Outside small circles of Web3 aficionados, when the topic of NFTs comes up in conversation, one of two reactions tends to occur: either eyes begin to glaze over or the topic is soon dismissed as silly and confusing. Both reactions are likely due to common misconceptions about what NFTs are and what the various applications for them are and will be going forward. Here, we attempt to dispel some of the myths and clarify the basic construct of non-fungible tokens as a foundation for embracing the potential patentability of NFT technologies.
Like the Great Beanie Baby Bubble of the late ‘90s, many have come to believe that “NFTs have had their day,” with some headlines going so far as claiming that all NFTs are “totally worthless.” While it is clear that rampant speculation has fallen off dramatically and trading volume is at a 2 year low, we submit that this is actually a sign of the industry maturing and not ending. Nothing evidences this maturation more than the investment that top brands are making into the Web3 space, with current projects ranging from loyalty programs, to token-gated physical product releases, to brand partnerships with Web3 leaders.
Background: What is an NFT, and What it is Not
At its core, an NFT is an immutable recordation of an underlying asset or bundle of rights. This recordation is made on a distributed blockchain and can be referenced as a single source of truth for a myriad of purposes. While cryptocurrencies are built on a similar technology, a deeper look reveals more differences than similarities. Unfortunately, to many of the uninformed/uninitiated public, the concepts are interchangeable and they are quick to conflate the crash of cryptocurrency in 2022 to reinforce their belief that the “silly” NFT bubble had burst and should now be relegated to the history books.
In fact, by their very definition, cryptocurrency and NFTs are not just different, they are antithetical constructs. An NFT, by definition, is a non-fungible token, whereas cryptocurrencies like Bitcoin are — also by definition — fungible. Like a U.S. dollar, one Bitcoin can be exchanged for any other Bitcoin — the value is equal, and therefore fungible. NFTs, on the other hand, are not directly correlative in value and relative values can increase and decrease over time, for example, based on demand, scarcity, and other market factors.
But the misconceptions don’t end there. There are many more misnomers about NFTs than the mere conflation and confusion of NFTs being mistaken for cryptocurrency. Even those with some understanding of NFTs may have only limited knowledge of the various types of NFT, the myriad uses for them that already exist, and what among them represents intellectual property that can be protected under U.S. law.
Three Categorical “Buckets” of NFTs
When examining the NFT landscape, we can broadly categorize most NFT implementations into three buckets: NFTs representing creative works, NFTs as functional tools, and NFTs that are a hybrid and often used for digital branding. While the first bucket — digital collectibles and art — may be the most publicly discussed, NFT innovation also continues full steam ahead in the latter two categories. As we will explore, these functional and branding applications present immense possibilities to implement NFTs in ways that are novel, useful, and potentially patentable.
Bucket 1 – Digital Collectibles and Creative Works
If you’ve heard about NFTs and seen hard-to-believe stories about seemingly ordinary digital images being sold for close to $100 million, you’ve likely associated the concept of NFTs with overvalued cartoon images. However, dismissing NFT creative works as just “digital collectibles” both oversimplifies the technology and ignores the broader values that this class of NFT can provide.
While speculative demand certainly plays a role in NFT prices, well executed creative projects also facilitate a sense of community that many find intrinsically meaningful. For some, being part of a select community of owners is equally, if not more, valued than the underlying digital artifact itself. The most successful creative NFT projects to date have been those that strategically fostered a shared identity and excellent sense of community among owners. This cultivated culture and sense of belonging in turn drives further demand from others wanting to join that same community. In effect, the NFT serves as both a certificate of authenticity for the digital image and as a membership card in the group at large.
How to Protect? In this realm of creative NFT projects, project leaders should clearly understand and define the rights bestowed with the NFT prior to minting the smart contract. Such rights may include the copyright in the image, the scope of permissible uses of the image, and to what extent ownership of the NFT may convey ancillary benefits to the holder.
Further, while the underlying digital image, art, video and audio recording cannot be patented, the manner in which these NFTs are registered, exchanged, adapted, identified and authenticated may be eligible for patent protection if those techniques are novel and non-obvious.
