Part 2: NFTs — A curious case of Utility

In our previous article, we gave a brief introduction to what NFTs (Non-Fungible Tokens) are about. For this part of the series, we will be diving deep into the utility, both existing and potential, of NFT technology, and how it stands to change the world as we know it.

What exactly is utility?

Previously, we have mentioned that NFTs are tokens with metadata attached (such as artwork). NFTs with utility are those with a use for it outside of the artwork. For example, STEPN’s sneakers can be used in the game — so, it has utility. By contrast, Beeple’s “Human One’’ exists purely for the art, with no utility whatsoever.

Interestingly, the limits of what is utility, is something the NFT community cannot truly agree on — where does one draw the line?

Some argue that Bored Ape Yacht Club’s (pre-Ape Coin) utility includes networking within a high net-worth social club. The argument is further convoluted by two contradictory statements, of which neither are controversial. First, networking falls under the community aspect of NFTs, not utility. Second, on the other hand, an NFT that grants you access to what is essentially a Web3 Linkedin equivalent does have utility. You can see how the lines are blurred here and are a grey area.

Ultimately, the litmus test for utility should be: Are people buying it for the art, social status or the community? By the process of elimination, we can ascertain what utility truly is.

We note that while NFTs started out as being digital art only, they are currently shaping up to take the world by storm through utility. Over time, it is likely that the general sentiment towards NFTs will shift toward acknowledging the immense potential of NFT technology.

Core traits of an NFT

The advantages of fully-developed NFT technology are life-changing for humanity. Currently, in parts, we are limited by the development of the technology itself. Crypto-natives know that the development of NFT technology is leaping and bounding, pushed by human innovation, passion, and hard work. A full-scale NFT adoption may come sooner than most anticipate.

The belief of crypto-natives is not without basis. The potential utility of NFTs includes running a business, record-keeping, or even as a social profile. These things are all made possible through certain traits granted by game-changing technology. We will talk about these traits, their usefulness to society, and how they solve certain problems.

Transparency

By being on the blockchain, NFTs embody transparency — furnishing a fully documented ledger of records. It essentially embodies a journey through time, depicting right when the NFT was minted, and how many times it changed hands, all down to its current owner. Such detailed records of provenance immediately bring to mind rare collectables like fine wine and art, where the current authentication process is arduous and fallible.

To say that art forgery is thriving is an extreme understatement. The fake art industry generates over US$30 billion annually, just half of the real industry’s $60+ billion. NFTs solve this problem by tying the art to the token.

Indivisible and Unique

One of the most fundamental traits of NFTs is their indivisibility. The idea behind NFTs is that they are meant to be owned wholly, thus retaining its original value. Similar to purchasing a ticket to a concert, each ticket only admits 1 person. This cannot be divided between 2 people. While some may argue that indivisibility is a double-edged sword due to its rigid and inhibitive nature, some projects have stepped forward to address this concern. This could potentially allow NFT owners to fictionalise their NFTs, enabling high-value NFTs to free up liquidity, while giving retail investors the opportunity to own a piece of an otherwise out of reach digital collectable.

This brings us to our point on uniqueness. Each NFT exists as a unique string of numbers on the blockchain, ensuring that no two NFTs are alike. What this means is that even if two NFTs have the exact same artwork, they are inherently different. This allows for easier validating of an NFT’s authenticity. Think of it as a digital barcode which is unalterable, ensuring that no tampering with the asset is possible.

For example, if I were to “right-click save” a picture of a BAYC and go onto OpenSea’s platform to create an NFT with the image, it would look similar to the original copy, but the underlying code behind the NFT would be completely different. This is easily spotted at a glance.

Transferable and Interoperable

NFTs are also known for their ability to be transferred seamlessly to different owners via blockchain wallets. Currently, the transaction of property deeds needs to be done manually, and it is a tedious process. If these deeds were NFTs, it would be possible to change owners with the simple click of a few buttons. Unlike the physical world, NFTs are not lost, damaged or stolen in the process of transfer. This allows for assets to be transferred with ease, and with peace of mind.

NFTs are also typically interoperable, being able to be traded across multiple chains via a blockchain bridge. As the world eventually transitions to a more decentralised economy, the ability of NFTs to exist on all chains will be a critical advantage to have.

