1. Introduction
💡 The systematic uniqueness of an NFT is only paralleled with its exclusivity shared by the community of owners.
Two years ago, no one could imagine the NFT market nowadays. Booming! Countless new NFT projects come out every day. A provable unique token, even when reduced to a simple JPEG format (which is what an NFT appears on the user’s screen), represents such a traceable value for its owner.
Underneath an NFT’s “deceiving” JPEG appearance lies an assortment of technological advancements. New technology are always created and then adopted to satisfy our basic demands, needs, and desires. NFTs have made it into mainstream media, TV talk shows, or even one South Park episode. Some are repulsed by the phenomenal emergence of NFTs. However, as the saying goes, “to deny our impulses is to deny the very thing that makes us human.”
We find the overall NFT landscape to be concrete. Web 2.0 reduces the social interaction costs among internet users which soon impacted both online and offline interactions. Web 3.0 solves the trust issue, has the verification included in smart contracts. NFTs to spread like wildfire due to the mainstream appeal and its underlying blockchain technology. NFTs are popularized through social media, entertainment, its value-finding market, and the gaming industry.
In this article, we will discuss the four main utilities that NFTs bring to our lives:
- Artistic
- Socialization
- Functionality
- Asset Tokenization
The integration of NFT utilities induces a compounding effect for its users. For example, the GameFi industry creates additional utilities for NFTs by building a virtual experience with game layers using DeFi technology. This buffer zone affects its marketplace performance which helps manage the community’s consensus and further cultivate the project’s future performance.
Due to the limitation of this article, we will refrain from going too deep into generic topics, such as how easily artists can monetize their digital content, the innovative application of the royalty system, decentralization of NFTs, or system-agnostic benefits empowered by blockchain technology.
Instead, we focus on (1) NFT’s underlying utilities and (2) utilities combination and its compounding effects.
Based on the content we discuss in this article, NFT cross-chain applications may be the next NFT usage scenario. However, we will discuss this in our upcoming article. In the next article, we will look at the future of NFTs and its various applications in a cross-chain setting.
2. NFT’s Underlying Utility
Utility is defined in economics as the total satisfaction received from consuming a good or service. This total satisfaction depends on the consumer’s interest, the owner’s vision, as well as the market trends. On the most basic scale, NFT utility is the benefit that the buyer and holder of the NFT perceive herself as the HODLER/Owner of a specific project. For example, in GameFi, consumers perceive an Axie Infinity NFT to be something that provides the utility of game participation, a community to participate into, and the ability to generate income through P2E rewards. Another example is the BAYC NFT we mentioned earlier. A bored ape carries most of its utility for its expansive, famous, and wealthy network provided to its owner. Throughout each possible utility, the central theme is how NFTs provide utility for a wider range of audience.
2.1 Socialization Utility
In the spring of 2021, a sudden shift in digital identity occurred. Twitter users noticed it first: an increasing number of Twitter accounts changed their avatars to a cartoonish representation of apes.
When NBA players and many A-class celebrities entered the NFT market, BAYC gathered millions of ETH trading volumes on Opensea, the NFT secondary market platform.
The success of BAYC and other generative NFT projects can be attributed to their successful implementation and ultimate fulfillment of their community’s demand for socialization utility. Enabled by blockchain technology, NFTs’ inherent provable indestructible uniqueness provides the foundation to satisfy an individual’s demand for digital identity with socialization.
NFTs are a balancing act between individualism and collectivism. The BAYC community satisfies the individual’s desire for an exclusive community while maintaining a platform to allow their community to freely express their personality, freedom, and value-allegiance.
Ultimately, the NFT community’s purpose is to build, reach, and aggregate consensus, both internally and externally:
- Internally is how the community members’ socialization utilities are satisfied, and
- Externally is how the marketplace price performs in the past, present, and future (to be expected).
Due to the difficulty of finding new usage scenarios for NFTs, the value of an NFT is largely (if not solely) based on the consensus shared in the community. NFT users tend to affiliate the NFT value with its marketplace price, i.e., the floor price of a project on Opensea.
On the other hand, due to the Ethereum network’s high gas fees and low liquidity nature, speculators’ value-finding ability in the marketplace is hindered, and it becomes relatively easy to maintain the community consensus. In other words, the NFT’s value shared by its community is always inflated relative to its market price. This results in an effective buffer against a FUD-caused death spiral.
2.2 Artistic
We believe the successful NFT artistic attributes lie uniqueness of the artist's inspiration, their work in blockchain technology, and its inherent level of artistic value.
