The Next Wave: The Rise Of Utility NFTs

NFTs, or non-fungible tokens, took the world by storm last year. From transaction volumes of under $100 mn in 2020, sales reached the $25 bn mark in 2021, as measured by DappRadar. Many thought it was a passing fad, but volumes picked up again at the end of last year and into 2022 with major brands and corporates realising the value of digital goods for the consumer. Emergen Research estimates that the compound annual growth rate of the global NFT market place will be 10.7% over the next few years. Investment in these digital representations of ownership have been buoyed by celebrity endorsements, a liquid resale market and popular demand, as the move towards a virtual economy accelerated with the pandemic.

While the rise of NFT has been mesmerising, their popularity and the eye-popping prices that have been achieved by a few collections or artists has raised questions about their usefulness and their inherent value. After all, what is the point in paying thousands, sometimes millions, for a digital image of a monkey or a pixelated character that can be easily reproduced online?

It is important to note that NFTs are permanent, digital representations of ownership of an asset, whether that be virtual or physical. NFTs, unlike currencies or even cryptocurrencies, are non-fungible, i.e. they are unique, each representing a different asset with its own value. Anyone can verify an NFT’s authenticity, as it is on the blockchain, an open and transparent digital ledger, where ownership is permanently recorded by a consensus-driven network, without the need for third parties.

Smart contract capabilities on the blockchain also allow for predetermined conditions to be met for a transaction to occur so it can, for example, give artists the right to royalties in perpetuity every time the artwork is sold. But NFTs have vast potential outside of the realm of art, they can be used to represent videos, music, and even real estate and luxury goods items, as well as virtual Nike trainers, account receivables for trade finance or gaming play to earn rewards.

Market demand for utility-driven NFTs

Utility-driven NFTs have proved popular as they appeal to people’s desire to form part of a community. Ownership can grant certain member rights and benefits such as rewards, discounts or preferential access to real or virtual events, artists and sports personalities. This means that their value is driven partly by a defined use case. Utility NFTs come in a number of broad categories, including social NFTs, community NFTs, in-game NFTs and fantasy sport NFTs. More are sure to follow.

The Bored Ape Yacht Club is one of the most successful examples. As the name suggests, buyers gain access to an exclusive members’ club. Owners also gain access to a Discord server, on which celebrities such as NBA star Stephen Curry, musician Post Malone, and talk show host Jimmy Fallon hang out and chat.

Gaming utility

The gaming industry has grown tremendously over the last few decades. We’ve moved from huge machines in arcades to handheld, online and live streamed gaming in two to three decades. There are play-to-earn games where players can earn an income stream by monetising NFT and token rewards and traditional gaming companies are now investing heavily in this area to bring NFTs into games that are played by billions of people around the world. The aim is to allow players to own their rewards, such as an avatar, item of clothing or even exclusive content, and to be able to trade them, while the ideal of some is to enable gamers and their NFTs to jump between different games, a type of gaming metaverse.

One example of a game that incorporates NFTs into its DNA is Blockchain Cuties. Blockchain Cuties is a collectible crypto game with adventures where players can play with puppies, lizards, bear cubs, and cats as well as other real and fantasy creatures. Similar to the Bored Apes, each cutie is unique and 100% belongs to the owners. Like traditional trading card games, users can collect their creatures, but also breed them, test their skills in battle, arm them and level them up, meaning that they can increase their value within the game’s ecosystem.

Within the game, there is an in-game economy. This allows users to trade Cuties using smart contracts on Ethereum, EOS and TRON blockchains, while also being able to sell or transfer them to other players like regular cryptocurrencies.

Blockchain Cuties, while exceptionally popular, is not at the Pokemon or The Sims level yet. However, games such as this are laying the groundwork for mass adoption. For example, in future, Call of Duty players may be able to purchase a new and unique outfit for their player as an NFT, wear it on their online avatar on another game, verify and display it on their Twitter profile and trade it with another gamer.

This underpins the development of the metaverse (or metaverses) and how people represent themselves in the digital world. At some point in the future, people may be studying in the metaverse, working in the metaverse and essentially living in the metaverse.

Will NFTs outgrow crypto?

Some think that NFTs are just the next fad after crypto, but in reality they are inextricably linked. NFTs are only possible because of digital ledger technology. When an NFT is minted on the blockchain, it creates a transaction, usually on the Ethereum chain, which generates so-called gas fees for the network and increases its usage and the value of the Ethereum token, Because of its popularity, the Ethereum blockchain is facing bottlenecks, meaning slower transaction times and higher fees. This has led to alternative chains, such as Solana, that promise faster and cheaper service, so their associated tokens would benefit from their success. To conclude, gaming NFTs are just one of many utility use cases in this space, there are sure to be more and this will boost the value of the ecosystem as a whole. Digital apes were just the start as the virtual economy comes into its own.

(Martha Reyes is the head of research at digital asset exchange platform Bequant)