NFTs: dead or here to stay?
Introduction
What is the first thing that comes to mind when you hear about NFTs? For most of us, it would be art, or “jpegs,” that resides on the blockchains. That partly has to do with the massive success the art world has had with NFTs. Profile picture collections such as Bored Ape Yacht Club and Cryptopunk have reached mainstream media, with many celebrities donning an ape or a punk as their profile picture, as well as Tiffany & Co crafting a real-world pendant on Crypto Punks.
It is important to remember NFTs by themselves really aren’t anything. An NFT’s first and foremost function is to establish ownership on a decentralized network. The ownership of what varies completely based on the use case. For example, it could be tokenized real-world assets such as houses or stocks or digital assets that are brought onto the blockchain.
So, what is an NFT, really?
Before we discuss the use cases for NFTs, let’s dive into what exactly an NFT is. NFT stands for Non-Fungible Token, and it differs from typical crypto assets because each token is uniquely identifiable. This is possible due to the token standard that NFTs are made in.
There are several commonly used token standards in crypto, such as ERC-20, ERC-721 & ERC-1155.
ERC-20
The standard tokens are created by smart contracts on Ethereum and other EVM blockchains. ERC-20 tokens are fungible, meaning you cannot distinguish one token from another. Examples of ERC-20 tokens are governance tokens such as UNI or SUSHI.
ERC-721 & ERC-1155
ERC-721 was developed to create a fully non-fungible token. ERC-721 tokens hold information regarding their ownership and details of its asset in their own personalized smart contracts.
ERC-1155 was then developed to improve the ERC-721 standards, making changes such as allowing for batch transfers, supporting the conversion of fungible tokens to NFTs, and the other way round.
Use Cases
It is undeniable that Art has been a primary use case for NFTs. We have seen the emergence of many successful protocols built around Art NFTs, with marketplaces such as Opensea and lending protocols such as the Bend DAO.
While art and digital identities are strong use cases for NFTs, many other use cases are overshadowed and deserve more limelight. We are seeing new emerging use cases for NFTs in the following industries.
- Domains
- Memberships
- Games
- Ticketing
- Music / Media
- Written Media
- Real Estate
Domains
Crypto addresses are complex and basically impossible to memorize. This forces users to copy and paste addresses when they do transactions such as paying their friends. This is not the optimal user experience as it opens up a vector for attacks to manipulate the copy and paste function, as well as causing unnecessary stress for users to double-check addresses and worry about a simple typo.
So instead of using a wallet address such as 0x29872342…., developers have come up with using domains to identify an address with a more easily memorable name. Much like website addresses, you can register a unique domain, such as mindworks.eth, so that it could be used to identify your wallet instead.
There are several teams building in this space, but due to the network effects enjoyed by those who are the largest, the space is dominated by two large players: Ethereum Name Service (ENS) as well as Unstoppable Domains.
Ethereum Name Service
ENS is the largest domain registrar on the Ethereum blockchain. ENS uses smart contracts on-chain to help users create their own domains without the traditional barriers of entering personal information and having to use a credit/debit card.
ENS domains are rented for as many years as the user wishes, and the ENS DAO earns revenue from rental fees as its sole revenue source. ENS currently does not implement royalties on secondary sales of ENS names.
As one of the first smart contract protocols to launch on Ethereum, it saw widespread adoption within the Ethereum community.
Unstoppable Domains
While ENS is known for its .eth domains, Unstoppable Domains allows users to register for an extensive range of domain endings from .crypto to .bitcoin.
Unstoppable Domains NFTs are minted on Ethereum, Polygon as well as the Zilliqa blockchain. Unstoppable Domains NFTs differentiate from ENS in that the domains are perpetual, rather than the ENS rental system. Once a user purchases a domain from Unstoppable Domains, they will have full ownership in perpetuity over it.
Other competitors
We have seen domain services on other chains, such as AVVY on the Avalanche blockchain and Bonfida on the Solana blockchain, but none has reached the traction of the 2 biggest players.
Memberships
It seems natural that NFTs would be used for proof of membership. So far, we have many membership clubs, such as DAOs utilize NFTs to serve as the key to entering the club.
For example, the PROOF collective is made up of 1,000 holders of their NFT card that grants privileges to holders to enter the private discord and more.
LinksDAO grant holders access to its pro shop to purchase its merchandise, as well as rights to purchase a membership in the future when LinksDAO open its own golf and leisure club.
This is an improvement over current membership systems as club members can permissionlessly buy and sell memberships. This also allows clubs to capitalize on royalties in the secondary market to grow their treasury.
That said, much of the membership clubs currently available on-chain pales compared with their real-life counterparts in terms of utility, as it often only grants special access to discord (and access to other members) and not much else.
Games
When games purchase in-game assets today, they often do not have full rights to the assets meaning they cannot resell the asset or move it to another account. For example, if I played League of Legends and I purchased an in-game skin for a champion, there is no way for me to trade or move that skin at all.
Web3 brought the promise that we finally found a way for gamers to truly own in-game assets they have purchased. Assets such as in-game skins could become NFTs that can be openly traded on a secondary market.
Crypto games took off in 2021 as we saw the introduction of various games such as Axie Infinity and more. The promise of using NFTs in games is for users to finally own the assets they spend money on. However, the industry took a turn when GameFi became popular instead.
