philippines doing just that, where the income available is better than many ‘real world’ jobs if they exist at all. And you can imagine it will be the same for the great unemployed youth from the COVID economic fallout.

This activity doesn’t just replace the economy proper, it creates entirely new wealth in a purely virtual sense, but one that actually puts bread on the table and roofs over people’s heads. Whilst play-to-earn is nothing new, it is now going mainstream as ‘play as work,’ where hold to play, share or curate to earn, and play for keeps, could become the primary income for hundreds of millions of people as a form of financial emancipation rather than digital feudalism.

Conclusion: Metaverse Washing, a GDP and The Open Meta DAO

In writing this post, it has been interesting to revisit many of the themes proposed in our thesis published in just January of this year (2021) and see that they have come true much sooner than we expected. As Raoul Pal of Global Macro Adviser says, this is The Exponential Age, made up of convergent exponential technologies and now assets. In short, things move dizzyingly fast.

Since our first paper, Facebook and their recent rebrand to Meta has dominated the headlines. And now every Big Tech company is obliged to present their Metaverse strategy and credentials to capture the zeitgeist and the stock market premium it brings.

It has forced every tech and media company to have a position on NFTs. Steam, the gaming publisher, has said they won’t allow games that enable NFTs. Epic has said they will roll out NFTs but in a permissioned way and Discord faced serious backlash at an aborted roll-out of NFTs from their user base showing that it isn’t entirely obvious to all companies and users, especially in gaming, why this is anything more than a passing fad and why digital property rights in the metaverse are so important.

Many are using the Metaverse narrative to push their own agenda and either deliberately or accidentally conflating key points and principles like Facebook Meta talking about privacy, not in the context of the privacy paradigm of user data and what they do or don’t do with it but instead simply being able to block people you don’t want to interact with. And if you subscribe to our proposition that the Metaverse is first and foremost a meta-economy, we believe enabled by integrating into the open and permissionless system of crypto, Big Tech would rather focus purely on the interface layer, and shiny UX, than addressing the economic systems and their business models.

Equally, I’ve been incredibly disappointed that even supposed champions of the Open Metaverse let Zuckerberg and Facebook business practices with all its contradictions with an Open Metaverse go unchallenged on what now looks to be a rather cynical ‘friendly influencer not mainstream media’ roadshow to distract from the mounting problems at Facebook HQ.

When combined with political headwinds in US and Europe taking a combative stance to crypto, primarily around stable-coins, I fear there will be an ‘out of the box state captured’ permissioned Metaverse where Big Tech as its corporate stakeholders will be coerced to integrate into the existing broken fiat-based system and forced to adopt CBDCs (Central Bank Digital Currencies) which perpetuate the indebted, inflationary and exclusionary financial system.

This is why we are deeply committed to and vocal about the Open Metaverse its principles as a counterpoint to Big Tech’s supposed version of the Metaverse. And will follow up with two more bodies of work that build on the Open Metaverse OS Paper one being on the subject of MetaFi; how DeFi can be leveraged in the Metaverse and what kinds of collateral will emerge and secondly beginning to formally track an Open Metaverse GDP; that is GDP created in a shared and open economic system enabled by crypto.

In short, we had a good fight ahead of us. We invite you to join us in it.

About Metaverse Summit

Metaverse Summit is set to explore and build the future of Metaverse together. The summit will gather builders, entrepreneurs, investors and experts from 3D, VFXGaming, VR, AR, Web3 and beyond.

We believe that sharing and transmitting knowledge is the most sustainable way to develop the decentralized, fertile future of Metaverse.

Download the full Open Metaverse OS Thesis Here

“Metaverse Masterclass” is a series of reports, articles and interviews from experts around different topics in Metaverse. This is an article by Moish E. Peltz, Esq, Partner, Chair of IP Practice Group, Co-Chair of Emerging Technologies Practice Group in Falcon Rappaport & Berkman PLLC, originally published here.

Overview of Crypto and NFTs

Like cryptocurrency, NFTs have taken the world by storm. Everything is being tokenized. NFTs, or “Non-Fungible Tokens” are digital files with a unique identity that is verified on the blockchain.

