The arrival of NFTs has been revolutionary for multiple sectors: gaming, art, music, fashion, and the list goes on. NFTs are solving a problem that has plagued content creators and collectors for as long as the internet exists: How to claim ownership of digital assets that can be copied easily and unlimitedly? Thanks to blockchain, NFTs can guarantee an item's provenance, create scarcity, and prove ownership. Digital artists are now given a chance to reverse their extinction.
Over the past few months, public craze for NFTs has been fueled by headlines of flashy million-dollar sales. Among others:
- Digital artist Beeple's Everydays —The First 5000 Days sold for $69 million
- NBA Top Shot reached $600 million in sales
- A CryptoPunk NFT sells for $11.7 million
- Elon Musk turns down $1 million offer for an NFT of his tweet
Looking more closely at these examples, you'll soon realize that these NFTs barely serve any specific use cases. So what is driving people to get in on the NFT mania?
WHY ARE PEOPLE SPENDING SO MUCH ON NFTS THAT SEEM TO HAVE ALMOST NO UTILITY?
- Art: At its most basic level, an NFT can be valuable for the sake of art. A collector who owns Monet's painting would certainly not expect it to carry any "utility" and acquire it for artistic and emotional value. Sometimes, there is more than aesthetics and emotions to art. For instance, it was cultural significance that made Duchamp Fountain widely seen as an icon of 20th century art.
- Artifact: When you look at CryptoPunks, are they art? Not really, yet CryptoPunk NFTs are selling for millions. It is because they were the first NFTs on the Ethereum blockchain, which carries certain historical importance.
- Status: The NFT frenzy can also be explained using the "Veblen goods" concept where the wealthy are drawn to "conspicuous consumption" to display their status. The demand for a Veblen good rises as the price rises, which stands in stark contrast to the law of demand we know.
- FOMO: Scarcity played a significant role in driving NFT sales. NFTs are usually dropped in limited quantities and sold in auctions. Therefore, FOMO (the fear of missing out) may push buyers to make irrational spendings.
- Alternative investment: Not all NFT buyers are fans. Many of them are crypto investors who buy NFTs as investment assets, for similar reasons people seek luxury watches, sneakers, or Hermès bags in hopes that they will increase in value over time.
ARE THERE SIGNALS AMONG THE NOISES?
It is common for new technology to be associated with exaggerated expectations and speculations. And it's not necessarily a bad thing. As the serial angel investor - Bobby Goodlatte - perfectly puts it:
“In crypto, speculation is the boot-loader for utility. Speculation creates demand for discovering specific use-cases within the open possibility space of crypto platforms. It’s artificial demand at first, but demand nonetheless. A “bounty” for discovering legitimate use-cases amongst the noise.
Each boom cycle floods the space with both signal and noise. The noise can be overbearing, or even comical, leading some to dismiss the entire category. But with every boom & bust cycle so far: the signal was there the whole time, temporarily buried by the noise. “Only when the tide goes out do you discover who’s been swimming naked” — Warren Buffett.
Since these platforms are entirely open, much of the early activity turns out to be noise. This isn’t because crypto is filled with scammers - it’s more because crypto is permission-less. Ethereum is the strongest example of “speculation is the boot-loader for utility”. Much of the 2017 ICO craze was washed out with the tide. When the speculative mania crashed, what remained was real utility: decentralized finance. A true rival to legacy financial systems. Bitcoin followed a similar use-case discovery process, boot-loaded by speculation. The payments use-case initially envisioned has largely been washed away to reveal the battle-tested utility: digital gold.
NFTs are the newest wave. Buried within this wave of speculative noise, there exists legitimate signal: real use-cases, not possible with prior technology. I have my hunches about which use-cases will endure. But either way, the tide will eventually wash out & reveal them. These “hunts for utility” would never have happened if it weren’t for the waves of speculation that provide bounties for discovering legitimate use-cases.”
— Bobby Goodlatte
NFT technology has real use value because it solves practical problems when it comes to ownership certification and the creation of scarcity. Therefore, even if some of the heat may die down, NFT will be here to stay.
BACK TO THE MILLION-DOLLAR QUESTION: WHAT CREATES VALUE FOR AN NFT?