So, instead of fun and interactive games that common players would expect to play, web3 saw a craze with ponzinomics gamefi protocols that could arguably be labeled as manual yield farming protocols with NFTs as a barrier to entry.
If we want crypto games to gain mainstream adoption, we must completely see a drastic redesign around the protocols and do away from the play-to-earn to a more sustainable model. NFTs should be an integral part of crypto games rather than being an artificial barrier to entry.
Ticketing
One of the most commonly forecasted use cases for NFTs is to disrupt the ticketing industry. Let’s be honest, the current ticketing industry is plagued by middlemen who extract value away from event organizers and impose higher costs for customers. NFTs seem to be a logical solution that allows for easy Direct-To-Consumer transactions and allows ticket creators to benefit from royalties in secondary marketplaces.
Mark Cuban, owner of the Dallas Mavericks in the NBA, has started exploring utilizing NFTs for ticketing purposes as he sees it as an opportunity to bring in more revenue to the team. He said that the blockchain integration side would be easy. The difficulty is for incumbents willing to take the risk to swap over from traditional partners.
There are quite a few protocols that are working to bring NFT ticketing to the mass market, each with a varying degree of success in different markets.
Yellow Heart is a US-based company leveraging the blockchain to bring the entertainment industry to web3. They offer ticketing services, digital memberships, digital communities, and gated access media to specific NFT holders. So far, they have been able to onboard popular artists such as Maroon 5 and Kings of Leon.
GET Protocol has seen the highest adoption so far in the web3 ticketing space. They have processed over 2,000,000 tickets on-chain through the GET Protocol since 2016, with 500,000+ of these being NFT tickets. They have mainly gained traction in Europe with smaller artists and organizations and are continuously working on converting larger artists and organizations into NFT ticketing.
Music / Media
By bridging intellectual properties to the blockchain and integrating them with NFTs, the music industry has the potential to move away from traditional publishers to directly to the fans.
Gala Music is a front runner for innovation in the NFT music industry. Launched in 2022, Gala Music enables musicians to sell music NFTs directly to fans. All the metadata for the musical tracks are stored on GALA’s nodes and can be played from the blockchain. Currently, NFT holders enjoy exclusive access to the tracks as well as perks such as live converts or direct interaction with artists. In the future, Gala has hinted that holders could earn from its NFTs, but it is currently unclear whether it is through token subsidies or royalties.
Audius is another example of a web3 reinvention of current infrastructures. Audius functions similarly to SoundCloud or Spotify in the web2 world but enhances the user experience by allowing its artists and users to participate in the protocol's governance to decide its future. That said, we haven’t seen mainstream adoption of music streaming protocols in web3, and some catalysts will be needed to push further use into web3.
Written Media
If you were to research any crypto protocols or follow any crypto influencers, you would often find that they publish their written content on either Medium or Substack. Lately, they have been an increase in the usage of its decentralized counterpart: the Mirror protocol.
Mirror allows users to log in with their Ethereum wallet to upload their written content onto its protocol which is then stored with Arweave. It utilizes a seamless experience for users to instantly log in to its protocol without signing up. However, Mirror is still in its development phase and will need to figure out to allow users to earn for their content, which they currently do on Substack or on Medium.
Real Estate
Due to the developments of NFTs, there is now virtual real estate as well as physical real estate bridged into NFTs. As virtual real estate is usually integrated into games, we would like to talk about physical real estate in this case specifically.
NFTs can be used for fractionalized investments in Real Estate. For example, let’s say the commercial rights for a building are divided up into 100 fractional NFTs; the holders of the NFTs would then be able to collect rent on the business as well as together vote on the future of the investment. This would definitely be categorized as a security and would need to set up a proper legal framework around it.
NFT can also simply be used to represent ownership of real-world properties. So let’s say if today you would like to list your apartment for sale, you could create an NFT for your ownership deed and sell it. While this sounds like a pipe dream, it has already been done in the real world. Houses have been listed on Propy, a US-based realtor that allows users to purchase real estate using crypto.
For fractional investment in Real Estate, there have already been some startups tackling the space. RealT is a US-based company that offers investors fractional investment in Real Estate. Each property is assigned to a particular LLC, which will then have its company divided up and tokenized. Due to regulations, there is no current way for these tokens to be freely traded in the secondary market. That said, this is the first step to democratizing real-world investments for all people.
Conclusion
There are plenty of viable industries where NFTs could be a better solution than what is currently in the market. However, many of these industries have to overcome certain roadblocks to gain mainstream traction. The main roadblocks we have identified are as follows:
- Reluctance for traditional companies to utilize NFTs (why take the risk?)
- Digital content in the form of NFT is still free to consume thereby, it needs better mechanisms to enable digital creators to monetize on a consumption basis
- Pushback against NFTs from everyday users (reputation of not being eco-friendly, only used as a medium for speculation).
- User experience for non-tech savvy users still lackluster compared to web2 apps
- Financialization of NFTs is still in a grey area in terms of regulations and needs greater clarity
We believe that by utilizing blockchains, we could eliminate middlemen and other inefficiencies that currently plague our world in specific industries. We look forward to seeing builders innovate to enhance the experience for both creators and consumers.
