The Landscape of Utility in Web3
Over the course of these R Planet Together articles, we’ve looked at words that get thrown around Web3 a lot — such as community, culture and even ‘degen’. Utility is another phrase that gets used (and overused) in Web3. It is a marker of value that projects use to entice buyers into their fold. In many ways, it is the core value-proposition in Web3 — what can you actually do with these tokens — but as with other terms we’ve looked at, it can also be misused to obfuscate the true nature of a project.
Considering what it means for a token to have true utility is an interesting discussion. So this week, we are going to look at a few different kinds of utility that currently exist in Web3 along with others that are starting to emerge that could add a lot to the real-world impact of the sector and the umbrella of technologies that it represents.
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Utility in Web3 Today
It’s an interesting exercise to bring together the different types of utility present in Web3 today. Below are some of the main categories, but there will likely be others not included as well. It shows there are already quite a few different forms of utility available in the space.
Access to Tools/Content
Token-gating access is one of the fundamental use-cases of NFTs. Whether that be for access to communities, events, information (alpha), software tools or other kinds of bespoke content, this is the bread and butter of NFTs.
It’s a kind of utility that is immediately tangible — you purchase the token and then can log into the Discord server, metaverse or other platforms or services that the project might have to offer. This kind of utility see NFTs as a ticket or membership pass, which is a simple and near-perfect use-case but also quite bare bones when it comes to the possibilities made available by block chain and smart contract technology.
IP Rights
Most pfp and even many art projects today offer the holder IP-rights for the image or character represented by their specific token. This allows people to build out brands or story-telling of their own, as well as sell merch and other products that might use the designs. It can be difficult to do so successfully, but for those with enough talented and vision IP rights can be a significant part of the value of owning an NFT — particularly for projects with strong brand recognition and/or artistic style.
Interactive Storytelling
Closely associated with IP-rights, but built more into the ethos of certain types of projects, interactive storytelling can be an emergent utility that draws token holders into a project and encourages them to express themselves creatively.
This kind of inspiration can be of huge benefit, as it allows holders to embrace the more imaginative sides of life and build closer bonds to the work of other holders in the same worlds. It also brings a closer relationship between holders and project teams, as the process of fleshing out the lore and story of their world is more collaborative. For those who love being immersed in new worlds and adding to them, interactive storytelling is a compelling and valuable utility that in the best cases can live on even when your particular NFT changes hands.
Governance
Decentralisation is an important part of the grand experiment that is Web3 and with decentralisation comes the need for collaborative forms of governance. NFTs can provide utility by enabling holders to have a seat at the table — and one that often scales with their holdings through various kind of secondary token drops that can be used for voting on the direction that a community might take in various ways.
You also often see this kind of thing emerge as sub-communities within certain projects, usually based around particular kinds of traits or types of tokens. For the most part, these ‘Trait-DAOs’ are more about having a playful and engaging way for holders to form bonds with one another (and add value to particular subsets of a collection) but in some instances they can become quite influential forces in their own right.
Staking
Staking is often the kind of utility many people of a more impatient variety seem to ask for, ironically given that it involves locking up or holding a token in order to receive something in return. But for many, staking is seen as a way to generate additional value and passive income just by holding a token over time. It’s a kind of ‘money can grow on trees’ approach to value creation in Web3.
Although there are certainly some examples where various forms of staking are done well and are carefully thought out, this is also where we start to get into a discussion about whether there are different kinds of pseudo-utility in the space. There are different forms of staking, so it depends what you are talking about — but staking that locks a token to give you some kind of liquidity token directly tradeable to ETH or a USD-stablecoin is almost always a bad idea. Why? Because it essentially relies on ponzinomics and requires network growth that is not sustainable in order to last for any significant period of time.
However, when done in a manner that is more about encouraging utility within the project ecosystem, staking can become a form of determining loyalty and providing your holders with added value over the long term — just stay away from those promising you some kind of ‘passive income’ through ERC-20 tokens.
Web3 Gaming
Sometimes the utility you get from a token is entertainment. The bonus being that in Web3 there’s usually some kind of opportunity to get a small return from your time spent playing a game or delving headlong into a world of riddles and interactive storytelling. It’s still too early to really see where innovative game mechanics using NFTs can be done in a way that is both entertaining and sustainable, but there are a lot of great examples out there now that are certainly having a good go at it.
The problem comes from many expecting much larger returns then are feasible — which goes back to the idea that the ever-present profit motivation is causing huge issues with unrealistic expectations in the space. Play-to-earn is, for the most part, an unsustainable pipedream and we need to move away from the expectation that these games will provide us with anything more than speculative assets and maybe pay for the groceries every now and then.
However, when we consider the fact that many traditional forms of gaming (be they tabletop or videogames) can cost upwards of $60+ we can see that there is an inherent value in entertainment that can translate into Web3 gaming tokens that provide entertainment as their primary utility. The trick comes from ensuring that the gaming elements aren’t just facades for various kinds of ponzinomics or gambling mechanics, which are very different things to enjoying the mechanics of a game for its own sake.
POAPs
Badges provided through various Proof of Attendance Protocols have seen a huge surge in popularity in the past year, becoming a compelling way to incentivise people to engage with events, information sessions and other content produced by Web3 projects. They are also fun to collect and, even though they aren’t tradeable themselves, give that little added sense of value to ‘showing up’.
On a practical level, POAPs allow holders and teams alike to quickly get a sense of the level of participation that any particular wallet may have in a project. This begins to indicate levels of loyalty — and potentially even trust — in an otherwise chaotic and mostly anonymous sector. They also become a way to screen out various types of bots or inauthentic users of your platforms, ideally enabling projects to build a more direct and honest relationship with their community.
