Just because you can use something doesn’t mean you own it outright. Lawyer up.

by Kevin Koo

This article was first published by Kevin Koo at the following link:

Building Blocks of NFT Utility | LinkedIn

Image created by Kevin Koo using AI

Wen NFT utility ser?

Now that crypto is in a bear market, NFTs are also in a bear market. And that means that people are starting to enquire what kind of utility they stand to get from their NFTs. This article helps break down the elements of NFT utility, so that NFT creators and their consultants can combine them to give rise to suit their collectors.

A bit of background – this was originally a long form answer to a question raised on Twitter, which you can find here. As I look back at my replies, I’m changing the content a little, because tweets are useful for quickly jotting down thoughts, but need a bit of thinking through for a more lasting form like an article.

Utility vs Ownership

Utility should be distinguished from ownership. Each entails its own rights and privileges. But utility flows from ownership. You cannot enjoy NFT utility if you’re not an owner.

NFT utility are often contractual rights, formed between the collector and the creator. The creator often advertises certain rights and privileges accorded to the collectors of the NFT. And the first hand collector rightfully enters into a contract with the creator. But when the first hand collector sells his NFT, and a second hand collector comes and collects it, is there a contract between the second hand collector and the creator?

There is no direct contract between the creator and the second hand collector, who buys the NFT on the secondary market – thus, no privity of contract. Arguably, however, the second hand buyer buys his NFT on the secondary market because of the representations of the creator, who has induced the buyer to part with his money because, the creator has made a guarantee that the buyer will enjoy certain utility.

There is estoppel, whereby the second hand collector has incurred a cost, and changed his position, based on an expectation given by the creator, and therefore, it is not fair for the creator to deny those expectations. An NFT creator who advertises certain utility often promises, implicitly, that he will honour and accord those privileges to the second hand purchasers of his NFT. And when he does not honour those, then he has rugged his collectors.

Aspects of NFT Utility

At their most basic, there appear to me to be at least four types of utility. These can be combined, as we will see later, to give rise to hybrid types of utility.

Thus, the four most basic types of NFT utility are:

  1. Usufruct – the right or privilege to use something belonging to another.
  2. Access – the right or privilege to see, hear, touch, something or someone.
  3. Membership – the right or privilege to become a part of a community based on the token.
  4. Voting / Governance – the right or privilege to influence a community’s decisions based on the votes.

When you think about it, there are more complex forms of utility, which can be described in the four basic types of utility above. For example:

License – the right to use an NFT’s associated art or music for certain purposes, e.g. commercial purposes. This is a form of usufruct because the copyright of the art often belongs to the creator, but the collector now has the right to make use of it. The collector now owns the token, but not the art associated with his token. However, the collector can use the art.

Classes and courses – the right to gain access to a mentor or a course which enhances the collector’s knowledge. This is a form of access given only when the collector holds the collection’s NFT.

Rights vs Privileges in NFTs

When an NFT collector is guaranteed something by the creator, that becomes a right that cannot be revoked. The collector may insist upon it, although, it may be unrealistic to enforce those rights.

On the other hand, where the creator makes it clear that the collector obtains a privilege, which can be revoked or changed, the collector may not then turn around and insist on the observance of the privileges in perpetuity.

Take it with a pinch of salt

In actual fact, there are many projects that promise the moon – but eventually discover that they are unable to fulfill their promises. Short term, however, these NFT projects may provide a path for dreamers to raise funds to do what they really love in the traditional world. Thus, web3’s real impact may be in the world of web2, where there are much more users whose lives can be impacted.