Nonfungible tokens (NFTs) are digital records of asset ownership. Digital assets, such as memes, GIFs, or gaming characters or properties, are the most commonly associated with NFTs. NFT assets, on the other hand, can be digital, physical, tangible, or intangible. Sports memorabilia, copyrights in music, artwork, and real estate are examples of asset types that have been transferred or whose ownership has been recorded using NFTs. Intellectual property assets, specifically patent ownership and transfer, can also be recorded and transferred as NFTs.
Real estate ownership can be recorded in a deed registry, patent ownership can be recorded in the United States Patent and Trademark Office (USPTO), and ownership of written works or music can be recorded in the Library of Congress via the copyright system. There is a significant benefit to using NFTs because similar systems for recording ownership do not exist for asset types such as collectibles, video clips, memes, digital avatars, or inventions that are deemed ineligible for patentability due to being too abstract. Even assets with existing systems for recording ownership, such as the USPTO for patents, may benefit from the use of NFTs to assist potential buyers, sellers, or licensees in understanding the owner and value of a specific patent.
Blockchain technology and NFTs
The ownership of NFTs is recorded on a blockchain, which is a distributed digital ledger that allows for immutable records of transactions and asset transfers via software code known as smart contracts. Blockchain technology is best known for its use in recording transactions involving cryptocurrencies like Bitcoin (BTC).
The recording of NFTs on a blockchain has several advantages. Information such as NFTs are recorded on a blockchain in a series of data blocks of varying sizes, depending on the blockchain implementation. When the amount of information to be recorded is sufficient to meet the blockchain’s block size requirement, a new data block is created and appended to the end of the blockchain’s existing chain of blocks. The new data block contains a cryptographic code, known as a cryptographic hash, generated from a combination of data associated with the information in the new block and the previous block’s cryptographic hash. This makes the information in a blockchain’s blocks secure. If a malicious party attempted to change information in a blockchain block, such as an ownership record included in an NFT, the cryptographic hash of the associated block would change. This change would cause mismatches or changes to the cryptographic hashes in subsequent data blocks, indicating an unauthorized change to the recorded data.
Furthermore, the data blocks in a blockchain, referred to collectively as the blockchain ledger, are not stored in a centralized location. Rather, the blockchain ledger is stored in multiple computer systems, typically those of users who have completed a transaction using the blockchain or who have added one or more new blocks to the chain. The lack of a single centralized location for the blockchain ledger adds to the security of the data recorded on the blockchain. A malicious party could not alter the records in a blockchain by hacking a single computer system because the ledger on that single computer system would then differ from the ledgers recorded on other computer systems in the network. If there was evidence of a change in previously recorded information on the blockchain, such as a change in a cryptographic hash of one or more blocks, the ledgers of multiple or all of the different systems in which the ledger was recorded could be compared to determine which system had been compromised. Thus, recording ownership, assignments, and prior sales or licenses of assets like patents as NFTs on a blockchain would benefit potential buyers, sellers, and licensees by providing an unalterable public record.
NFTs and patents
There are currently no requirements for recording patent assignments or sales with the United States Patent and Trademark Office, making it difficult to determine who owns a patent. It is also difficult to assess the worth of a patent because the terms of patent sales or licenses are rarely made public. If a patent was sold or licensed using NFTs, the public would have instant access to a record of the sale as well as the current owner or licensee of the patent. To benefit potential buyers, sellers, and licensees even more, patent sales or licensing via an NFT could be automated through the use of smart contracts.
The first NFT was created in May 2014, but NFTs did not gain widespread public attention until 2017 when Larva Labs released CryptoPunks, a project for trading cartoon characters on the Ethereum blockchain, and Dapper Labs released the CryptoKitties gaming project, which allowed players to buy, trade, and “breed” virtual cats.
The market for NFT sales increased significantly in 2021, with an estimated sales value of more than $250 million. Notable NFT sales include: a CryptoPunks project algorithm-generated pixel art image of an alien in March 2021 for $7.57 million; Twitter CEO Jack Dorsey’s first-ever tweet from 2006 in March 2021 for $2.9 million; and many more. Christie’s sold a digital artwork, “Everydays: The First 500 Days,” by digital artist Mike Winkelman, also known as Beeple, for $69.3 million in March 2021, in one of the highest-priced NFT sales to date. NFTs can now be created and sold on digital auction sites or by traditional auctioneers like Christensen.
Developing an NFT-based marketplace for asset types such as patents will take time, and patentees will need to adopt a new paradigm for recording patent ownership, transfers, and licensing. To create digital representations of ownership of existing patents as NFTs, a significant amount of initial work would be required. Difficulties may arise if transfers or licenses are made but not recorded on the blockchain, resulting in conflicting ownership records; however, work on such a marketplace has begun. For example, IBM has announced plans to collaborate with the patent market IPwe to create a digital marketplace to record and transfer patent ownership via NFTs. True Return Systems LLC has launched the first auction for a patent in the form of an NFT, appropriately for a blockchain-related patent.