Utility NFTs: The future of digital assets or a flash in the pan?

With all the hype around non-fungible tokens (NFTs) these days, it’s easy to get caught up in the frenzy. In this article, we take a look at so-called utility NFTs, i.e. NFTs that have a function beyond being collectibles, and explore some of their potential use cases.

TL;DR:

• Utility NFTs are digital assets that have a complementary function to their underlying collectible value.
• Gaming, hospitality, and music are some of the most promising use cases for utility NFTs.
• The main challenges facing utility NFTs are technological (scalability), regulatory (clarity), and centralization (single point of failure).

NFTs at large: To pop or not to pop

In early 2021, Iranian-born crypto entrepreneur Sina Estavi purchased a non-fungible token (NFT) of Twitter founder Jack Dorsey’s first-ever tweet for $2.9 million. Last week — a year later, — the NFT could sell for just under $280 despite being listed for $48 million.

Stories like this one have led many to wonder whether the NFT market is in a bubble that’s about to pop. With the total value of NFTs traded in 2021 reaching $17 billion and celebrities like Paris Hilton and Snoop Dogg releasing their own NFTs, it’s easy to see why some are concerned.

The problem is, new emerging markets often experience high volatility and attract traders from all experience and knowledge levels. This causes outlier cases such as the above to happen before the market is able to reach equilibrium and enter a steady state phase.

So far, people often misunderstand NFTs nowadays, seeing them as an asset with no other purpose than hype or speculation or gambling. More often than not, people participate in the market impulsively, leading to situations such as Estavi’s case.

But let’s not forget that the technology behind NFTs is much more interesting than the speculation and gambling aspect. In fact, it could eventually transform how we interact with digital assets and even redefine what it means to own something.

Utility NFTs: The future of digital assets?

Utility NFTs are digital assets that have a complementary function to their underlying collectible value. They may be used, for example, to represent ownership of a virtual asset or to unlock access to exclusive content or services.

While utility NFTs are still in their early stages, there are a number of projects that already demonstrate the potential for this type of digital asset. Here are just a few examples from different industries:

Gaming

With its massive global audience and fast adoption of new technologies, the gaming industry is a key influencer in the burgeoning NFT market. From digital collectibles to virtual land, gaming is a natural candidate for the adoption of utility NFTs.

The most common mechanic in pure-NFT games is that creating characters, items, and other assets requires the purchase of “tokens” that can be used in-game. Famous examples include games like Cryptokitties, Battle of Guardians and Evolution Land.

Whether the ability to buy and sell these assets in-game assets actually represent “utility” is up for debate, but there’s no doubt that these games have driven a lot of interest in NFTs. And, although most major studios are careful in their rhetoric around NFTs, there’s no doubt that they are watching the market closely.

Hospitality

From restaurants to hotels to vacation rentals, the hospitality industry is another promising use case for NFTs. Exclusive memberships have for a long time been its cornerstone, with everything from access to premier wine cellars to private beaches being marketed as exclusive perks to special guests.

Needless to say, this concept of exclusive access is ripe for disruption by blockchain-based technologies. One example is Flyfish Club, the self-proclaimed “world’s first-ever NFT restaurant,” whose perks include things such as unlimited access to a private dining venue in NYC and access to in-person special events.

Basically, NFTs don’t bring any paradigm-shifting benefits to the table here, but they can provide an elegant solution for the management and tracking of access rights. This, along with the potential to tokenize physical assets, could open up new revenue opportunities for hospitality businesses.

Music

While gaming and hospitality could benefit from NFTs due to how well it underlines their intrinsic business and behavior models, music is a direct opposite: Historically centralized in the hands of just a bunch of major labels and publishers, it craves disruption like no other industry.

A few high-profile musicians have already started to experiment with NFTs, including 3LAU, Kings of Leon, and Grimes. These artists have used NFTs to sell everything from digital artworks to one-of-a-kind experiences, such as a private concert or backstage tour.

