When NFTs first exploded into the marketplace, their value was inherently derived from their unique divisibility, non-replicability and exclusive scarcity, however as the world of NFT drops continue in their evolution, utility and execution have become integral differentiators.
Although art-focussed NFT projects still remain vastly popular, there is a growing movement within the NFT community to explore ways of adding real-world experiences and rewards to collectables.
Utility NFTs (essentially NFTs with benefits) are different in that they create intrinsic value propositions that sit alongside their collectability and scarcity. Benefits are often in the form of redeemable rewards, privileges, access to special events or premium gated content.
These kinds of “added-value-extras” offer the holder an invitation to participate in a more immersive experience and appeal to a desire to form part of a community.
Community: an NFT cornerstone
Community is at the heart of utility NFTs and crucial to their long-term growth – enhancing both value and investment potential: “when a community of inspired members buy into a project, believe its cause, and enjoy the utility it offers, it makes for a place of great innovation and engagement” – and drives sales.
The Bored Ape Yacht Club (BAYC) is a well-known example.
Initially launched as profile picture (PFP) artwork, BAYC gradually began adding utility for NFT holders, including exclusive access to branded parties, a member’s club, celebrity hang outs and a plethora of other rewards and incentives, generating over $2.4 billion in sales (knocking Cryptopunks off their top spot).
Combining collectable art with utility in the form of community membership and a swathe of benefits ultimately enhances desirability. A sense of belonging, it turns out, can have a price tag.
A primary factor to the value of an NFT in terms of utility – according to Nextrope – is “the emotional charge that accompanies a product or service.”
Increased demand occurs when the emotional appeal of an item is backed by social status, finances, property rights, a great experience or, in the example of IMPT, protecting the planet.
Utility NFTs of the future
By utilising blockchain technology and NFT ownership, IMPT is turning carbon credits into tradable and ownable NFTs, helping users fund eco projects around the world.
Instead of simply remaining “a high-priced novelty for collectors,” Fio suggests “NFTs of the future will be judged by how efficient and secure they make everyday business.”
Jigen.app is the first NFT gateway for fashion and luxury items, blending the concept of digital and real-world goods and using blockchain technology to digitise, track and authenticate a product’s entire life-cycle, potentially solving the problem of counterfeit high-end goods.
“Several investors and traders, of different industries, intend to utilise NFTs for their characteristics of uniqueness, originality, and demand elevation capability. Business can gain advantages from NFT utilisation such as an increase in marketing value, new ways to raise capital, content creation, and elevation of brand awareness,” says Dhrubabrata Ghosh, Managing Director, Data & Digital expert at Protiviti.
Another example of a utility NFT breaking new ground is Pawn Protocol – an open source and non-custodial liquidity protocol for NFT collateral that allows a crypto holder seeking a short-term, high-interest investment to open a digital Pawn Shop and lend out crypto to other NFT owners who want to access liquidity quickly.
The rising utility of NFTs has unlocked new pathways to digital ownership, brand storytelling and community building, and has encouraged consumer interactions, conversions, and revenue. However, as with everything, not everyone is a fan.
The flip-side to the (crypto) coin
For many, NFTs represent the digital equivalent of snake oil. This often stems from questioning the purpose of NFT ownership and indeed whether there is true ownership, in any event.
Critics have argued that an NFT owner has nothing more than a (potentially) perpetual and exclusive licence to access a link, purporting to point to a representation (of particular software) such as a jpeg, and facilitating publication. An exclusive licence to access and publish – albeit without guarantee or likely recourse in the event of loss.
“Hacks can’t be reversed, misplaced funds can’t be retrieved by calling customer service, and a failing crypto exchange is not likely to get a government bailout. Investors have few protections,” affirms Today Online.
The collapse of Sam Bankman-Fried’s FTX, following a mystifying series of bad business decisions, due diligence failings and procedural oversights, is the largest in a string of crypto-related failures this year.
According to the Bloomberg wealth index, these collective losses have cost crypto billionaires over $96 billion in 2022 alone (and this isn’t including the billions owed to the estimated 1 million creditors of the FTX insolvency fiasco).
“The collapse of something as major as FTX just illustrates the importance of transparency, importance of appropriate regulatory protection, regulatory requirements for all financial activities,” says Laura Cha, chairman of Hong Kong Exchanges and Clearing.
“The biggest concern institutional investors have with investing in crypto is the uncertain regulatory environment,” tweets Tom Dunleavy, senior research analyst at Messari.
Regulation has to catch up in the Wild West of crypto: a recent survey by Privacy Affairs revealed over $3.5 billion has been lost in 2022 to crypto losses, scams and rug pulls.
A “rug pull” scheme follows when crypto developers who attract early investors to a project, who may quickly abandon it, taking with them project funds, or who may otherwise instigate the selling of project assets, without the proceeds finding its way back to investors.
The collapse of Thodex, the Turkish cryptocurrency exchange is a prime example of a rug pull – as is One Coin, the crypto-Ponzi scheme that allegedly duped more than three million of its members out of $4 billion (to date, the largest amount stolen in crypto history).
The increasing number of rug pulls in recent years has gone on to demonstrate that where there is endless possibility for value, investment, improvement (and of course profit), there is also the inevitable risk of deception and fraud, miscalculation and misrepresentation.
At this time the UK is finalising plans for crypto regulation after the FTX implosion – which, if approved, will give the Financial Conduct Authority new powers to oversee the digital-assets industry far more widely.
Whilst the market remains split, and the levels of investment and degrees of loss remain incredibly high, there is no doubting the potential advantages of NFTs (especially those with sought-after utility). But in any event, irrespective of your view, for the NFT sector to flourish standard business fundamentals must be embraced: suitable due diligence; good business practices; security. And it seems increasingly likely that for a successful existence on a blockchain or within a digital environment, such as the Metaverse, appropriate regulation and effective enforcement will be needed.