Bucket 2 – NFTs as Functional Tools
Perhaps the most practical, but often overlooked, application of NFTs is as functional tools integrated into business processes and systems. In these implementations, NFTs can derive their core utility from two key attributes:
- The NFT can serve as an immutable recordation that includes a unique hash or fingerprint of a digital asset. Here, the NFT effectively registers the asset on a blockchain, serving as a single source of truth and allowing detection of unauthorized modifications; or
- The NFT incorporates a self-executing smart contract that can automatically trigger actions based on preset conditions. For example, an NFT could automatically release payment to a supplier upon verified delivery of goods.
Some examples of using NFTs as functional tools:
- Recording the unique hash of entire source code repositories on an immutable ledger, making alterations evident.
- Logistically tracking pharmaceuticals through complex supply chains, reducing risk of counterfeits entering the ecosystem.
- Automatically executing payment transfers when shipping milestones are reached, streamlining international commerce.
- Anonymously settling securities trades between private parties, maintaining discretion of market participants.
In these functional capacities, NFTs are poised to transform workflows in trade, finance, supply chain and countless other industries. Their utility here is only beginning to be tapped.
How to Protect? In this domain, NFTs often represent new systems, methods and processes — all ripe for patent protection. For instance, one could patent a supply chain integrity system that employs NFTs to track assets and ensure authenticity. Or a novel procedure for using NFTs to privately exchange financial instruments may be patentable. The functional applications are vast.
Bucket 3 – Digital Brand Strategies and Marketing
This bucket represents an exciting use of NFTs: as tools for brands to connect with consumers and build engagement between digital and physical spaces.
For example, while Nike has had digital partnerships with Electronic Arts as far back as 2003, and with Epic/Fortnite since 2019, the company has recently began building a Web3 presence that lets users own their own digital wearables, convert those digital assets into physical product, and possibly import those wearables into popular video games. Along the way, they have also been quite active in developing and patenting unique manners of distributing, using, and interfacing with these collectables in manners that drive user engagement and experiences. In fact, it is reported that “over the last two years, Nike’s top three Web3 collections generated approximately 1.45bn social engagements, nearly as much as the Nike brand itself, and around 800k social mentions, about 6.5 times more than Nike’s total mentions in the same period.”
Beyond Nike, brands such as Adidas and Dolce & Gabbana have also explored NFT digital apparel that can translate into physical counterpart items. And the applications extend far beyond just clothing.
NFTs present limitless ways for brands to surprise and delight consumers, drive engagement, and integrate digital experiences with physical products and spaces. Some examples:
- NFTs that unlock access to exclusive virtual or real-world events
- Digital collectibles that can be redeemed for physical merchandise
- Augmented reality experiences triggered by NFTs associated with physical products
- Metaverse integrations where NFTs are required for avatar upgrades
- Gamified experiences with NFT rewards, leaderboards, etc.
- Limited-edition NFT content tied to product releases or campaigns
For many brands, these creative NFT integrations provide a major opportunity to cultivate brand affinity and community with their audiences. The applications are endless, and the market is still nascent.
How to Protect? The integrations between digital NFT experiences and physical/digital brand engagement present limitless possibilities that companies can explore to better connect with their consumers. Protecting this investment should be multi-faceted, including licensing terms on who is eligible for product/experience redemption, how derivative assets can and should be used, and what the customer actually owns within the experience. Further, the manners of distribution, integration, and use can be explored for patent protection. This can range from patents on associated distribution techniques, redemption methods, metaverse avatar systems, and much more. Brands should strongly consider where their unique NFT utilities may warrant IP protection.
NFTs are Here to Stay. Proceed Accordingly.
Unlike the process of mining new cryptocurrency, anyone can create an NFT. Whether there is a relevant application for your business, product, processes or inventions is something to explore with your technology and marketing teams. And whether whatever you create may be intellectual property qualifying for patent protection is a conversation you should have with an experienced patent attorney.
There is much more to NFTs than simply dismissing them as “digital Beanie Babies.” There are business cases to consider, and there are exciting possibilities in store for those who embrace what the future truly holds for the technology.
David Nay and Mark Levine are Partners and Patent Attorneys with Quinn IP Law. To learn more about NFTs and what may or may not be protected under U.S. patent and trademark law, call them at (248) 380-9300, or email them at [email protected] or [email protected].