Reed Smith Guide to the Metaverse

Legal pad and stamp icon
By removing the physicality of the real world, the metaverse is poised to shift our human society away from several long-held legal concepts, including the concept of ownership. Because “owning” has a completely different meaning in the virtual world than it has in the real world, what one owns or may own in the metaverse will likely be a question that is only relevant to a happy few and will also likely be the subject of films, books, heated societal debate, and of many more lawsuits before the notion settles. Could NFTs offer a solution?

This tension results from a very simple stance. The Internet is made of code and content, yet there are no ownership rights in code and content but for those who wrote the code and created the content. Do you think you own your software, a piece of music, an audio book, a game character, a game asset, a virtual car? Think again. At best, you received a license to use the items; at worst, you may be infringing upon someone else’s rights.

Yet, paradoxically, one has never bought and sold more than on the Internet; and in a society where capitalism is alive and well, study after study shows that owning continues to be far more valued than licensing. This “endowment effect” explains why marketers and advertisers are so reluctant to use expressions such as “limited license” or “permission to use.” Possessing runs the world, and the metaverse will have a hard time changing that. But here come the NFTs.

What is the endowment effect?

In psychology and behavioral economics, the endowment effect is the finding that people are more likely to retain and value an object they own rather than acquire that same object when they do not own it. This is typically illustrated in two ways. In a valuation paradigm, people’s maximum willingness to pay to acquire an object is typically lower than the least amount they are willing to accept to give up that same object when they own it – even when there is no cause for attachment, or even if the item was only obtained minutes ago.

Used in experiments in psychology, marketing, and organizational behavior, the endowment effect also materializes when people who are randomly assigned to receive a good (“owners”) evaluate it more positively than people who are randomly assigned to receive rights to do certain things with the good (“controls”), and that is the gigantic paradox that the metaverse will need to confront. While they are poised to solve the ownership problem of the virtual world, without some drastic intervention from legislators, NFTs may turn into nothing more than a collective illusion of ownership.

What is an NFT?

In short, an NFT, or “non-fungible token,” is a unit of information recorded on a blockchain about a good or service that is not interchangeable. Blockchain? A blockchain records information in a distributed database that seals the information with a collaborative cryptographic procedure. The information comprises transaction data and a time stamp and is organized in linked “blocks” as it is recorded. One transaction is recorded in a block, and the subsequent related transaction is recorded in another block that is linked to the first one, using cryptography. By design, a blockchain is resistant to modification because altering one block retroactively cannot be done without altering all other linked blocks. This feature and its functioning in a decentralized peer-to-peer network give it its reliability. Arguably unfalsifiable and incorruptible, blockchain technology is new, enigmatic, and terribly appealing as a concept.

Key takeaways
  • “Owning” has a different meaning in the virtual world than it has in the real world
  • NFTs bolster ownership and control over digital assets
  • Investors should understand the risks and limitations attached to NFTs
Download this article Download full report
Download this article
Download full report