Bitcoin (or real fiat currency for that matter), can be thought of as entirely interchangeable (or “Fungible”). If you owe me five dollars, I wouldn’t care if you gave me five $1 bills or a $5 bill (even if they each have a unique serial number), so long as you pay me my money. Same with Bitcoin — it’s a commodity.

However, NTFs are ‘Non-fungible’ because each NFT is somewhat unique (at least in theory). NFTs can represent a 1 of 1 “original,” such as a unique work of art. NFTs can also represent one of a fixed number of copies in a limited series (For example #3,100 of 10,000 CryptoPunks, sold for 4,200 ETH, or $7.58 million on March 11, 2021).

In fact, NFTs can represent almost any real or intangible property, including artwork, music, videos, collectibles, trading cards, video game virtual items, or even real estate. In sum, an NFT is the digital version of a certificate of authenticity, embodied in the blockchain.

For that reason, unique NFTs are bought or sold in auctions, or in marketplaces based upon the principles of supply and demand, with a dash of cryptocurrency speculative fervor thrown in. Lately, these NFT marketplaces (such as OpenSea, Rarible, or NBA Top Shot) have gone crazy, with millions of dollars being paid for single digital collectibles. Even the esteemed auction house Christie’s has gotten on board with the sale of Beeple’s EVERYDAYS: THE FIRST 5000 DAYS for an astounding $69 million.

Some view this is an unhinged speculative market that will eventually come crashing down. Others perceive it as the new frontier of digital commerce and art. Only time will tell.

But when it comes down to it, what does it mean to sell or to buy an NFT? What do you really own? If you are a brand with valuable IP, how do you approach NFTs?

How to Create NFTs

The basics of blockchain and cryptocurrency are beyond the scope of this article, and conversational knowledge is assumed.

NFTs can be created on one of any number of blockchains. The most popular of which is Ethereum, which has smart contract functionality (unlike Bitcoin). However, there are a number of alternatives, including: Binance Smart Chain, and Flow by Dapper Labs. On Ethereum, the Ethereum ERC-721 standard is the primary Non-Fungible Token Standard that powers the tracking and transferring of digital art and collectibles. This standard specifically contemplates tracking not only virtual collectables, but also physical property and “negative value assets” such as loans. https://eips.ethereum.org/EIPS/eip-721.

Once you have selected a blockchain, for ease of use you may want to select a platform that operates on that blockchain to help mint your NFT on that blockchain. For example, a popular NFT platform and marketplace running on the Ethereum blockchain is OpenSea, which has a section where you can ‘Create’ NFTs. You will deposit some ETH from your wallet to pay for the creation of your NFT on the Ethereum blockchain, accept the platform terms of service, and start creating the NFT.

Depending on the platform, creating your NFT can include uploading an image, video, or music file, adding a name and description. Additionally, NFTs allow the creator of the NFT to decide whether they will collect a royalty for future resales of the NFT, potentially an incredibly powerful tool that would allow a creator to profit from any future sale of the NFT. Various options currently exist on different platforms and additional options will undoubtedly be developed in the future.

Now that you have minted your NFTs, you can sell your NFTs to your fans. Choose a price and list it for sale or auction!

You can find a more step-by-step break down of this process in an article located here: https://www.coindesk.com/how-to-create-buy-sell-nfts

Copyright vs NFT Ownership

If you are an author of a work of art, who owns the copyright? At least from a US perspective, the default rule is that the author retains the copyright in their original creation. Although NFTs and other projects on the blockchain present numerous potential copyright minefields, there does not seem to be anything inherent about NFTs that would change this default rule as to copyright ownership.

The typical analogy is that copyright can be thought of as a ‘bundle’ of rights. For example, when an artist (or copyright “author”) sells a physical painting to a buyer, the artist/author is, by default, the copyright holder and will retain the original copyright in the work, even upon a sale to a buyer of the artwork, unless there is some deviation from the general rule. The buyer owns the physical copy and the related right to display that physical copy. The buyer does not have the right to make additional copies (that right is retained by the copyright holder), but the purchaser can of course resell his physical copy to a third-party without violating any copyright restriction. Indeed, the “first sale doctrine” limits the ability of copyright holders to control the further resale of their copyrighted works (and the application of the first sale doctrine to the digital era is already a bit of a gray area).