Royalties

The main reason why digital art has exploded in recent years is the ability for artists to build a royalty entitlement into their NFT contract. This entails the artist to seamlessly collect a royalty on their art in perpetuity as long as it is traded in a marketplace. When it comes to physical art, although there are certain rights granted to artists such as Droit de suite (Artist’s Resale Right), contenders often lament that it is not only costly to collect these royalties (administrative costs run up to 10–40% of royalties received) but also tough to enforce and easy to circumvent as it is not recognised in many jurisdictions.

This directly addresses the issues that many aspiring artists face when art collectors end up reselling their work for a sizeable profit, usually while the artists remain in poverty. An example of this is the conception of the Droit de suite law in France in 1889, whereby French painter Jean-François Millet’s work was selling for large sums of money, prominent sales being his The Angelus, which sold for 553,000 francs in 1889 (In today’s value, about USD $130 million), while he received no royalties and his family remained in poverty.

NFT Use Cases

Now that we have touched on the characteristics that make NFT technology so groundbreaking, let us explore the actual use cases that NFTs can possibly see.

We will be covering 2 main areas, namely:

1. Secular Utility — I.e. what you see within limited ecosystems like NFT projects
2. Broad Utility — I.e. utility that can be applied in a general sense for the betterment of humanity

Secular Use Cases for NFTs

Enhancing NFT Projects

The NFT space is currently rife with projects all competing for a slice of the same pie within the ecosystem. Dozens of new projects pop up every day, and it is no surprise too. According to data by theblockcrypto.com, NFT sales for art and collectables overwhelmingly dominate the trading charts on marketplaces, with only a meagre portion coming from game sales. (STEPN is excluded from this data as most of our sales are from within the app.) However, the competition between art and collectable projects is tremendously fierce. With only limited existing liquidity, it is slowly apparent that good art alone is not sufficient for projects to stand out from the competition.

NFT projects have begun weaving in utility pairings to complement their art, in order to add value to their holders, thus creating a more immersive experience. Typical offerings include:

• Staking: NFT owners are able to stake their NFTs for the project’s token. Usually, rarer NFTs will offer a higher yield. These tokens usually offer utility within the NFT project’s ecosystem. For instance, some projects allow holders to stake their NFT for tokens. In return, these tokens can be used to raffle for whitelist offerings into other projects, take part in in-house NFT auctions, and even swap the tokens out for cash.
• Exclusive benefits: Holding the project’s NFT will bring about passive benefits. As an example, some verified NFT platforms offer holders raffles for limited-edition items and mint discounts on future sets.
• Redeemability: Real-life merchandise redemptions are gaining traction. One good example is Adidas’ Into the Metaverse NFT. Launched in January 2022, holders will be able to claim physical merchandise across 4 phases, totalling a set of 4 unique clothing items.
• Breeding: Popularised by the likes of CryptoKitties, Axie Infinity and now STEPN, holders are able to combine 2 NFTs to breed a new one. Users are then able to trade this new NFT for profit, or utilise them in the game.

It is important to pay attention to this area of the NFT space. Competition breeds innovation, and the constant experimentation and development within the NFT trading sphere may pave the way for mankind’s progress.

Memberships (Physical)

NFTs are not exclusively for the Web3 folks. Web 2.0 businesses have also begun adopting this technology to enhance their value proposition. What makes NFTs so appealing as a membership token, apart from ease of access, is its immutability. This ensures that there is no way to fake your way in with a forged membership, thus retaining exclusivity for holders.

Celebrity chefs Tom Colicchio and Spike Mendelsohn launched CHFTY Pizzas, a collection of 2,777 pizza-themed NFTs, with the intention to connect holders with their favourite chefs, bridge the gap current F&B businesses are facing in adapting to this new climate, as well as offer real-life meet-ups with free pizza!

Flyfish Club is another example of an exclusive membership created using NFTs. 1,500 NFTs were made available for mint in January 2022. Slated to be opened in 2023 in New York, they are dubbed the world’s “first” NFT restaurant, essentially being a private dining club that is exclusive only to token holders and their guests.

