Splitchain: the legal and technological strands of blockchain

A splitchain analysis involves interrogating or 'splitchaining' a blockchain use case using a series of targeted inquiries. Because the growth of blockchain is rapid, it is becoming increasingly clear that more robust 'off-chain' structures are needed to govern the 'on-chain' environment. However, before undertaking the analysis, it is important to contextualise the need once more for the analysis and recount some lessons learned - whether blockchain-based or blockchain-inspired as can be seen in the decision protocols or governance protocols of decentralised autonomous organisations (DAOs).⁶

(a) Contextualising splitchain

As discussed throughout this paper, the utility of a splitchain analysis is particularly evident in use cases involving intellectual property rights and ownership of NFTs, as well as trading and investing in value stores that enliven consideration of securities and derivatives laws and/or gaming laws. In the former case, it is widely understood that creator economy NFTs attempt to solve the IP issues experienced by creators in the 'real' world and that of Web2.0 ─ songwriters who do not own the copyright to their music; counterfeiting of designer clothes and jewellery; fake online profiles and other forms of 'copying'. As stated earlier, creative NFTs seek to solve these problems not only by removing intermediaries but by recording ownership and change of ownership details. An NFT provides a source of 'truth' or, more accurately, one piece of the truth spectrum.

As discussed, however, a common misconception held by consumers of digital collectibles is that 'on-chain' ownership of an NFT is equivalent to off-chain ownership of the underlying creative work ─ which is not the case.

This lack of contractual clarity in respect of many blockchain use cases, as well as the conflation of 'ownership' on-chain with off-chain ownership, is causing cracks in blockchain and specifically the NFT marketplace and commercial transactions more generally.

Misunderstanding of what is being bought or sold can lead to considerable issues and volatility for those creating, buying or selling both digital and physical assets. While perhaps more an example of immaturity in the world of business, some recent examples demonstrating the pitfalls include the following.

(i) Dune disaster

When auction house Christie's listed a rare book linked to the sci fi classic Dune, an anonymous NFT group of investors, called Spice DAO, decided to purchase this iconic artefact for a significant sum of 2.6 million Euros.

The DAO publicly announced via Twitter their plans to 'make the book public, produce an original animated limited series inspired by the book and sell it to a streaming service, and support derivative projects from the community'.

What the DAO failed to grasp was that their purchase did not transfer any intellectual property rights to the literary work that would entitle them to exploit the copyright in the book, let alone create, and generate profit from, derivative projects or 'works'. They had simply purchased a physical copy of a book, albeit rare.⁷ Whether the sum paid for the book alone would have been paid given the non-conferral of any IP rights, is an open question but it seems unlikely.