2022 Report on Technology Transactions and Data Privacy
What we saw in 2021
The year 2021 has seen tremendous growth in the use, interest, and diversification of blockchain technologies. From the rise of non-fungible tokens (NFTs) as a medium for digital art to the creation of many bespoke cryptocurrencies, blockchain stood at the crossroads of intellectual property, content creation and finance. . 2022 will be another exciting year for blockchain as the gap between traditional contracts and contracts using blockchain continues to narrow. Polsinelli’s Technology Transactions team has been at the forefront of bridging this gap in 2021 through a further fusion of Ethereum’s smart outsourcing capabilities with sophisticated inbound and outbound content licensing. This article lays out the fundamentals of how the Ethereum blockchain has been used to solve complex licensing issues arising from the creation and mortgage of digital assets.
How Ethereum smart contracts work
Basically, the Ethereum blockchain is a platform that uses distributed ledger technology to execute and validate smart contract transactions. Each transaction is called a “block” and connects to the previous transaction as the next link in the chain of transactions (hence the term “blockchain”). Each participant in a blockchain holds a full copy of the entire ledger and all of its transactional history (NFTs use this feature, for example, to prove ownership and provenance of digital art).
When a new transaction or change occurs in the blockchain, the new transaction must be approved by the blockchain network using a consensus mechanism. The consensus mechanism used varies depending on whether the blockchain is privately or publicly accessible. A blockchain is public when it is open to all participants and does not require permission from others. A private blockchain requires permission to transact from a private party authorized to transact on the network. Because of this permission structure, private blockchains can be contingent on written agreements between parties regarding the use of the blockchain.
A new approach to content licensing
Leveraging the ability to establish high-level written agreements on a private blockchain, Polsinelli developed a new licensing model for digital assets (Assets) on behalf of an independent gaming platform (Platform). The process begins with a traditional Content License and Hosting Agreement (Licensing Agreement) that transfers the assets to the platform, which are then released to the platform’s online digital asset marketplace. The license agreement further establishes key transactional issues such as intellectual property rights, distribution of royalties between the platform and the content creator, the number of license tokens (described below) available per asset, the cost of each license token for an end user and the overall process by which the Platform will sub-license and market the Assets to end users. Once the asset is published on the platform, an end user can gain access to the asset by purchasing a license token. The license token serves as a gatekeeper for accessing resources. If the end user does not have the required license token, the platform allows the end user to purchase the said license token and once the license token is added to the end user’s digital wallet, the end user may access the asset (subject to any usage stipulations, e.g. end user license agreements). This process is executed through the Ethereum smart contract, which manages both the distribution of the asset to the end user and the real-time payment of royalties to the content creator and the platform.
A bottom-up approach to content creation
The use and consumption of assets by the end user are not the only advantages offered by the platform. Through the platform, content creators can list, sell, or license their assets, which can then be leveraged by other content creators to create new digital content in a collaborative or derivative manner. As digital content creators generate new content, Ethereum smart contracts tied to the underlying assets comprising the new content are again leveraged to facilitate real-time royalty payments for licensing and the sale of the new digital content as a whole. This process creates a decentralized model allowing for a bottom-up approach to content creation and monetization. This, in turn, creates additional incentive for independent creators to develop new and diverse content. Content creators also have the ability to develop new content as “work done for hire” directly for the platform under a content creation agreement. This approach may grant a larger upfront payment to the creator, but a lower sub-licensing fee to end users. This gives flexibility to how content creators engage in the development and monetization of their works.
Future prospects in 2022
We expect the above model to be further refined in 2022 and rolled out in other unique ways for the distribution and monetization of digital content. We foresee, for example, the creation and management of decentralized autonomous organizations (DAOs) that leverage smart contracts to raise capital for the creation and sale of digital assets. In theory, a DAO could award voting stock tokens (similar to the license tokens discussed above) to investors based on their respective contributions to the DAO. Investors could then vote their tokens on unique content creation proposals with smart contracts reviewing the votes and corresponding tokens to determine if the proposal is approved. If approved, DAO funds would then be disbursed in real time to content creators to fund the creation of their digital assets. Naturally, royalties resulting from the sale of these digital assets would automatically be distributed to investors based on their respective voting stock tokens.
Using Ethereum smart contracts and distributed ledger technology to execute transactions on the blockchain to establish content usage and distribution rights enables content creators and content hosting services to benefit financially from sublicensing content to end users and redistributing content to other creators.
© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XII, Number 42