So, by analogy, if you were to create and sell an NFT which embodied your art, what does that mean for your copyright? Although these concepts have not yet been tested in Court, presumably, the author of the work still owns the copyright in the underlying work embodied in the NFT itself. That is, unless the author of that work specifically conveyed ownership of the copyright as part of the sale of the NFT (this is not likely, although presumably possible). As part of creating an NFT, you may sign up for a platform, and agree to further terms and conditions (likely including a grant of license to the platform to use your copyright to the extent required to create the NFT).

As a purchaser of an NFT, what are you receiving? The buyer of the NFT receives ownership of the NFT (with that ownership being recorded on the blockchain), and also presumably some implied right or license to make limited use of the underlying artwork embodied within the NFT in order to buy, own or sell the NFT.

By default, the purchaser of the NFT generally will NOT receive ownership of the underlying work of art embedded in the NFT, nor the right to reproduce, or transform that work of art. It is theoretically possible that this default rule could change, for example, if the work of art in question was issued pursuant to a creative commons license, or if the transfer of the underlying ownership were expressly stated in the terms and conditions governing the creation of the NFT.

Issues to consider:

• If you are planning to create an NFT, you should ensure that you own the copyright that will be embodied in the NFT. If a work of art is anything but 100% indisputably your own creation, this might not be obvious and should be confirmed before irreversibly committing it to the blockchain.
• Analysis of copyright ownership gets more complicated if there are multiple copyright authors for a single work. Joint works of authorship may have a slightly different analysis than what is discussed above. A good practice would be to ensure that you have the (written) consent of all co-authors in a work before creating an NFT utilizing that work.
• This analysis also gets more complicated if the copyright holder is a company. As a general rule, a company should ensure that it has documented its ownership of any copyright which it will be turning into an NFT. This might be pursuant to an employment agreement, independent contractor agreement, work-for-hire agreement, or assignment agreement. Don’t assume that you own the creations of your employees or contractors without having it documented.
• Does your work of art include, remix, or reference other works of art? Have you ensured that you have the right to do what you are planning to do when you create an NFT?
• Does a digital first sale doctrine apply in the context of NFTs? Are there ways that you control the resale of works embodying your work by limitations built into the blockchain?

Trademarks and NFTs

How do trademarks fit with NFTs?

If you are creating NFTs, as a best practice you will want to avoid using any trademarks of another company embodied within your NFT.

If you are a brand owner, like any new technology, you may want to consider how your brand can or will be utilized in a new context, and how you can engage with the new technology to reach new audiences. The artists Deadmau5 and Kings of Leon each released NFT packages branded under their trademarked artist names. Similarly, LVMH (the owner of Louis Vuitton, Tiffany, and Dom Perignon) reportedly is using the AURA blockchain to allow consumers to use NFTs to trace the authenticity of their branded luxury goods.

NFTs present numerous open and potentially difficult questions for brand owners:

• If you have a trademark for one type of goods or services, does your trademark cover your use of the brand as an NFT or on the blockchain? Should you apply for additional trademarks to cover uses in this area?
• Would your brand benefit from authentication of your goods via an NFT?
• If you are an artist or musician, are there real-world goods or services (for example, concert tickets, VIP experiences) that can be combined as an offering with the NFT? If so, does this present additional challenges?
• Are there ways to monitor and enforce potential uses of your brand on the blockchain or as embodied in an NFT? Are these ways more efficient than brand monitoring current practices?
• What do you do if someone creates an unauthorized NFT which includes your trademarked brand?

Patents and NFTs

NFT patents are already here, and more are surely on the horizon. For example, Nike has obtained a patent for “generating cryptographic digital assets for footwear,” which would allow a buyer of a shoe to ensure that their shoe is authentic, and also enjoy a digital collectible version of their shoe in their wallet (otherwise known as Cryptokicks). In general, blockchain patents continue to show accelerating growth.

