Utility in NFT Projects and Illusory Promises

We’ve all heard the magic word when it comes to different NFT projects and their promises to bring a world of animated series, members-only access, and the next evolution in (insert buzzword here). That’s right, I’m talking about utility. Let’s take a deeper dive into the concept of utility and what it actually means…

What Exactly Is Utility?

We can’t really get into a deep discussion about NFT utility without defining what utility actually is first. In the NFT space, utility refers to NFTs that grant their owners certain rights, privileges, or rewards that they otherwise wouldn’t be entitled to through their ownership of a specific NFT. Lots of NFT collections and 1 of 1 pieces launch with no utility whatsoever and only give you the artwork attached to the token itself. Others, like a recent Bill Murray Genesis NFT, give you access to an experience or perk such as enjoying a cold one with a cinematic comedy legend. However, in this case, said utility is pretty much limited to one person.

Check out our article Bill Murray 1000 Brings Fun, Laughter and Charity Together by clicking here.

It may also help to highlight some common examples of utility we’ve seen across different NFT collections such as:

• Exclusive membership to a VIP club of holders (think private Discord chat for holders)
• Grant early access to merchandise sales for NFT holders
• Your NFT entitles you to—you guessed it—a second NFT
• NFTs for shared revenue with other holders and artists (totally not an unregistered sale of securities issue…just kidding, it is)
• Access to a special experience (brunch with the artist, meet x athlete or celebrity)
• The NFT acts as an alpha or beta pass to a game the project is based on

While there’s no shortage to ideas that can be added to this list, it does feel like many NFT utility perks fall under the category of…

So Everything Sucks?

No actually! Just because this is the typical approach doesn’t mean that there aren’t novel ideas coming to life. Luxury and fashion brands are already using NFTs as certificates of authenticity/ownership. Gary Vee uses specific NFTs in his VeeFriends series as lifetime passes to his speaking events, and Ticketmaster just tapped the FLOW blockchain to let event organizers issue tickets as NFTs.

So while there’s a lot of hype around NFTs and a ton of projects where utility only amounts to a private chat in a project-run Discord, there are some areas where real innovation is starting to take root. Even though the room for innovation is definitely there, collectors should still be wary when NFT projects that launch with no utility promise it in the future…

Utility and Illusory Promises

If a project is going to promise utility, it should be present at launch. Why? A lot of projects like to bring up utility when trying to find an audience for their NFT collection.

“You should get into our project because we’re going to do a bunch of awesome things with this IP. We’re going to have XYZ, and it’s going to be promoted by Beyoncé! Oh, and keep this on the down-low, but we’re deep in talks with Disney for an adaptation based on our IP!”

This is typically referred to as marketing talk or puffery.

In contract law, these types of statements are commonly referred to as illusory promises. In simple terms, an illusory promise is a promise that is unenforceable either due to vagueness, lack of consideration, or plainly because the promisor (the person promising) can choose whether or not to honor it. These types of promises are not legally binding and do not create a contract between the buyer of the NFT and the person or project selling it.

Your Honor, my client was simply shilling JPEGS…

Take a look at the following example:

Person A creates an NFT collection called Cool Snails. Person A says, “If Cool Snails sells out, I may give away a Bored Ape to 3 holders of Cool Snails.” Upon hearing this, Person B decides to buy 30 NFTs. Following this, NFT tradoooors see a large buy taking place and continue to ape in en masse. The project quickly sells out.

Person A never runs a giveaway for holders of Cool Snails and buys some Bored Apes for himself. Person B is furious and claims he had a contract with Person A since he fulfilled his end of the bargain which led to the collection being sold out.

Now is there actually a valid contract in place? The most likely answer is, “No.” Consideration in the above example is based on Person B and others selling out the collection and on Person A’s subjective feelings. Now can a court still find a way to create an enforceable contract or hold Person A at fault? Sure, the doctrine of good faith or promissory estoppel are some ways courts have found to make affected individuals whole. Usually a strong motivator is when a person relies on a promise to their own detriment.

So What’s the Takeaway Here?

All of the above is merely to say that the way in which projects communicate in the space carries great weight. Also bear in mind that their shortcomings may not be due to bad intentions and may in fact be the result of failing to find a market-fit, inexperience, or sometimes plain and simple mismanagement of the resources they’ve been given.

The lesson other projects can learn is to come up with a strong plan on how to provide utility from the onset of a project. In contrast, they can also focus on simply delivering really unique, eye-catching art. Not every project needs to be a precursor to a AAA blockbuster video game or anime series. We should call that out more as a community. It’s great to have lofty ambitions, but we’ve also seen bad actors who try and promise the moon to their community and deliver nothing in the end. Launching a project is a full-time commitment, and a cookie-cutter template for utility isn’t going to get us anywhere…