What if you couldn't sell an NFT?
What if you couldn't sell an NFT?
Or, what else NFTs can be good for aside from speculative trading
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Most investable assets have three key characteristics:
Entry price - how much you pay to acquire the asset
Return of capital - how much capital you earn back over the hold period (e.g. dividends for stocks, interest payments for bonds, rent for real estate)
Return on capital - proceeds at exit in excess of the entry price you paid
Today most NFT investors focus only on entry and exit price - the vast majority of NFTs are owned for speculative reasons in hopes of selling the asset at a higher price in the future. Some projects also offer return of capital via airdrops (e.g. Yuga Labs giving away MAYC or Otherside land plots to BAYC owners). All told, the end goal remains the same - for most NFT market participants the goal is to end up with more money than what they started with.
But what if we abstract the financialization of NFTs away? What if we removed both the entry price (NFT was free to claim/mint or was earnable) and the exit price (NFT was non-transferable or there was no market for it)? In other words, what can an ownership of an NFT offer to its holder other than financial gain?
In this essay I am going to work through this thought experiment and offer some ideas of non-financial applications of NFTs. I hope to cover the following:
Four key types of NFTs (it’s not just JPEGs)
Non-financial NFT use cases (Art, Access, Commerce, Identity)
Why blockchain? (why do we need web3 for this?)
Conclusions (where do we go from here?)
NFTs are not just JPEGs
When most people think of NFTs, they imagine those small profile picture (PFPs) that they see on Twitter (and soon Instagram) - they appear as a simple JPEG (many even wonder why would someone pay thousands of dollars for something that can be ‘right-click-saved’ - topic for another essay).
In reality, NFTs are typically just a link between an on-chain item with some off-chain data (picture, text, music, video, etc). With that in mind, there are some important distinctions between the different types of NFTs available today:
Transferrable vs Non-Transferrable NFTs. Most NFTs today are transferrable tokens that one can buy, sell or trade to another person/wallet. These represent the vast majority of NFTs that you might have heard of or seen in the news. Less known, there are also non-transferrable NFTs (or as Vitalik Buterin dubbed them “Soulbound Tokens” or SBTs). These NFTs cannot be sold or transferred to another wallet (though some may be revoked).
Static vs Dynamic NFTs. Static NFTs are those that have permanent immutable traits - for example, a Bored Ape or Doodle. Dynamic NFTs on the other hand can be modified - for example an NFT Sneaker from the viral move-to-earn app STEPN, in which users could “level up” / upgrade their Sneakers as they progress throughout the game.
Dynamic NFT used in STEPN move-to-earn game
These characteristics open up a wide design space for a myriad of different use cases and industries in which these NFTs can be used in new and creative ways.
With that out of the way, let’s explore some of these in more detail.
NFT Use Cases
NFTx Art/Collectible
Aesthetic/Sentimental Value. I’m listing this as the first use case since it’s the one that is probably easiest to grasp and understand. Some NFTs can valuable to its holder for purely aesthetic/sentimental value - this is very similar to how one would own a piece of art in their apartment that they can’t / don’t want to necessarily sell.
Intellectual Property. Going one step further, owning an NFT can endow its holder with unique IP rights, enabling them to innovate and create new derivatives (clothes, accessories, games, etc.), providing an avenue for potential monetization .
Digital Flexing. As our lives become increasingly digital, so will our needs and/or desires to flex. Whether we like it or not, the items we own (physical or digital) are signals for access, wealth, style, etc. Today, most people flex online via social media (e.g. Instagram photos/stories) or (increasingly) with art/PFPs/digital collectibles. In the future, people will be able to flex with verifiable purchases they made in real life. For example, instead of wearing a potentially fake Rolex on Instagram you may display a proof of purchase of a Rolex from an Authorized Dealer - more on this later). The proof itself does not have any financial value, but it may have social/signaling value to the holder. Social media giants are already adding NFT functionality to their platforms:
Twitter was first major network to add NFT capability to its platform
Instagram has announced it will add NFTs to its app in 2022
NFTs x Access
Memberships - NFTs can be used as verifiable memberships in various clubs, programs and communities. These scarce tokens can endow users with exclusive access to gated Discord channels / online communities and even IRL experiences. Most current iterations of this use case use transferrable tokens (you can buy/sell them), but it is likely in the future we will have communities which will provide access to its members for free in exchange for doing something (being a contributor, being first/early, working in a certain industry). Some examples of these communities today are:
Artist/Creator/Brand engagement - Fans/customers earn NFTs via desired behavior (e.g. being in top 1% of artist’s content consumers or attending X number of games of their favorite sports team), and in return they receive first dibs on front row tickets or exclusive merch / discounts / deals. The NFT itself may not have explicit financial value, but it allows its holder to connect with their favorite brands on a deeper level and be rewarded for being a true fan.
Loyalty programs/perks - Generative NFTs can be used as a “digital punch card” which would provide its holders with discounts on coffee/drinks, guaranteed reservation spots, etc (Tascha wrote an awesome piece on this). There has been already some experimentation in this space:
Coachella selling limited edition NFTs for life-long pass to its concerts
E1even nightclub launched NFT passes that provide its holders with exclusive access to its IRL events at its venues
Superlocal is an early stage Foursquare x Web3 startup that will enable small businesses to create and mint NFT-based loyalty programs.