On the intrinsic value of NFTs, Hugo Chang puts forward a framework as follow:
Value of an NFT = Utility + Reputation + Future Value + Liquidity Premium
- Utility: The utility value of NFT depends on how the NFT is used. Game assets and community passes are examples of NFTs with high utility value.
- Reputation: The value of an NFT also depends on the reputation of the NFT issuer and previous owners. NFTs with high value are often created or distributed by influential people or companies with strong brands. Elon Musk got offered $1 million for his NFT because he is a celebrity.
- Future Value: Among others, two driving factors for the future value of an NFT are scarcity of supply and speculation. CryptoPunks are valuable because there is a limited number issued, whereas a lot of people are willing to buy them.
- Liquidity: Liquidity represents how easy it is to buy and sell the NFT. ERC-standard NFTs can be easily traded with ETH holders in the secondary market, increasing the number of potential buyers.
IT'S REAL-WORLD UTILITY THAT WILL DRIVE MASS ADOPTION OF NFTS
In order for NFT projects to sustain when the hype washes down, they'll need to go off this beaten track of relying on scarcity, reputation, or speculative value. NFTs have to be designed to add utility to our lives. Here are three layers of utility that we are seeing taking shape:
An NFT has internal utility when it is useful within its project. Since the utility ties to the project itself, if the entire project shut down, then you would lose all your items.
A good example of NFTs with internal utility is Sorare, where players can use their player cards represented as NFTs to buy, sell, trade, manage a virtual team, or enter tournaments & compete for prizes. Sorare cards are issued in limited supply, making it rewarding to own the best players both on the court and in trading. Another play-to-earn NFT platform is Axie Infinity, which is "turning the pandemic jobless into crypto traders" - in the words of Bloomberg.
Another promising field for NFTs to flex their utility is in the metaverse. The metaverse can be described as a shared, virtual, and always-on environment where people log on to their computers and use avatars to interact with one another. NFTs matter to the metaverse because their owners can use them to buy, trade, sell, or invest outside of a metaverse layer. In other words, the utility of NFT can be increased by its interoperability across multiple applications within the same or in different metaverses.
Although the idea of the metaverse can seem far-fetched at this point, we have every reason to bet on it. Considering that we are increasingly working, playing, shopping, and socializing online, that world seems closer than ever.
Some major players on the market are Decentraland, The Sandbox Game, Cryptovoxels, and Somnium Space. By partnering with popular NFTs, these companies promise to provide 3D utility in their layer of the metaverse. Major video game studios are also jumping on the bandwagon. Epic Games - the developer of Fortnite - just announced a new funding round of $1 billion to accelerate their metaverse, while Activision Blizzard CEO says a Ready Player One-like metaverse is coming.
This is the highest level of utility for NFTs where the owner of an NFT enjoys a perk in real life because of his/her ownership.
Kings of Leon is a case in point. For the release of their new album When You See Yourself, the US rock group offered three different types of NFTs to provide a myriad of experiences for owners. The first type is a special album package; the second type (called "Golden Tickets") offers front-row seats for life, while the third type is for exclusive audiovisual art. Another example is Stoner Cats - a short animated series created by Mila Kunis, Ashton Kutcher, and friends. Buying an NFT is the only way for viewers to get a look-see. The NFT also serves as an access pass to exclusive membership perks. Thanks to the sale of over 10,000 collectibles for 3,647 ETH, Stoner Cats is one of the first shows that are fully funded by NFTs. In these cases, NFTs play a big role in building communities and bringing together people with mutual interests, both virtually and in real life.
At Arianee, Real-world Utility has been our guiding North Star from day one. By giving a digital life to physical products in the form of NFT passports, we want to empower customers and augment their ownership of valuables. With Arianee-powered NFTs stored on their phone, consumers can unlock a plethora of possibilities, from immersive digital experiences to transparency tracking, authenticating, reselling, as well as other exclusive services & events. From the perspective of brands, NFTs help them unlock new engagement paradigms and maintain a perpetual connection with end-users while respecting their data privacy thanks to blockchain technology. Having the safety, trust, and ease of owning a valuable good on top of the incredible feeling of experiencing it - for us, that is true luxury.
While it's true that some of us may once in a while buy an NFT artwork for our own enjoyment, this is a very niche audience for now. For the average person, they would want to reap some utility from their purchases. Therefore, for NFTs to go into the next phase of mainstream adoption, companies need to think of ways to weave them into our real world and solve real problems consumers are having.