The sources for NFT artwork can be divided into two types：
- 1) A well-known artist creates the NFT：
- Pak: ”The Turn”, “Cube”
- Beeple: “Everydays: The First 5000 Days”
- Dmitri Cherniak: “Self Portrait #1”, “It’s such a shame I fixed this bug”
- Xcopy: “Mortal”
- Osamu Tezuka: “From the Fragments of Tezuka Osamu – Generative Art”, “From the Fragments of Tezuka Osamu – Mosaic Art”
- Takashi Murakami: “MURAKAMI.FLOWERS”
- Burnt Toast: “Doodles”
- 2) Well-known companies release a series of NFTs：
- Time Magazine: “TIMEPiece”
- Konami: “Castlevania”
- Adidas: “Into the Metaverse”
- Gucci: “Gucci Virtual 25”
- Twitter: 140 pieces of NFT
- Justin Roiland: auctioned on Niftygateway platform
NFT artwork is valued based on its cultural influence and its meaning. A ‘good’ piece of artwork will show mainstream values, moral standards, and inspire people in the community. Women Tribe, 3Landers, and Doge Pound Studios are three NFT projects which have fundamentally positive mainstream values, community visions, and impactful aspirations to elevate society. On top of these core standards, each exhibits a mix of unique digital artworks and growing companies.
This specific kind of NFT audience will pay more attention to the artwork of the NFT compared to its community or usability. Therefore, the value is also placed on trusted artists or trusted companies. Market behavior resembles traditional art collectors who have a hobby for collecting. These collectors appreciate art and do not frequently trade their works so they aren’t interested in the application value.
2.3 Functionality
In-game NFTs
- Gaming functionality: depending on the actual gaming experience, players may choose to pay for the gaming functionality without a high expectation for future return.
- Emotional attachment: the impression that the in-game NFT is for gaming activity and is not a financial product provides an emotional projection for players, especially when the players spend resources to upgrade the NFT, spend time to play combats along with the NFT characters. Such projection further reduces users’ expectation for future return.
Music NFT
Music NFTs allow fans to purchase songs, albums, and tickets for events. They also provide artists with more profitability of their name, likeness, image, and artistic work.
- Catalog and Sound.xyz are two music NFT marketplaces where fans can purchase songs from artists.
- Music NFTs can provide special utility since the owner and artist of the song can create royalties linked to the NFT’s smart contract. Both artists and NFT holders will generate income/utility from streams in Web 3.0 (ex→Royal.io).
- Glass.xyz is an example of a Music Video NFT marketplace. Although it is not popular yet, the platform builds on the concept of artists releasing content directly to users through Blockchain technology.
- Blockchain technology and smart contracts provide utility to both the artists and fans. Artists will retain more profit from their work and fans who want to show support their favorite artists can do so by purchasing their NFTs. Tickets & exclusive passes are a future element of NFTs in the music industry.
DAO NFT
Below is the basic structure for an NFT which gives DAO membership:
- —> Governance rights
- —> Token distribution
- —>Pass Certificate
DAOs have been speculated as the next-generation of companies. They provide a new organizational form for coordinating global investment and communities. Many DAO organizations are emerging today. In terms of governance, many forms of NFTs will be used, and functional NFTs are one possible example.
DAO members can make governance contributions to the development of the DAO through the NFT they hold. Members who have made outstanding contributions can also obtain short positions of the DAO Token. At the same time, DAO NFT acts as a pass certificate for the DAO system.
2.4 Tokenization of Assets
Equating NFTs with assets brings out a new paradigm which broadens our conceptualization of asset classes. It is well expected that this take comes with fierce rejection from tax evaders. NFTs are derived from the concept of FTs (Fungible Tokens), and thus should also be regarded as belonging to the asset category.
Under the financial nature of cryptocurrencies, NFTs have specific attributes of assets. Their amplified market price fluctuation is another factor that influences their real value. Stemming from many variants of financial applications such as transactions, loans, splits, and ETFs, NFTs can integrate complex financial contractual relationships. As a result, NFTs have become credible financial investments, representing ownership in the cryptocurrency world with guaranteed rights stored in the smart contract.
NFTs providing financial rights and interests are known as Asset NFTs to distinguish such NFT assets from the common collector NFTs.
Currently, asset-based NFTs have a wide range of financial applications：
With the continuous evolution of concepts such as DeFi and GameFi, there will be more and more financial behaviors using NFT as a carrier, and even become the main source of value of NFT in the future.
3. Utility Integration
By combining NFT utilities, NFT values are multiplied. The largest and mainstream communities are linked to projects of unique artwork with valuable networks. Gaming and investment communities buy NFTs which generate ROIs or an individual gaming experience with P2E rewards. The Metaverse is an example of combined utility. Each NFT is unique and carries its own gaming ability while also enabling each player to participate in a digital and limitless community world. An existing platform combining both could be the SandBox where SnoopDogg has generated a natural community following by releasing his NFT collection called ‘Doggies.’