NFT x Commerce
Token-gated commerce - this is similar to the “access” use case described above - stores/artists/brands can restrict sale of certain items to holders of specific NFTs. Shopify already added an API that enables this functionality.
Digital Twins - this concept has been brilliantly explained by Nic Carter in his deep dive on NFT use cases in the fashion space. In essence, NFTs can be used to redeem a previously purchased physical good. This means that goods can be both physical and digital goods (hence the “digital twin”). Some examples Nic mentions in his article are:
Nike/RTFKT - NFT holders can ‘forge’ a real-life sneaker
Tiffany - CryptoPunk NFT holders can purchase a necklace for 30 ETH resembling their own Punk. This is the first example of a known luxury brand leveraging existing 3rd party IP (composability!)
Anti-Counterfeit/Authenticity - another fascinating use case Nic mentions in his essay is one of anti-counterfeit/proof of provenance for luxury items. Brands can leverage chip-embedded links connecting the physical good to the NFT proving its authenticity. A number of brands are tinkering in this area - Breitling and Vacheron Constantin invested in a ‘luxury good passport’, LVMH, Mercedes Benz, Cartier and Prada joined a consortium to develop a global standard for digital luxury goods.
Innovative Marketing - Given that NFTs can be ‘airdropped’ into users’ wallets, there is an interesting design space for new marketing campaigns of brands targeting specific demographics (e.g. members of particular communities, or power users of certain apps). For example, Sephora could airdrop NFTs redeemables for in-store discounts to holders of World of Women NFT. To date, airdrops have been largely used by crypto-native companies, but it is only a matter of time until “web2” brands start looking at how they can enhance their marketing efforts using web3 primitives.
NFTs x Identity
Identity is probably the biggest, most fundamental application of NFTs (and probably Web3), yet it is one that is least built out today. As our lives go increasingly digital (and perhaps eventually onto the Metaverse?), digital identity will become more and more important. Today, digital identity is mostly associated with our PFPs or avatars on social media platforms and games. In the future, our digital identities will extend far beyond what you look like on Twitter:
Credentials - non-transferrable NFTs can be used as verifiable credentials such as university degree, age, accredited investor status, vaccination records and others. In the future, we will likely have something akin to a private “digital backpack” which will house safely and securely a number of important on-chain credentials which we will be able to reveal selectively to whatever service we deem appropriate. A bunch of startups have emerged in this space:
Reputation - somewhat adjacent to credentials is reputation - this can be anything from on-chain proof of involvement/contribution to various communities (Reddit is already experimenting with this) to on-chain credit scores (which would unlock cross-border credit history/proof of credit worthiness)
Reddit’s Crypto Wallet
Why blockchain?
If you made it this far you may be wondering, why would we need blockchain technology to unlock this functionality? Can’t this be done with existing web2 solutions? In reality, most of these things can indeed be done without blockchain/crypto. However, there are three properties that web3 primitives unlock:
Interoperability. This is by far the biggest unlock that comes from using blockchain - it introduces standardization and interoperability across the entire ecosystem. This benefits both brands and consumers alike. Brands benefit from composability, enabling them to easily deploy new products/campaigns on top of existing applications as well as seamlessly collaborate with other brands. For consumers the benefit is true ownership of their data/assets and the ability to take these assets with them from one application to another without worrying about compatibility/integration.
Transparency/Auditability. Blockchain ultimately is a public ledger - it makes it very easy to verify ownership of a particular digital asset and trace it back to the original issuer/owner directly on the blockchain. Importantly, the ledger needs not be fully decentralized (though the libertarian in me would love for this to become the status quo) - web2 incumbents may opt in to use centralized, permissioned ledgers to adopt web3 primitives - time will tell where the various technological solutions/paths will ultimately converge.
Liquidity. I know I started this piece deliberately omitting the ability to buy/sell digital assets - the primary use case of this property today is speculation and profiteering. However, when overlayed with genuine utility, NFT liquidity allows the asset to end up in the hands of a holder that values it most (this is true only for transferrable NFTs). I may write another piece on this topic and talk about use cases where liquidity may be important - such as ticketing, textbooks, etc.). In the end, I expect NFT liquidity will be used the same way we use Craigslist or Facebook Marketplace - for people to simply offload something they no longer need to somebody else who does.
Closing thoughts
Some of these applications may appear futuristic - and in many cases it is because they are. Brands and artists will need the develop the necessary knowledge and understanding of digital ownership, blockchains, and web3 primitives. Beyond that, they will need the tooling and infrastructure in place to easily deploy their ideas without having to hire an army of blockchain engineers and developers. This will take time. Some will develop this expertise in-house, while others will look to crypto-native startups and advisory firms for help. On the consumer side, the industry needs to abstract any and all complexity associated with interacting with blockchains - we need to get to a point where receiving, sending or redeeming an NFT is as easy as sending a Venmo. Digital wallet wars are still in its infancy phase, and there will be a lot of solutions available in the market offering simple UI/UX for the everyday person to easily access and interact with digital assets and their own digital identity. All of these challenges are critical, but not insurmountable. They create a significant business opportunity for builders and founders to bring this fascinating technology to the masses and I am confident that they will.
We are still very early.
Disclaimer: None of this is financial advice. Do your own research. The author may hold long positions in some of the digital assets mentioned in this essay.