By Kalyan Banerjee, co-founder and Chief Growth Officer at Lumenci
Recent years have seen massive growth in the investments in crypto native companies. Even the U.S. government recognizes the importance of the crypto industry and recently published an Executive Order on digital assets.
There is a narrative in traditional engineering circles that the crypto industry is completely open source and doesn’t have much use for patents, and that only the old companies who are looking to get into crypto industry care about patents. The reality is different. Although a large part of the industry is open source, many crypto native companies value patents and regularly use it for various business strategies. As several examples in this article demonstrate, many significant crypto native companies not only file patents but use a variety of creative strategies to drive business value from their patenting activities.
If you are building a web3 or a crypto native company, here are the top five ways you can think of using patents for your business goals.
Traditionally, companies file for patents, and when an important patent is issued, the company publicly announces this development and its importance for the company and the industry. Many crypto native companies promote their patent issuances to drive the narrative that they have developed innovative crypto/web3/DeFi technologies with significant real-life applications.
An early example of a crypto native company using its patented technology to showcase its innovation is perhaps Coinlab, which was a Seattle based startup funded in 2012 by prominent angel investors like Tim Draper. In 2015, Coinlab developed a technology to de-anonymize Bitcoin wallets and transactions. The patent was issued in March 2016, and Coinlab explained in a blog post why they developed the technology (to track the ‘missing’ funds from the Mt Gox incident, in which over 700,000 bitcoin were allegedly stolen or lost). At the time, it was hailed as an example by the Zcash community of why Zcash is needed (since it offers true anonymity, and Bitcoin doesn’t).
A more recent and prominent example is the Theta Network (“Theta”), a Bay Area based startup which started in November 2018 as a blockchain powered CDN and has recently started to position itself as “an essential infrastructure for metaverse development.” Theta proudly explains its early technical breakthroughs in 360 VR real time rendering, peer to peer streaming, and talks of Theta as a “de facto standard for video and media NFTs” by implementing “decentralized digital rights management (DRM) for NFTs.” Theta’s official blog is replete with several explanations of its patents, and reinforces its narrative as an innovative project. Theta’s market cap is currently over $2B (and it briefly crossed $12B in February 2021), so it is a significant project.
Another crypto native streaming startup is Verasity, which considers patents as a “Proof of Utility” and a part of its strategy to “prove without a shadow of a doubt that Verasity has ready-to-deploy and truly useful technology.” Verasity positions itself as a protocol and product platform for esports, video entertainment, adtech and NFTs. It promotes its patented Proof of View mechanism in its various blog posts as a way to detect ad fraud in streaming and in NFTs. In its recent partnership announcement with Brightcove, Verasity proudly referenced its “patented” technology.
In 2015, when it became known that Coinbase had filed a number of (9) patents, it faced some criticism and curious questions around why an open protocol (Bitcoin) company is filing for patents, Coinbase CEO Brian Armstrong wrote an article explaining the company’s position. The article explained that a patent rejection creates a prior art record of technology, while its issuance reduces the risk of threat from opponents. Seen from this business lens, patents improve the value of the business, and help with patent litigation defense. The image presented was that although a young crypto native company with open-source ethos, Coinbase takes patents seriously, and is committing to act responsibly (by not suing smaller companies).
Gemini, one of the top 5 cryptocurrency exchanges in the U.S. founded by the Winklevoss brothers, received several patents in 2019 and 2020 on stablecoins (full list of Gemini patents is on its website). At the time, its head of Communications explained that its patents protect the investments Gemini makes in R&D of its products. Gemini continues to showcase that it values patents in its important job post a Senior Patent Counsel. The company thinks this position will “play a critical role in developing and implementing the foundational processes for Gemini’s patent program” and will identify inventions and help create a best-in-class portfolio.
Blockstream, founded in 2014 by Adam Back and others to build B itcoin based financial infrastructure, was one of the early crypto companies to take a defensive strategy for its patents. In July 2016, it took a patent pledge to use its patents only for defensive purposes, and that it will not sue the developers and users of Blockstream technologies as long as they don’t file patent lawsuits themselves. Later in September 2020, Blockstream joined Square lead COPA which is explained below.
Stacks (earlier Blockstack), which enables smart contracts for Bitcoin, took a defensive pledge for its two patents on single sign on for decentralized applications and decentralized data migration in 2020, and later on joined COPA with its 5 patents.
Square (now Block), although not originally a crypto native company, has become an influential bitcoin company through its various businesses, initiatives, and Jack Dorsey’s constant advocacy for Bitcoin as a native internet currency. In 2014, when still a very young company, Square started allowing sellers to accept bitcoin as payment. In recent years, various Square entities have enabled buying and selling of Bitcoin, have open sourced its cold storage solution, have started to build defi services, and a Bitcoin mining hardware.
