The IP (Intellectual Property) protection has been widely concerned by more semiconductor companies and research institutions, due to the rapid advances in deep sun-micron integrated circuits. A DFA (Deterministic Finite Automaton)-based distributed IP watermarking method is presented by using data compression technology. DFA is used for generating pseudorandom key stream and encrypting the original signature. The cipher text is generated, and then transformed into embedding coordinates and watermarks by specific data compression technology. Finally, the watermarks are denoted by some identical logic modules, and embedded in the LUTs (Look Up Table) of FPGA (Field Programmable Gate Array) design.