True ownership or lip service?

In this week’s Nexus, we explore the concept of ownership in the context of web3 and look at some of the ownership rights mechanisms enabled by smart contracts

"True ownership" is often mentioned as one of the benefits of web3, but without a deeper understanding of the concept, it can sound somewhat vague. To begin with, let’s examine what is meant by "ownership" in relation to tokens and NFTs.

The true meaning of a digital wallet

There is a common misunderstanding that tokens and NFTs are stored "in a wallet," but this belief is wrong. The truth is that your wallet represents a digital signature or "password" (private key) that authorizes you to sign messages/transactions, providing proof that they are signed by you. The tokens and NFTs themselves are simply entries in a smart contract, similar to a list that reads, "Wallet address 1234567890 has this many tokens" or "Wallet address 1234567890 has this NFT ID." Ownership is established by sending action requests to the smart contract, accompanied by your signature as proof that you are the one asking for a specific action to be performed.

Adding backdoors and administrative functions

The code of a smart contract, once deployed on the blockchain, is immutable, meaning it cannot be directly modified. The rationale behind this is to ensure that the code is open and trustworthy, but the average user of tokens or NFTs typically does not read the code. In theory, this means that a smart contract developer could add backdoors and administrative functions without the user's knowledge. Typically, a smart contract will allow certain actions to be performed based on the wallet address of the user making the request. While there are standards such as ERC-20 and ERC-721 that specify basic requirements for token and NFT contracts, these are minimal requirements and do not restrict what can be done. These standards simply provide guidelines for functions such as "transfer", which expects certain parameters to ensure that the transfer or sale of an NFT works as intended.

Limitations of blockchain “ownership”

It is important to note that we are not suggesting here that token or NFT smart contracts are typically deceitful. Generally, they are standard contracts with additional functions such as "whitelist" mint functionality (which is a list of approved addresses that can use the mint action) or airdropping (which allows a special admin wallet address to assign certain NFTs to specific wallets) or other special extensions. However, there are times when special code is added, such as for transfers to enforce royalties as evidence that you do not actually "own" the item. For example, some NFT projects have allow or block lists of marketplaces that are authorized to transfer the NFT to facilitate royalty enforcement. We are not saying this is strictly a good or bad thing, but it is important to understand the limitations of what blockchain “ownership” actually means.

Persistent existence and transferability

After discussing the technical aspects of blockchain ownership, it is important to understand what "true ownership" means. Typically, this refers to two aspects: the ability for items to exist beyond the game or platform and the ability to transfer or resell owned items. While persistent existence is a critical feature, it does have limitations. The ability to prove that you own a specific NFT is what truly persists, but only the metadata that is stored on the blockchain for the NFT remains intact as images hosted elsewhere, game mechanics or functionality context, and any data stored on game servers can be lost. To address this, some decentralized hosting solutions like Interplanetary File Service (IPFS) and Arweave exist, but they are not permeant. Recent examples highlight how NFT developers may be the true owners depending on their ability to modify items. Storing proof of ownership on the blockchain is still superior to typical digital media ownership, which is a license stored on centralized servers, such as Kindle books (which can and have been revoked by Amazon) or iTunes music (which Apple controls).

Re-selling digital items

The previous section lays out the limitations of transferring or re-selling what you own, particularly with regards to enforcing terms of sale such as royalties. In fact, this is a step backwards from physical items, which can typically be freely re-sold without any interference. The ability to re-sell purchased items may be a big step forward for digital items, but considering physical copies of digital games already had this feature it is not much progress towards “true ownership”. Allowing transfer or re-sale also poses potential drawbacks, such as disrupting game balance through pay-to-win mechanics or exacerbating economic issues such as inflation. Nevertheless, given the often exploitative nature of in-app purchases, the ability to re-sell digital items remains a valuable feature, although there is room for improvement.

Rights granted via ownership

To gain a better perspective on the possibilities of ownership, it is helpful to view it as a mechanism that grants "rights". The transfer of an NFT, for instance, is an example of a right that is bestowed by a smart contract, but can also be constrained or withdrawn. The ability to modify a physical product is generally assumed, but with NFTs, this is not the case, except in rare circumstances. For instance, if you purchase a PFP, you cannot draw a moustache on it and have it reflect for others. Similarly, if you buy a weapon NFT, you cannot modify its stats, appearance, sound, or other aspects. Even purchasing weapon skins as NFTs only allows you to display them together with the weapon. While it makes sense not to allow owners to change how NFTs function in the game, such restrictions should be part of the game's code or database, not the NFT itself. It begs the question: what metadata can we realistically allow owners to modify? And what does "true ownership" mean if you cannot modify your assets in any way?

Licensing in web3

Protecting intellectual property can be a complex issue as it involves safeguarding intangible information, meaning the rights have to come from the legal system. Bored Ape Yacht Club provides an interesting example of how a license for intellectual property usage rights can be granted to the NFT holder. Many people, including celebrities like Seth Green, have explored the implications of owning a license for a unique 1 of 1 piece of art. Licenses can offer various rights such as reproduction, distribution, copyright usage, and derivative work. The derivative work right is particularly interesting as it allows the creation of new assets that use modified versions of the original, rather than modifying the original itself. This can give a stronger sense of "true ownership", but it is more complicated to manage. Part of the problem is that brand identity is still a significant concern that NFT projects and games may be overprotective of.

Transferring ownership

Some rights are implicitly granted or in some cases explicitly integrated into the NFT marketplace or game, such as the right to rent, lease, or loan NFTs. This is an interesting extension of the right to transfer ownership as it monetizes temporary transfers of control or ownership. This right has gained popularity with the Axie Infinity guild and scholar model and has been adopted by many games. In contrast, web2 games have typically lacked the means to enable this for game assets. In games where land ownership is significant, these rights are often considered an essential part of the asset's value. Profit sharing models are another interesting aspect of this space, where instead of paying upfront rent, the owner receives a share of the profits. Although this model is not commonly found in the physical world due to overhead, smart contracts make this process seamless.

Governance tokens vs. NFTs

One area that has seen some experimentation in terms of granting of rights but requires more exploration is governance. Having ownership of a corporation can grant the power to influence decisions and profit, but involvement in profit may draw attention from security laws and pose legal issues. However, ownership that provides governance rights, such as voting or participation in decision-making, is an area worth exploring further. Governance tokens have been used to have varying levels of influence and represent vested interest through risk, while some games treat ownership of genesis NFTs as a type of founder membership that offers a voice in exchange for early investment. Both models require further iteration and consideration of incentives and alignment. Land ownership is an obvious case for strong influence, but the specifics of how that influence is exercised are still being developed.

Moving beyond bait-and-switch

As we continue to think about the potential rights that come with "true ownership," we must also consider how these rights will be enforced, whether through smart contracts or other forms of community management. The matter of rights can prove to be complicated, often requiring a struggle to safeguard them, with no guarantee that they will be honored despite any promises made. If game developers are promoting "true ownership" as a feature, we need to hold them accountable for what it entails and ensure that we are making progress rather than simply tweaking the current system. The financialization of digital assets is just the beginning of what this could entail, so let's move beyond the existing system and ensure that NFTs are empowering rather than just another bait-and-switch, as some traditional gamers might suggest.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.