Art NFTs vs Utility NFTs: What’s the difference and why are they valuable?

NFTs are misinterpreted as empty digital assets, but offer so much more than that from their immutability, to uniqueness, this technology has far-reaching implications.

Image from DepositPhotos.

Why do we collect things? Is it due to our innate ability to form attachments to items and want to care for their condition? Perhaps it is because some things that can be collected accrue value over time, or maybe we collect things because of the uses they provide us. Honestly, it is entirely subjective and could be a combination of factors but regardless of any reasoning one may have for collecting something, it is done all the time all over the world.

The collecting of Non-Fungible Tokens (NFTs) has become extremely popular. However, what is problematic about the collecting of these assets is that the public perception of them is negative because of a lack of understanding regarding their value. NFTs are perceived as useless volatile assets that cannot be interacted with due to their intangibility. Which yes, NFTs are intangible because they are completely digital, but no they are not useless because there is an ever-growing demand.

This article will seek to clarify why these tokens are valuable through a look at the two different types which are art NFTs and utility NFTs, the main difference between them being their purpose. Art NFTs are minted to be collected and displayed whereas utility NFTs are minted to represent a real-world use case.

Art NFTs Explained

Image from DepositPhotos.

Art NFTs are exactly that, art. The global art market was valued at 65 billion USD in 2021 and that market consists of paintings and sculptures being paid for exclusively to be displayed and looked at. These assets offer nothing more to the consumer than a solely visual experience.

Due to the physical properties of real art, paintings can be changed from their original design. Real art is also recreated and reprinted constantly, so if you cannot purchase an original, you can settle for a cheap knockoff. Counterfeiting and forgery plague the art world; there is no efficient or cost-effective way of validating real art legitimacy without a lengthy consultation process involving professional art critics.

Art NFTs are immutable, meaning that their properties cannot be modified once published. When an NFT is minted, the image data that makes up the JPEG file it sits on is uniquely encrypted so that it cannot be replicated or altered in any way. This unique encryption ensures that every art NFT created, regardless of the collection, is completely individualistic and will always be the only one in existence. As an art NFT is minted onto a blockchain, its full transaction history becomes viewable to all participating members of that chain’s network, making forgery impossible.

Each art NFT collection minted only features a limited supply which creates scarcity and adds to their value. Prominent art NFT projects that are extremely popular because of their scarcity are Bored Ape Yacht Club (BAYC) and CryptoPunks.

Example of a BAYC NFT listed on the OpenSea marketplace. Image from DepositPhotos.
Examples of CryptoPunk NFTs. Image from DepositPhotos.

The global NFT market, with most assets traded in that market being collectible art NFTs, was valued at 15 billion USD in 2021. The value of the NFT industry is fast approaching that of the real art industry and is projected to exceed it in market capitalization by 2030. That is a staggering outcome considering the collection of real art and its impact on various cultures has been a pillar of anthropology for centuries.

However, the collection of rare art has become a hobby exclusively for the very wealthy as secondary markets see prices skyrocket to unfathomable amounts. This hurts artists as they only make commissions off their works being sold in primary markets which are regulated by commercial art galleries. For example, say an artist’s work initially sells for $10,000 at auction, they may receive a decent percentage of those primary sales, but when their work resells on the secondary market for 30X the original amount, they will barely see any of those profits. So, the majority of wealth created from a piece of art goes back into the pockets of the gallery regulating its sale.

Within primary art markets, art dealers and galleries determine how much an artist will make from their work and purposely keep auction prices low to maximize their percentage returns from secondary market sales.

Art NFTs enable artists to have complete control over access to their work, the supply of their work, and control over the profits generated from their work.

Utility NFTs Explained

Image from DepositPhotos.

Utility NFTs are defined by the use case they allow for holders, a measure of functionality that a consumer derives from a specific commodity. Utility NFTs are idiosyncratic in the way they take a purely digital asset, and bring a level of tangibility to their existence. The utility provided by these NFTs is connected to, or typically represents something in the real world so their purpose goes beyond simply collecting them to be displayed.

Coral Tribe is a utility NFT project based on the Ethereum blockchain and listed on the OpenSea marketplace, where holders of these assets actively contribute to environmental protection.

Example of a Coral Tribe NFT. Image from DepositPhotos.

A large percentage of the proceeds generated from every sale of a Coral Tribe NFT is allocated to the preservation of coral reefs — a critically endangered category of ecosystem that is crucial to carbon sequestration, and according to the Global Coral Reef Monitoring Network (GCRMN) under the United Nations Environment Programme (UNEP), provides over 2 trillion USD worth of economic goods and services globally every year.

Although they can be collected and displayed, Coral Tribe NFTs are purchased for their utility: the allocation of funds to protect the ecology and biodiversity of ocean habitats, which just so happens to be a very tangible use case.

Image pulled from the Coral Tribe Twitter profile.

The utility provided by this category of NFT can also manifest in the form of digital authentication. In certain markets, products are unable to be verified as legitimate which is problematic because fake goods can be sold to consumers in place of real ones. Instead of a utility NFT being its own asset, it can act as a digital receipt attached to a real-world asset that represents its make, model, and transaction history which in turn verifies its authenticity. The utility provided in this case is how the immutability of a digital NFT can be leveraged to validate a physical asset.

Luxury watchmaker Patek Philippe only produces 60,000 units annually. That is an incredibly limited supply which has resulted in the formation of a large illicit market where fake Patek models are sold. Upon being manufactured, every Patek watch is inscribed with a unique identifying serial number. However, these numbers can be forged and so the only current way of authenticating a specific model’s legitimacy, is to pay Patek a fee to compare the serial number of the watch in question, with that of the number they keep on record in their archives. This process is very inefficient and can be drawn out or time-consuming.

If each of the 60,000 Patek Philippe units produced, had a utility NFT attached to them, consumers would know immediately upon purchasing the watch if it was a real and authentic model.

Final Thoughts

Art NFTs offer a degree of marginal utility through their immutability and the blockchain technology they’re minted on, but their main purpose is to be collected and displayed. Utility NFTs on the other hand can also be collected and displayed, but their main purpose is derived from the utility or real-world use case they enable holders beyond their digital structure.

NFTs are an innovative new form of digital asset class technology that has unlimited potential when it comes to their applications.

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Outsyde Inc.

Outsyde Inc.

Outsyde is an ESG project that will be tokenizing land plots as fractional NFTs to be sold as offsets to allow SMEs to reduce their carbon footprint.