The problem lies in a broken stakeholder incentive loop.
Yet we’ll also explore how emerging technologies allow NFT brands, creators, and holders to fulfill those promises, setting a new standard for how Web3 works—and how every stakeholder can make money. It’s a win-win-win.
In this manifesto, we’ll clear up why the NFT community has had a rough history and why NFTs are poised to revolutionize the web and the economy. Let’s get started.
The problem lies in a broken stakeholder incentive loop.
In the beginning, non-fungible tokens (NFTs) got their start as pieces of art, which remains the dominant medium of these digital representations. In June 2021, Sotheby’s sold (and was sued over) the first NFT called Quantum, made by artist Kevin McCoy in May 2014, for $1.47 million.
Since then, NFTs have exploded in popularity. This is especially true after late 2021, when daily sales were roughly $6 million in June 2021, catapulted to $100 million six months later, but now rest near a support level of $35 million in June 2022.
Source: NonFungible.com, July 2022
People often don't know other use cases for NFTs beyond digital images of bored apes.
Trading volume and sale prices of NFTs peaked in November 2021. The interesting thing to note is that these trends seem to correlate with bitcoin and the broader crypto markets as well as public equities.
The folks at NonFungible.com have categorized NFTs into five categories: art, collectibles, video games, metaverses, and utilities & finance.
When most people hear of NFTs, they think of the first few categories, but they often don’t know other use cases for them beyond digital images of bored apes. They also don’t know how to buy, access, trade, and use NFTs. We’ll cover this in more detail in a bit.
Source: TradingView, July 2022
Source: TradingView, July 2022
It’s like the evolution from paper records to databases. But bigger.
NFTs have been associated with digital images, but in the future it’s easy to see how authenticating the ownership and transactions of digital files can be extraordinarily valuable. Think of medical records, insurance and mortgage documents, bank transactions, resumes, college degrees, identification documents, and so on. These files can be verified and shared instantly without the need for a trusted third party, like an escrow account or financial intermediaries. Imagine most digital files on earth becoming NFTs—the size of the NFT market, therefore, is almost unimaginably large.
When an NFT creator creates (or mints) an NFT or a collection of NFTs, they often provide perks for those who buy them (called holders). Consider the promises made by a relatively successful collection called Okay Bears. Holders of an Okay Bear are able to access exclusive merchandise as well as in-real-life (IRL) events and experiences.
Utility incentivizes holders to buy the NFT, which incentivizes the creators to grow the community. After all, the size of the community often dictates the size of the market for that particular NFT. A large community also incentivizes brands with a ready and willing audience to market to.
In the sense used in the NFT community, utility is defined as the benefits or usefulness associated with minting, marketing, or purchasing an NFT. If someone buys an Okay Bear, their roadmap says the holder is entitled to access merch, voting rights, tickets to exclusive events, and meet-ups in real life. Other NFTs have other benefits or uses, depending on the creator and the community.
It’s not just creators who want to build utility into their NFTs but big brands too. Starbucks recently announced that they’re creating NFTs that serve not just as collectibles but “would provide their owners with access to exclusive content and other perks.” Leaders at Starbucks believe NFTs can be an extension of their successful customer loyalty program. The project also adds to their brand reputation of being digitally savvy and innovative.
Presently, NFT projects and collectors favor preferred blockchains, wallets, and ecosystems, each with their respective quirks. NFT projects employ a variety of technologies to custom-build marketplace, minting and checkout solutions, all working slightly differently. It’s no surprise that extensive FAQs pepper most Web3 experiences, with conversion rates favoring crypto-natives. Educational campaigns target the crypto-curious as the market forges ahead in the Web3 frontier.
And, as we'll continue to explore, the NFT Value Loop can make or break project adoption via utility and brand.
For many projects, utility promises outpace capability.
Much of the crypto community’s writings have explored the economics of incentives, and how that’s changed over time from Web1 to Web2 to Web3. Read Andreessen Horowitz partner Chris Dixon’s essay “Why Decentralization Matters” for a good primer.
However, some challenges remain in aligning the desires of buyers and sellers. Think of the market participants involved, starting with creators.