3.1 Socialization + Artistic Utilities
The concept of the Metaverse has generated a lot of attention toward the crypto world. However, the MetaVerse cannot be realized without the diversification and construction of all the different NFT utilities which are being built. Among them, coupling the socialization utilities and artistic utilities is necessary.
Community Value
Through the formation of a community, they gather consensus and connect with each other. A common consensus built on the love of artworks shows commitment and demonstrates a strong desire to socialize. Also, the promotion of artworks through the community further expands and contributes to the community consensus towards the project.
Take the whitelist mechanism for example. Before the pre-sale phase of the project, the most committed and influential community members will be given a whitelist. This enables them to mint a certain amount of NFTs before the public sale. The presale avoids high gas fees caused by congested traffic during the formal sale. Therefore, incentivized believers of the artworks are motivated and encouraged to spread the project to people outside of the community. Enthusiastic community members reinforcing the common expectation of the project create an upward spiral to invites more people into the community
Artistic Style
An NFT is produced through the combination of blockchain technology and avant-garde art. Both are questioned by the mainstream media and at their core these NFTs are highly abstract, which requires deeper participation and understanding from market players.
Artists package their self-identity through paintings and expose their artwork to the public through different blockchains. In the process of participation and understanding, the audience will form a common consensus of "Understanding and Agreement," which will eventually lead to the emergence of a community. Through community development, NFTs will be deconstructed and given more new meanings. Thus attracting more players to enter, and promoting a positive and valuable community cycle.
Style Fused with Community
In fact, community and artistry become the specific manifestation of culture. Cultural influences can impact NFT audiences around the world, and provide an imaginative space for artists.
Generative NFTs is a perfect combination of artistic and socialization utilities. The low liquidity nature brought by the inherent high gas fees within the Ethereum network brings a net positive market expectation for the NFT community. On the other hand, the community can be driven by artistic demand. Combining the community effect with the marketplace speculation, generative NFTs target a group of audiences, including art lovers, KOL, speculators, and community builders. With increased value generated from the community, new members will flow in, reinforcing the community values and thus creating an upward spiraling effect.
3.2 Functionality & Tokenization of Asset Utilities
If the community and art determine the upper limit of NFT value, then more specific and realistic NFT applications still create their lower limit.
We can see NFTs in the fields of games, music, domain names, insurance, collectibles, real assets, and identities. In addition, NFTs act as a container for displaying assets and mapping virtual assets.
NFTs can be in multiple formats, serving different functionalities with various assets being tokenized:
- Gaming NFTs that provide users with a gold-farming function in Axie Infinity, or
- Music NFTs that bring artists and copyrights together in Catalog, or
- Mortgages and loans that use NFT as its collateral.
The user's holding is not based on the love of NFT content nor the NFT expression, but based on real needs such as obtaining returns.
Unless a new NFT product emerges and replaces user’s demand, this utility-focused user tends to hold for a long time. And the value of this type of NFT on the marketplace is solid.
The performance of each individual NFT is varied. However, by combining various applications, the value of an NFT grows.
Currently, the community and artistic communities are located on the ETH network. The application and asset performance-based NFTs usually lower gas and high liquidity, resulting BSC, Polygon, and other public chains being frequently used.
The combination of different performances makes NFT cross-chain a clear need. More to come on the subject in our next article.
4. Conclusion
NFTs have developed rapidly over the past year. Mainstream projects such as Cryptopunks and BAYC have achieved a transaction volume of hundreds of millions of dollars. According to Messari data, in the past year, NFT secondary market cap has risen from $100 million to $5 billion. The entire NFT secondary market sale has reached $22 billion. This data emphasized that the NFT market is booming.
With the rise of Web 3.0 and the introduction of the Metaverse, future NFTs will have a deeper impact on the way we live, socialize, and invest. The ability to integrate different NFT utilities will unimaginable value to NFTs and Blockchain adoption.
We have witnessed the success of various projects integrating NFT’s different utilities which are then presented in a singular product. In the end, the product effectively solves a set of problems, which are the dissatisfaction with basic human needs. And the phenomenal performance of said products is attributed to how effective the problems are being solved.
However, we have yet seen any product that is able to integrate all four utilities together, namely, the socialization needs, artistic needs, and the needs to have functional and tokenized assets. We conclude that one chain alone cannot bring out this product.
Therefore, the only logical answer may lie in a multi-chain application with a MetaVerse setting. We will discuss this topic in our subsequent articles.
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