In 2019, Square started a nonprofit Cryptocurrency Open Patent Alliance (COPA) with the stated goal to avoid “patent lockup” of core crypto patents using a dual approach. COPA members pledge to use their crypto patents only for defensive use, and pledge their crypto patents to a shared pool which all COPA members can use under “reasonable” terms. Several companies including Coinbase, Blockstream, Kraken, ARK.io, BitPay, Microstrategy, OkCoin, Uniswap, and now Meta, are COPA members.
All of these companies (mostly fintech, but gradually more expansive), by contributing their crypto patents to an open defensive pool, are indirectly also enabling patent related dialog between various companies in the crypto industry.
A recent Fidelity Digital Assets 2021 Institutional Investor Survey found out that 71% of U.S. and European institutional investors surveyed intend to allocate to digital assets in the future, thus also opening up a healthy chance of M&A activity in crypto. Selling crypto patents, or more generally crypto related IP, also provides a reasonable path to realize the value of the crypto IP when a project either doesn’t work out, or a more lucrative path opens up.
After a few years of trying to make it work, Facebook recently shelved its big crypto project, which was known under various names, Libra, Calibra, and later Diem. The Diem Association built and tested a blockchain based cross border payment system and implemented controls preventing anonymous transactions. But due to regulatory pushback, it decided to wind down its business. In January of this year, Diem sold its IP and technology assets to Silvergate Capital Corporation for $182M. Silvergate is looking to launch a regulated stablecoin this year, and Diem’s tech and IP would likely play an important role in it. It could potentially bring a new competitor to Circle’s USDC and Tether’s USDT.
Patent filings at the USPTO suggest several examples of companies such as First Bitcoin Capital Corp, and Open Invention Network, which buy crypto patents from individual investors or companies. First Bitcoin Capital Corp was the first publicly traded crypto company also sold a majority its crypto IP assets to BOTS, Inc. in 2020 in a hybrid deal.
Some crypto native companies actively assert their patents when they think a competitor is infringing on their patented technology. Most of this action has been so far been China based, although there are now early indications of U.S. activity as this section describes.
One of the earliest and well known patent cases among the crypto native companies involved the Chinese bitcoin mining company Bitmain, when in 2017 it filed a patent case in against Bitewei (also called MicroBT) which was founded by a former Bitmain Director of Design, Yang Zuoxing. The patented technology was about reducing power consumption and improving efficiency in the chips used for bitcoin mining. Bitmain alleged patent infringement by Bitewei’s Whatsminer, and subsequently Bitewei retaliated by filing a patent invalidity countersuit. The Chine IP Office (SIPO) later found the Bitmain patent invalid.
Another recent patent case, again in China, is between Canaan Technology and AGM Group, although the details of this are relativey less known, and will likely emerge in coming days.
While we are on the topic of bitcoin mining hardware and chips, a recent news in the US is worth paying attention to. A few weeks ago at the ISSCC 2022, which is an international semiconductor conference, Intel listed a presentation for its “Bonanza Mine” processor, a chip described as an “ultra-low-voltage energy-efficient Bitcoin mining ASIC.” Intel has several patents and publications on crypto mining, including for energy efficient hardware acceleration geared towards bitcoin mining. With Intel now launching its bitcoin mining chips, and customers (Block, Argo Blockchain and GRIID) for its gen 2 ASIC chips lines up already, it would be interesting to see how the patent assertions regarding the bitcoin mining chips shape up in the future, especially in the US.
Patents provide long term value to businesses by creating optionality even for web3 or crypto native startups, as the several examples in this article describe. If you are a funded company building in these domains, or an investor in a crypto native company then encourage your portfolio company to, get started immediately on getting those patents on file. Don’t get fooled by the narrative that patents aren’t useful for crypto native companies. As you dig in, you’d likely realize that many of your (or your portcos’) competitiors are probably already thinking on these lines, but just privately. You can figure out later what to do with your patents, like all these examples in this article. In the future, even more options could open up for you to realize the value of these patents, and perhaps you could even create the 6th strategy. Lets get going, and good luck with scale.
About the author:
Kalyan is a Cofounder and Chief Growth Officer at Lumenci, a consulting partner to top IP law firms and tech companies on IP Strategy. He is a testifying and consulting expert in software IP cases in various District Courts, in AAA arbitration disputes, and at the ITC. He has previously written on IP issues in Law360, IPWatchdog, spoken on IP issues in various Texas universities, and on crypto at the Austin IP Law Association. Kalyan lives in Austin TX with his family.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.