NFT Licensing

Licensing terms can be encoded directly into the smart contract (on-chain) or referenced via a link to an external legal document (off-chain).

• On-chain: Terms are immutable, transparent, and programmatically enforceable (e.g., via a tokenURI pointing to a JSON file with a license field).
• Off-chain: Allows for more complex, human-readable legal agreements (like Creative Commons) but depends on the availability and integrity of the external link. The choice impacts decentralization, permanence, and legal clarity.

A core function of NFT licenses is specifying commercialization rights. This defines if and how the holder can use the asset for profit (e.g., on merchandise, in advertising).

• Commercial Use: Grants the right to monetize the asset.
• Non-Commercial Use: Limits use to personal, non-profit display. Licenses often specify royalty structures, where a percentage of secondary sales is automatically paid to the original creator via the smart contract's royalty standard (e.g., EIP-2981).

Many NFT projects adopt existing, well-understood legal frameworks.

• Creative Commons (CC): Licenses like CC0 (public domain dedication) or CC-BY (attribution) are commonly referenced off-chain. CC0, in particular, is used by projects like Nouns to place artwork fully in the public domain, encouraging maximal remixing and derivation.
• Public Domain: The asset has no copyright restrictions. The NFT itself remains a record of provenance and ownership, but the underlying content is free for anyone to use.

Smart contracts enable programmable license terms.

• Enforcement: Royalty payments can be enforced on-chain. Access to gated content or utilities can be contingent on holding a valid license.
• Revocation: Some licenses may include revocable terms, where the licensor can terminate rights under certain conditions (e.g., breach of terms). This is complex to enforce fully on-chain and often relies on legal action off-chain.
• Expiration: Licenses can be time-bound, with rights expiring after a set period unless renewed.

Licenses must address the unique aspects of generative art and derivative projects.

• Generative Art: The license typically covers the specific output (token) from the algorithm, not the entire algorithm or collection traits.
• Derivative Works: A critical clause defines whether holders can create and sell their own derivative works (e.g., new art based on the original). Projects like Bored Ape Yacht Club grant commercial rights that explicitly allow for derivatives, fueling a vast ecosystem of secondary projects.

Licensing terms can be encoded on-chain (e.g., in the token's smart contract or metadata) or referenced off-chain (e.g., linked to a separate legal document).

• On-chain: Terms are transparent, immutable, and programmatically enforceable.
• Off-chain: Allows for more complex, traditional legal language but creates a trust dependency on the issuer to uphold the linked terms.

Standardized frameworks provide clarity for creators and collectors.

• CC0 (Creative Commons Zero): Places the work in the public domain with no copyright restrictions.
• Commercial Use Licenses: Allow holders to use the NFT's art for commercial purposes, often with revenue caps or attribution requirements.
• Custom Licenses: Unique terms set by the creator, which require careful review as they can be highly restrictive or permissive.

A critical legal nuance is whether the license is bound to the token and transfers automatically upon sale, or if it requires separate, explicit agreement by the new holder. Most smart contracts transfer the NFT itself, but the associated license's transferability is not always legally clear, creating potential gaps between on-chain ownership and off-chain rights.

Enforcing NFT license terms, especially against infringement, presents significant challenges.

• Jurisdictional Issues: Digital assets and parties are often globally dispersed.
• Anonymity: Identifying infringers can be difficult.
• Smart Contract Limits: While they can manage ownership, they cannot inherently enforce complex copyright law. Legal action typically requires traditional off-chain litigation.

Creator royalties (a percentage of secondary sales) are a separate mechanism from licensing. A license grants usage rights; royalties are a financial claim. The erosion of enforceable on-chain royalties in some marketplaces does not inherently alter the underlying IP license, but it decouples the creator's ongoing economic incentive from the asset's commercial use by the holder.

Buyers must perform due diligence before acquiring an NFT for a specific use case.

• Verify the License: Read the terms directly, don't rely on marketplace summaries.
• Check Provenance: Ensure the minter is the legitimate rights holder.
• Understand Limitations: Common restrictions include no derivative works, no commercial use, or trademark limitations on character designs.

These are the foundational smart contract standards on Ethereum that define the core functionality of an NFT. While they establish ownership and basic metadata, they do not inherently specify licensing terms. The license is typically referenced in the token's metadata or provided off-chain.

• ERC-721: Standard for unique, non-fungible tokens.
• ERC-1155: Multi-token standard supporting both fungible and non-fungible assets within a single contract.

This distinction is critical for licensing. On-chain metadata is stored directly on the blockchain and is immutable, making any embedded license terms permanent. Off-chain metadata (e.g., stored on IPFS or a centralized server) is referenced by the NFT and can be more flexible but also mutable, posing a risk if the link breaks or the data is altered. Most complex licenses exist off-chain.

A specific license grant allowing the NFT holder to use the underlying artwork for revenue-generating activities. This is a key differentiator in NFT projects. Terms vary widely and may include limits on annual revenue, types of commercial use (e.g., merch, advertising), and whether the rights are exclusive. These terms are often defined in a separate Terms & Conditions document.

A financial component often tied to licensing, enabling creators to earn a percentage of secondary sales. This is typically enforced at the smart contract or marketplace level. Key implementations include:

• On-chain enforcement: Royalties are programmed into the NFT's transfer logic.
• Operator Filter Registries: Marketplaces voluntarily comply with a creator's preferred royalty settings.
• Optional royalties: Payment is not enforced by the protocol, relying on marketplace policy.