Transitioning to the upmarket scene, we have Dolce & Gabbana (D & G). In September 2021, the high-end fashion brand launched a one of a kind 9-piece NFT collection, which sold at auction for a collective near USD 6 Million worth of ETH. Breathtaking works of art, the NFTs come attached with an array of benefits. On top of physical redemption of the actual clothes, holders will be entitled to 2-year access to private D & G events and a private tour of the D & G Atelier in Milan, amongst other benefits. In a way, this can be seen as a pseudo membership that gives holders of the NFT private access to various events that are only available to the inner circle of the scenes (i.e the rich and famous).

Broad Use Cases for NFTs

On the other hand, broad use cases for the NFTs stand to benefit everyone and are largely not limited to any specific ecosystem. When this eventually materialises, we can expect seamless integration of services as a whole.

Authenticating products

The most latent benefit of NFTs is in authenticating products’ entire supply chain, from the conception of the good in raw materials all the way to the production of the item in its final form. This sees benefits in two-fold. Firstly, buyers and sellers will have transparency about knowing a product’s origins and where it has been. Secondly, this immediately addresses counterfeiting issues of the present. With only 1 NFT per product produced, counterfeiters will have an almost impossible task trying to pass off fake items as genuine.

While still picking up steam in general, this technology is being rapidly adopted by larger brands. For instance, luxury brands consisting of the likes of LVMH and Prada came together to create Aura Blockchain Consortium, an on-chain validation process to enhance authentication and supply-chain transparency of their products. Flipkick offers up-and-coming artists the ability to link their physical merchandise to an NFT via an NFC sticker attached to the item. Nike has also started something similar named Crytokicks, all with the intention to provide more transparency to consumers.

Intellectual property/Personal Data

As the world progresses towards a more digital era, it looks inevitable that our personal data will be stored on the blockchain. Ethereum Name Service (ENS) is already allowing users to link their social media profiles to their Web3 identity, truly giving users the ownership of their online personas.

This applies to all other personal data too. Think educational qualifications, medical records, and even employment history. The potential to fully track one’s personal records on the blockchain is mind-blowing.

The potential to extend this even further makes this all the more exciting. Ernst & Young has also recently launched the EY Opschain platform as a supply chain manager. They have been working with Canadian Blood Services (CBS) towards tokenising blood donations, providing real-time visibility via an inventory of blood donations that can be fully monitored and minimising human error.

Real Estate

Real estate is an industry which is perfectly primed for the adoption of NFT technology. Once the infrastructure is set up, we can look forward to simplified, fast, and most importantly — secure transactions. The idea of properties being illiquid assets will soon be a thing of the past. The only foreseeable drawback is that property owners are still by and large the older generations, and it may be some time before they open up to accepting such new technology.

Ticketing/events

Ticketing leans itself naturally into NFT technology. This completely bypasses the concerns of event organisers about fraudulent tickets and double usage of tickets. Utilising NFTs to replace physical tickets will also allow organisers to better manage their ticketing process and save on printing costs. Event organisers are realising the massive potential too, not only from a logistical standpoint but also from that of a collector. Coachella recently launched 10 premier lifetime passes for their music festival, offering holders lifetime VIP access.

Honourable mentions

• Voting: Eliminates cheating, allows voters to vote without a physical identity, and provides a trackable record of votes.
• Insurance: NFTs can also be utilised to track insurance policies. Even in the Web3 world, insurance like Nexus Protocol already exists for Defi products to cover protocol risks.
• Music: NFTs also allow artists to not only immortalise their music on the blockchain, but it also serves to give the bands revenue directly, bypassing streaming websites and agents. Leading the way, Kings of Leon released their 8th album When You See Yourself as an NFT, and have already generated USD 2 million in sales.

Closing thoughts

We are only at the fringes of what is possible with NFT technology. As it stands, the reason the general folks have a negative view of NFTs is predominantly due in part to the fact that the most public-facing aspect of it — overpriced JPEGs, is viewed as redundant with no real value. While this is somewhat understandable, a lot of the real utility of NFTs lies beneath the surface. Without digging deeper, the only association the public will link NFTs with are monkey pictures and scams.

At the moment and according to a recent survey, only 1 in 4 adults actually know what an NFT is. In line with tort law, the crypto community has a duty of care towards their friends and family to educate them on this revolutionary invention. It will come as no surprise that when the eventual uptake of NFTs materialises, it will take the world swiftly and abruptly, and it would do one good not to be left behind.