Art Collecting
Sometimes the art is the utility. Similar to the way in which Web3 gaming can provide an entertainment experience as its primary goal, so too the extension of art appreciation into the world of NFTs is a valid utility.
Not only is it as legitimate as the appreciation of non-digital artworks (with some different questions to debate, which is part of what art does), but Web3 is also providing innovation to the art world in the form of closer connection between artists and those who purchase and appreciate their art. There is a greater degree of interactivity, collaboration and communication that can take place using the utility provided by NFTs when connected to the aesthetics of art.
Heck, it even makes the tax evasion, money laundering and bribery aspects of art easier to facilitate… (oops, did I say that part out loud?) But at least it also makes the transactions more transparent at the same time.
Gambling
Last week we discussed some of the darker side of Web3 and the topic of gambling is an important part of that conversation, closely linked as it is to compulsive behaviours and even addiction. Gambling is one of the primary utilities offered by NFTs today and dominates how the markets currently function. Even if it’s not always explicitly stated as such, we know this because of how loosely and universally the term ‘degen’ is thrown around to describe the behaviour of many in the space.
Reveal mechanisms are essentially a form of gambling utility, as are any kind of randomised loot drops that have value on secondary markets. Like all forms of entertainment there’s a role that gambling can play, when done in moderation and respect for the punters, in the broad suite of activities available in Web3. The problem right now is that it is the primary utility and reason why many people are involved — even if they don’t necessarily recognise it as such.
Emerging Forms of Utility
If the above categories of utility can be seen as the ‘bread and butter’ of NFTs right now, there are also some emerging forms that we’re starting to see more often. Over time, the space will evolve and develop new ways to bring value to holders in the form of different kinds of utility — so it’s always interesting to look out for novel ones and consider whether they might form the start of a new trend.
Reward Platforms
Loyalty programmes for holders are an evolution of staking mechanisms that are more sustainable. Focused specifically on the purpose and eco-system of different projects, rather than those looking to extract value before moving to the next, they provide a well-established mechanism to keep holders interested in a project over the time it takes to really build things out.
Reward platforms are also a way to encourage certain kinds of behaviour and can be done in a way that ‘gamifies’ the construction of communities and our active participation within them. When done well (and again, without the dreaded ponzinomics of ERC-20 tokens), they are part of the two-way street between holders and project teams — rewarding loyal participants and acting as a way to show progress being made with partnerships, creative output and revenue streams used to fund such programmes.
Credentials and SBTs
In a sector that currently values trading profits over every other form of utility, the emergence of Soulbound Tokens (SBTs) as a way to bring non-transferable value to wallets is an interesting and important evolution.
POAPs are the most popular use of them, but SBTs can have an important role to play in helping to boost the professionalism of the sector by enabling different kinds of credentials to indicate an individual’s experience and expertise across multiple relevant areas. Web3 currently has a bit of an issue with professionalising and SBTs are part of the answer moving forward. They can also be used like gaming achievements or to facilitate any other kind of utility mentioned in a way that de-emphasises the profit motive.
Asset Tokenisation
There is an often-touted report that has suggested that asset tokenisation could become a $16-trillion dollar industry within the next decade. It’s an astonishing figure to consider, but ultimately what it boils down to is taking traditionally illiquid or inaccessible assets and linking them to the hyper-accessible marketplaces that tokenisation provides.
Asset tokenisation also enables expensive assets to be fractionalised, with shared ownership being an interesting on-ramp for many people to enter asset classes that are otherwise accessible only to the wealthy. There are a lot of regulatory hurdles to overcome when it comes to this kind of utility — so it’s important to do your due diligence when a project promises such things — but it’s clear that a large part of the future of Web3 and NFTs will be in asset tokenisation and the impact it can make on traditional investment practices. This is also where institutional investors will start to take notice of NFTs in a serious way.
Charity & Sustainability
Something that isn’t often discussed in Web3 right now, is the idea that utility can result from having a positive impact on the world. This can be seen in certain examples today, such as art projects that attach carbon credits to each token; or projects that seek to uplift people in disadvantaged communities, providing support to those who need it in a variety of ways.
This kind of utility isn’t just about how value can be added to the tokens of each individual holder, but how the time and money spent by holders can have utility beyond the project itself. This creates a more holistic relationship between Web3 and the positive impact that something like blockchain technology and smart contracts can have in bringing positive change to areas that might need it.
Conclusion
The above examples are just some of the ways in which utility has begun to emerge in Web3. We’re going to see new forms continue to emerge that will, particularly with the use of smart contracts and deeper integration of AI, change the boundaries of what we see as possible with NFTs.
There’s also a role for all of us to play, though, in recognising when certain forms of touted ‘utility’ aren’t always to the benefit of holders or the sector as a whole — such as the rampant use of ERC-20 liquidity tokens that almost always function as rapidly collapsing ponzi schemes. Thankfully, it seems people are becoming more savvy to these kinds of faux-utility that are really just trying to draw attention to a project that has little else to offer.
As the purely speculative, profit-driven game begins to flatten out and become less of a dominant motive for entering the space we will see newer and more interesting forms of utility gain more of a foothold. Because, ultimately, we all know that life is about more than money.
For Web3 to become a new foundational layer for how we create, learn and interact with one another, it is ‘utility’ in its most productive and inspiring forms that will matter most. The manner in which we use the body of technologies that collectively make up Web3 will revolutionise how our digital realms operate — and the hope is they will do so in a manner that is more decentralised and support personal and communal agency over exploitative systems founded upon centralised, authoritative control.