If you are a blockchain inventor on the blockchain, you should be considering whether what you are doing could possibly qualify for patent protection. While obtaining patents for blockchain-related items might be difficult, it is also possible. In the US, a patented invention must be patent eligible, new or novel, useful, and non-obvious. Thousands of blockchain patents are already being filed every year.

Licensed Brands and NFTs

Artists or brands may choose to license their brands instead of creating NFTs themselves. For example, the National Basketball Association licensed the NBA brand and content to Dapper Labs to allow the creation of NBA Top Shot. NBA Top Shot is an application that allows users to trade, collect and showcase digital blockchain collectibles containing officially licensed NBA content, such as gameplay highlights. If you are a fan of the Miami Heat’s Tyler Herro and think he’s going to be the next NBA superstar, you can buy an NFT including a highlight of Herro as he “gets in the paint and nails the high-arcing floater over the outstretched arm of Anthony Davis during third quarter action of Game 4 of the NBA Finals.” Lowest asking price for a 1 of 43 edition? $22,500.

With NBA Top Shot, the NBA has a verifiable hit on their hands that can barely keep up user demand. Certainly, other brands will want to get in on the action. When they do so, like any other licensing arrangement, there are numerous considerations, including:

• Who are you partnering with and can you trust them to execute your vision?
• How will you protect your intellectual property in the context of an NFT licensing arrangement?
• How will payments and royalties be handled?
• How will disputes be resolved?

Enforcement against NFTs that have an Unauthorized Use

What do you do if someone has infringed your intellectual property in an NFT? The area of NFT copyright infringement, NFT trademark infringement, or NFT patent infringement is not fully developed, and the implications are unclear.

To the extent you can identify an individual company or individual that is infringing your intellectual property, you may be able to take action to enforce your intellectual property rights. However, it may be extremely difficult, impossible, or just not economically feasible to pursue random copycats duplicating your intellectual property within an NFT. Artists have already reported finding that their art has been stolen and sold as NFTs without their knowledge.

Some of the platforms, such as OpenSea state that they will work to “take down works in response to formal infringement claims and will terminate a user’s access to the Services if the user is determined to be a repeat infringer.” It is unclear to what extent the DMCA applies to NFT platforms, and how different platforms will respond to such infringement submissions. More decentralized platforms may not have appropriate avenues to make formal IP complaints.

There are potential limits to suing people for actions taken and recorded on the blockchain when their actions are decentralized, pseudonymous and international.

NFT Risks

Like any other cryptocurrency investment, the value of an NFT is uncertain and ultimately is only worth what someone else is willing to pay for it. The current environment is likely somewhat of a bubble. An initial time and money investment is required and transactions creating NFTs carry fees that may not be recouped if no one buys your NFT. NFTs (at least for now) do not generate cash flow and are only worth what someone else would pay for them. This amount, like the price of Bitcoin, could presumably drop by 90% in a period of weeks.

The creation of NFTs is largely irreversible and the future implications of NFTs are unclear. If you make a misstep, it may lead to unintended consequences that may not be correctable. Like any other marketing or advertising campaign, things can go wrong. You could do harm to your brand and intellectual property if you don’t get things right the first time. For that reason, it is important to think through possible consequences and associated downside risks that may be caused by NFTs before pressing ‘mint.’

Conclusion

The maxim to live by in cryptocurrency is to “never risk anything that you are not prepared to lose.” Creators should abide by this same mindset when creating NFTs. NFTs present an exciting new opportunity to engage and find new fans in a new territory, and perhaps make some money in the process. As an artist or brand owner, you must be mindful that you are also putting your intellectual property at risk, with uncertain and undetermined consequences.

In the meantime, artists and businesses that are seeking to participate in these markets should do so carefully, and as always, be mindful of their risks when it comes to ownership of their intellectual property.

More Questions? Contact Us!

Falcon Rappaport & Berkman PLLC has the knowledge and experience necessary to guide you through intellectual property and cryptocurrency matters. To set up a meeting with one of our attorneys, please call (212) 203–3255 or submit a request through the contact form below.

Disclaimer

This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.