So far these are all big-name projects that have attracted a lot of media attention and might not work as well for smaller or indie musicians. But there are also startups, such as ourselves at DOPE ONES, that believe that NFTs could truly democratize not just consumption but also creation of music in ways we’ve never seen before.

The idea here is that, historically, music has been created in a very centralized way, with fans entering the equation much later in the process. With NFTs, we can flip this model on its head and give fans a direct say in what kind of music gets created and how it’s distributed.

Imagine, for example, if you could interact directly with your favorite artist and help them create new music by voting on what kind of songs they should make next, which remixes they should do, what type of merchandise they should sell, and so on.

We believe that by allowing fans to directly support and engage with artists, we can create a more fair and sustainable music ecosystem that’s better for everyone involved.

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Anyway, these are just some examples of how utility NFTs could be used in different industries. The list is by no means exhaustive, but it should give you a good idea of the potential for this technology.

But, of course, there are also a number of challenges that need to be addressed before utility NFTs can reach their full potential. We’ll explore some of these in the next section.

Challenges: From technology to regulations to… centralization?

Technological challenges

The main challenge of utility NFTs is, of course, their technological nature. As mentioned in the previous section, one of the key benefits that NFTs offer is flexibility, whether it’s in defining ownership rights, tracking access, or managing assets.

But flexibility often comes at a cost, and in the case of NFTs that cost is scalability. The most popular NFT blockchain, Ethereum, has been struggling to keep up with the demand for new tokens, resulting in high gas fees and long wait times for transactions.

Some solutions to this problem are already in the works. For example, there’s Ethereum’s upcoming upgrade to ETH 2.0 and various sidechains that are designed to improve token scalability.

We also believe that different protocols — inherently with different speed and security involved — are suitable for different types of applications. In a while, there likely won’t be a one-size-fits-all blockchain that works for all NFTs and applications. In the end, it doesn’t have to be “Ethereum for everything.”

Regulatory challenges

Another challenge facing utility NFTs is the regulatory environment. Early adopters of blockchain technology have learned that it’s not easy to just roll out new technologies without first addressing the regulatory issues that come with them.

From a regulatory standpoint, utility NFTs — and cryptocurrencies in general — are in a bit of a gray area. They don’t fit neatly into any existing category, and so far there hasn’t been much consensus from regulators on how to deal with them. Are they securities? How to tax them? Can they be used for money laundering?

The last thing you want is for your hard-earned utility NFT to be frozen in your account or, worse, your wallet to be outlawed just because some government agency decides that they don’t like it. Granted, this risk is not that high at the moment, but it’s something that still needs to be taken into account.

Centralization challenges

Lastly, there’s also the issue of centralization. Although NFTs are built on decentralized blockchains, the “last mile” — i.e. that place where the your bored ape jpeg is actually stored — is a conventional “web2” server. This means that there’s a single point of failure — and a single point of banning — that could have a big impact on the overall utility of NFTs.

If you’re purchasing an NFT granting you an exclusive membership in some exclusive club, it is still the club that decides whether or not you’re allowed in. If you’re a musician and you want to sell your latest album using NFTs, there will still be a physical server streaming the music to your fans.

So, although NFTs are a step in the right direction towards decentralization, they’re not there yet. It’s not to say that they won’t eventually be — with more decentralized storage solutions and more regulatory clarity, we will definitely see a future where decentralization actually means decentralization.

The road ahead: From speculation to utility

Now, we don’t want the readers to take the challenges described above as arguments against utility NFTs. Granted, there are certain infrastructural challenges that need to be sorted before our world becomes a lot more “decentralized” and “web3 enabled.” But wasn’t the Internet itself at that stage 15 or 20 years ago?

So while there are still missing pieces in the current development phase, we are convinced that NFTs — and especially utility NFTs — are here to stay. With the right approach, we believe they can revolutionize the way we engage with the world around us and with each other.

What do you think about utility NFTs? Are they really the future of digital assets or just a fad that will soon be forgotten? Let us know in the comments!