NFTs have grown dramatically in popularity in the last few months. But what are they, how are they being used, and what are the pros and cons of using NFTs as part of a product or brand marketing effort?

NFTs: What are they?

NFT stands for “non-fungible token,” and each NFT is a token created and transferred on blockchain networks such as Ethereum.

NFTs differ from other crypto assets because each NFT is expected to have a unique price and a set of attributes. Typically, we treat one bitcoin or one ether as essentially the same as any other bitcoin or ether. In general, no unit of bitcoin is likely to have a very different market value than any other.

Selling a good for bitcoin or ether is akin to asking someone else for a dollar out of their wallet. You generally don’t care which dollar you get. You just want to get paid.

NFTs, though, are created or “minted” using software that embeds unique information in them. The typical NFT purchaser cares about that information. In their most usual form today, NFTs contain references to unique locations (e.g. a URL) where one can view files such as JPGs or GIFs, representations of digital artwork. When the NFT is displayed on an NFT marketplace, the website reads and displays the digital art referenced by the NFT.

At this point, you might want to ask what a token is. And there, you will get a somewhat unsatisfying answer like “a store of value or medium of exchange secured by a chain of digital signatures.” To conceptualize, you might want to think of an NFT as a certificate of authenticity. The NFT’s provenance and metadata, which indicate who created it and who has transferred it, are (or should be) publicly available.

The typical approach for launching an NFT is to tie some artwork to the NFT, then launch the NFT on one of a few different NFT marketplaces. The launch can be in the form of a sale for a preset price, or as an auction. If the NFT sells, the NFT will be transferred via a smart contract to an address under the control of its purchaser, and you as the originator of the NFT will get paid in, e.g., ether, the currency of the Ethereum blockchain.

What NFTs are not

NFTs are not, generally, artworks themselves, and unless you specifically transfer other rights along with them, they do not carry any intellectual property grants or licenses. NFTs generally do not carry copies of works within them, though they may carry references to digital works (or other things on the internet), and they may also carry hashes of those works. A hash is a one-way mathematical function that encapsulates the work in mathematical form, though without more information the work itself cannot be discerned from the hash.

It is up to the creator of the NFT to figure out where any files referred to by the NFT will be stored, and how those files and the references to the files will be maintained after the sale of the NFT.

Why Use NFTs?

The reason several brands are jumping into NFTs right now is pretty simple: they’re hot. NFTs being sold for millions of dollars are grabbing headlines, and many people and companies are finding that the opportunity to gain publicity by releasing an NFT is too great to pass up. As with so much in the world of crypto and blockchain, there is a lot of FOMO. Do you want to sit back while your competitor makes waves in your market by launching an NFT before you do? Maybe not.

And just like there’s something cool about having an artist sign art, proving a real life connection at some point in time, there is something cool about the concept of an NFT, which can prove a similar connection at a very specific point in time. They are in their infancy, and it’s hard to say how they might develop. Having ownership of interesting NFTs could prove to be an important signaling mechanism over the next few years and decades. Or they could go the way of Beanie Babies, essentially dropping in value overnight. It’s hard to say what the future will bring, but their popularity right now is huge.

Problems with using NFTs for marketing purposes

If you are considering using NFTs as part of a marketing effort for a product or brand, right now, there are some pitfalls to be aware of.

For one thing, blockchains are generally not built to make things easy for centralized organizations or brands to interact with them. As with some social media functions, you may want to appoint one person, or a small group, to be authorized to log into your accounts on NFT marketplace platforms, as company-wide access to these platforms may prove unwieldy. Interacting with crypto platforms is generally not something that can be easily delegated to a large group, and you should plan for that accordingly.

Upon launching NFTs, you may find active pushback from participants in blockchain networks, because they don’t want to see their space invaded by large multinationals. There’s also an ethos of promptly and directly compensating creators in the NFT space, so if you are dropping a digital art NFT, you may want to consider how you commission it and whether you would want the artist to have an ongoing royalty. Your brand might become a target for ethical hackers who want to keep corporate influence out of blockchains. It’s hard to say whether you’ll face this or not, but it should be on your radar.

Also, NFTs use energy in larger amounts and in different ways than typical marketing efforts do, because of the inherently energy-intensive nature of Ethereum’s proof of work consensus mechanism. This may be changing before long as Ethererum moves toward a different consensus mechanism, but high energy usage is a reality today. Brands that have an affinity for ecologically positive messaging may want to consider their NFTs’ energy usage as part of their planning.

There are other risks that can arise when using blockchain-related technology like NFTs for a marketing effort. There may be reputation risks tied to possible downstream illicit activity (e.g. money laundering) connected to your tokens. You may have problems to solve relating to carrying cryptocurrencies on your company’s books. After selling an NFT, you will likely hold a volatile asset in the form of ether – beware the tax implications if you take a while to liquidate that asset. There are risks from smart contract failures, unintentional fund lockups, and any number of other weird things that can happen in the crypto world. This space contains a lot of unknowns, and by trying to play on the latest and hottest playing field, your company may get involved in some unpredictable outcomes that we would place under the heading of “crypto weirdness.”

Some of these risks can be mitigated through the use of legal or technical means. Others may be more or less unavoidable, and a good post-launch approach would include monitoring and responsiveness to problems as they arise. You should have legal and technical advisors on your team who are highly educated about NFTs and their risks, so that you can go into the process as educated as reasonably possible.

The underpinnings of NFTs are more complex than we can cover in this article, and while we are trying to summarize them in a simple way, by necessity we are glossing over some important details.

In Conclusion

If you’re a brand manager or marketing executive interested in these topics, please contact us. If you are asking whether or not to launch NFTs as part of a marketing effort, you will have to move fast without breaking things. Our team, in collaboration with other industry experts, has seen the issues firsthand, and can adeptly come up with creative solutions that take into account your organization’s risk tolerance and goals.

Thanks to Diana Stern, Josh Garcia, and Nelson Rosario for their significant contributions to this post.

This is provided for information purposes only and does not constitute legal advice. If you have questions about any of these topics, you should consult with a lawyer.