Despite renewed scrutiny in recent months, it would be unwise to dismiss NFTs as a Web 2.0 gimmick. Although it is just “a piece of data on a block in a ledger”, NFT affects almost every industry, from sports and video games to fashion and art. In this piece, we bring together patent and trademark experts Arthur Roberts and Alain Godement to demystify the blockchain and its related technologies – but more importantly, to illustrate exactly why they matter and what legal challenges they may face.
Why care about NFTs?
For the uninitiated, it can be hard to take NFTs seriously when cash is being splashed on Lindsay Lohan’s ‘Herbie’ art collection or ‘cards’ with Donald Trump shooting lasers from his eyes. However, that’s exactly why you should care about them – because other people do. And they are willing to spend significant sums to generate, compile, store and purchase NFTs. Entire business models exist solely around NFTs, to the point where they have become their own segment within the digital economy.
Various sources estimate that the global NFT market was worth around $17.7 billion in 2021, and many predict that it will increase at least tenfold in the coming years.
How can the assignment of ownership for what is effectively a string of data reach such withered heights? In short, because NFT technology is a Swiss army knife of utility.
Before we get to all that, let’s start by demystifying what an NFT actually is.
Demystifying NFTs
Non-Fungible Tokens (NFTs) are units of data stored in a ledger. An NFT is often used to represent (or be associated with) a physical or digital good, with ownership that can be transferred between users by means of transactions. Through Distributed Ledger Technology (DLT) – which provides an immutable history of all transactions – a record of ownership and authenticity can be cryptographically verified with high security, so that users can only prove ownership if they own NFT.
While it is virtually impossible to falsify the ownership and/or transfer of an NFT, there is an issue surrounding people creating (or “executing”) NFTs to represent goods they do not own. In this case, the NFT simply provides a secure chain of ownership for a counterfeit item.
Together with information on ownership and provenance, other information relating to NFT can be stored on the ledger. This can be metadata that describes the item(s) NFT represents. For example, where an NFT represents a work of art, the ledger may also store a link to an image of the work of art. Standards such as ERC-721 exist to ensure that NFTs have consistent usage and format on the ledger.
Since an NFT is just a piece of data on a block in a ledger, there are no inherent or fundamental rights attached to them other than the ability to assign (through a transaction) the ownership of the piece of data to someone else. This is particularly important to note, as many users assume that ownership of an NFT confers additional rights – such as the right to reproduce a work associated with an NFT – when there is no standard mechanism to suggest that this is the case.
Since storing data on a distributed ledger can be expensive, digital goods with associated NFTs are often stored outside the ledger. Instead, a link (such a web address) is given to the product. This can present problems, as it requires additional technologies and services to maintain the data beyond the ledger itself.
Use cases for NFTs
NFTs in the arts — financial security for artists
A career in art can be fraught with financial uncertainty. A 2018 report by the UK Arts Council revealed that fewer than one in three visual artists rely solely on their art to generate income, with 73% earning just £5,000 per year from their creations. There are significant differences between genders, minorities and across geographical locations.
NFTs help artists reach a wider audience and receive an immediate financial return for the work they have created, freed from the constraints of the physical world. Online NFT marketplaces such as Opensea.io offer a wide range of art-related NFTs where owners can purchase their own unique digital copies. These can be formal visual artworks (such as paintings and photos) or video clips, GIFs, memes and more. If you can convert it to 1’s and 0’s, you can probably sell it as an NFT. Some popular NFT art is procedurally generated, making the business very lucrative (see Bored Ape Yacht Club).
Now the difference between buying an NFT and simply right-clicking the mouse and choosing “Save image as…” in abstract terms is nothing. In the latter scenario, you also end up with a digital copy of the file for private use and enjoyment, albeit happily for free. But there lies the spark – if anyone can do it, then it isn’t special or unique. Its intrinsic and subjective value diminishes.
In contrast, an NFT is by definition unique – or at least the underlying string of data that confirms you’ve “purchased” the artwork. What would entice a person to part with an eye-watering sum (as with Pak’s $91.8 million NFT ‘The Merge’) for a work of art? Although there are a variety of individual and subjective reasons why people behave the way they do on the internet, ultimately the saying applies – beauty is in the eye of the beholder.
In this use case for NFTs, there are similarities between purchasing an NFT and engaging in traditional art protection. It is simply ‘Patronage 2.0’ on a global scale and for the masses.
NFTs in video games – collectibles and microtransactions
The video game industry was valued at $93.6 billion in 2016 and $193.4 billion in 2021. It shows absolutely no signs of slowing down, with projections reaching $210.7 billion by 2025.
“Collectibles” have been around for a long time in video games, with players able to collect rare or unique possessions long before NFTs existed. From World of Warcraft® to Counter-Strike® and every genre in between, video games offer limitless opportunities for creating unique digital assets. These were initially free, but eagle-eyed video game publishers identified a gap in the market for “microtransactions”, affordable for your average teenager. Want a “special edition” golden sword for your character that all your friends have? You don’t want to be the odd one out in your guild of online adventurers – it’s yours for just $10.
Multiply this seemingly insignificant amount by hundreds of millions of users and you get a very profitable lesson in economies of scale. Add unique NFTs into the mix – where only a handful of them are sold and labeled as the “pinnacle of exclusivity” – and you also have a lesson in scarcity economics.
NFTs in real life — authentication for goods
One of the advantages of NFTs is their ability to authenticate goods in the physical world by representing the digital “doppelganger” of a physical product. You wouldn’t buy an NFT associated with a genuine pair of rare NIKE® sneakers and intend to wear or view them – instead, you’re making a speculative investment based on your knowledge of the global secondary market for collectible sneakers. This can apply to all products, including cars.
Some businesses have introduced new business models based on this concept. StockX is a notable example of a marketplace where you can buy and collect the NFTs of your favorite CROCS®, which you can either redeem for the actual shoes or sell on at a higher price. This results in highly entertaining datasets on the global value of a pair of CROCS® NFTs.
Big gains in an unregulated market
NFTs can bring significant financial gains to those who are able to leverage this technology to their advantage. But still largely unregulated, there are significant legal and IP challenges – coupled with serious economic implications – that cannot be ignored.
StockX, for example, is engaged in a high-stakes legal challenge initiated by NIKE® regarding the use of its trademarks in NFTs. In a largely unregulated market, the appeal of the gold rush has been tempting for many, as the StockX v Nike trial shows. However, it appears that intellectual property laws have not always kept up with the pace of technological advancement.