Creators want to create NFTs, but will there be a market for their creations? This is partly why Gary Vaynerchuck, a famous marketer and crypto investor, believes that 98% of NFT projects will fail.
Holders want to buy NFTs, but why? Is it because, for instance, they value the artwork as such? Or is it because they can sell it to someone else later for a profit, validating critics’ claims that crypto is a de facto Ponzi scheme? Or is it because they value the perks they’re promised? But if so, why go through the trouble of purchasing the NFT at all—why not just save or find a more traditional discount? Or maybe it’s because they value the community, but why go through the trouble of purchasing NFTs and avoid other communities that can be found for free through channels like Reddit, Discord, Twitch, Twitter, or even a local, IRL community?
Brands want to be involved, but how do they access these communities without extensive knowledge of the communities or its technology? And what’s their upside exactly? Investing hundreds of thousands or maybe even millions of dollars into a venture with an unknown rate of return will give CFOs a heart attack.
It’s true, the inability to deliver on utility hurts a brand’s reputation. But as far as the business model is concerned, brands are hard pressed to generate revenue beyond primary and secondary sales (at least without offending their audience with high royalties), so their primary alternative is just to sell more NFTs.
This has a diminishing effect in that more NFTs dilute the exclusivity of previous holders. In addition, standing up a minting marketplace and coordinating a drop can be hard without the funding or Web3 technical acumen.
Decentralization makes marketing visibility difficult. NFT audiences depend on disparate tools like Discord, Twitter, and Reddit to know project details and feedback. And, ask any NFT project coordinator: Onboarding new users to set up a wallet and buy an NFT is challenging, to say the least.
In general, users of NFTs—brands, creators, and holders—have trouble understanding what NFTs are and how to enter the Web3 world. The technology is just so new. It’s like trying to understand back in the early 1990s what the internet was, how to access it, what to use it for, and what it could become.
Nobel laureate economist Paul Krugman infamously predicted in 1998 that the internet’s impact on the economy would be no greater than the fax machine’s.
Polls from YouGov show that only a quarter of US adults understand what an NFT is, but, importantly, that percentage is growing.
Further, some analysts estimate that only about a quarter of Americans own crypto, and a quarter haven’t bought crypto because they don’t know how.
The average person has trouble with advanced technology. In 2020, for instance, while NFT creators were minting collections and trading skins in metaverse games, many organizations were creating webinars for their employees to teach them how to use Zoom. Pew research showed that 26% of US adults “say they usually need someone else to set up a new computer, smartphone or other electronic device for them or show them how to use it.” That’s why one writer in The New York Times said, “Tech forgets about the needs of the 99%.”
The NFT community is asking those people to make a crypto wallet (how? which one?), transact through markets (how? which one?), and collect digital assets (which are what, exactly? and what for?). It’s important that they do, since the larger the community, the larger the market, and the more money that can be made.
The broken flywheel can be observed by some of the more infamous failures of the crypto community. You can read about many of them in mainstream media as they pop up. Here are just a few examples.
Celebrities have spent millions marketing their NFT collections, but with terrible returns to holders. Chris Brown’s Breezyverse sold only 297 of the 10,000 NFTs, or 3%, of the total collection. Logan and Jake Paul’s NFT collections’ floor prices plummeted 62% and 98%, respectively, at the time of this CoinTelegraph story.
Others have sold out, creating huge successes from their drops. Yet they too ran into trouble when that success soon faded due to slow implementations and limited utility.
Some NFT projects have sold out, creating huge successes from their drops. Yet they too ran into trouble when that success soon faded due to slow implementations and limited utility.
In August 2019, an influential group of business leaders known as the Business Roundtable redefined the purpose of a corporation to one that creates value for many stakeholders, not just shareholders. In a sense, NFT utility provides value for many stakeholders in the NFT ecosystem, not just holders of valuable NFTs.
The concept of utility is where the economics of creativity become realized. Until now, many of the stakeholders in the NFT community have been unable to gain economic value from projects. Without that incentive mechanism, many projects have simply failed to live up to their hype.
If we can address this challenge, we can create economic value for the three primary stakeholders.
Build an audience, target that audience, and improve customer loyalty.
With these benefits it’s easy to see how Web3 utility provides a transformative marketing channel.
Utility solves many of these problems.