Can NFTs Move From Speculation to Utility?
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I’ve written about how NFTs can help creators and brands build thriving communities. But the truth is, the last NFT bull run was dominated by speculation.
So how can NFTs move from speculation to utility?
To answer this question, I spoke to Azf, an NFT collector who holds many top projects (e.g., Bored Ape) and advises founders in this space.
In our hype-free interview below, we cover:
How Azf got into NFTs
How NFTs can provide utility (IP, community, products)
What the drawbacks are
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How did you get into NFTs?
Like many people, I couldn’t understand why anyone would pay thousands for a jpeg.
What piqued my interest was the launch of NBA TopShot’s digital collectibles. I’ve always been a big NBA fan and trading card collector, so I wanted to see what all the hype was about.
I decided to buy a few TopShots NFTs along with Gary Vee’s VeeFriends. Luckily, these NFTs grew in value over time. I’ve since then traded up to top projects like Bored Apes and Moonbirds.
NFT sales have dropped to 12-month lows since the last bull run. What happened?
The last bull run was dominated by speculation:
Traders flipped NFTs to chase the high of making life-changing money.
Influencers pumped projects leading many fans to “ape in” at peak prices.
NFT founders promised the world and many then didn’t ship anything.
We need to move NFTs from speculation to utility.
People should buy NFTs because they care about the project’s mission and utility first, and the price second.
What types of utility can NFTs provide?
I think NFTs can provide three types of utility:
Products and services
NFT utility from IP rights
How does utility from IP rights work?
If you have IP rights to your NFT, you can create all kinds of derivatives. For example, if you had a Bored Ape, you could create a coffee brand featuring your Ape and get:
Brand recognition from day 1
A community of holders that’s primed to buy and invest in your product
Do all NFT projects provide IP rights?
No, there are three types of projects:
Team owns IP: For VeeFriends, the core team owns the IP. Holders can’t create derivatives without the team’s permission.
Holders own IP for their NFT: For Bored Apes, holders own the IP for their Ape. They’ve used these rights to create derivatives like Jenkins the Valet, a content production studio that’s working with Hollywood.
IP is public domain (cc0): For Moonbirds, the IP is public domain. That means that anyone can create derivatives based on the NFTs.
If the IP rights are public domain, then how can the NFT provide utility to holders?
With public domain, anyone can extend the IP. You can start a Moonbirds coffee brand even if you don’t own the NFT. The win-win outcome is:
You can use Moonbirds to promote your coffee brand to the community.
Holders see their Moonbirds NFT grow in value if more people buy your coffee.
The drawback is that Moonbirds (and its holders) no longer have control over how their brand is used. Your Moonbirds coffee could taste awful or be a straight-up scam.
We’ve seen how valuable IP is with Marvel and other top franchises. It’ll be really interesting to see these different IP options play out for NFTs.
NFT utility from exclusive communities
How does utility from exclusive communities work? Doesn’t this go against web3’s WAGMI ethos?
WAGMI (we’re all going to make it) was popular during the NFT bull run because everyone was getting rich on paper. But the reality is that exclusivity drives value.
A study found that people can only maintain 150 relationships. The value that you get from a small, well-curated community is priceless.
How do you find valuable NFT communities?
I look for communities that have:
Clear mission and values
Great founding team
Members focused on the long-term
High levels of engagement
A plan to provide utility
My favorite communities only have a few hundred members. It’s hard to keep all the traits above as you scale.
Even if you build a strong community, I think the problem is that holders can trade the NFT at any time. You could start with members focused on the long-term but eventually, more speculators could come in.
Yes, there’s pressure for early members to sell if the NFT grows in value significantly. The balance between the price and mission focus will be super interesting to follow for many top projects.
How can NFT founders find long-term holders?
They can use:
Access lists like Premint to pick mission-focused holders to mint their NFT.
Staking like Moonbirds to reward holders for keeping their NFT long-term.
Vetting processes like Midnight Labs to weed out speculators. Even if you buy a Midnight Labs NFT, you need to go through onboarding (e.g., many 1-on-1 calls) to join the community.
I’m also interested to see how soulbound tokens (NFTs that are non-transferrable) might solve this problem.
NFT utility from products and services
How does utility from products and services work?
If you hold an NFT, you may get IRL (in real life) drops such as:
Products: e.g., Hoodies, fanny packs.
Services: e.g., Access to IRL events, ticket discounts, 1-on-1s with experts.
I think IRL products and services will become the main utility that NFTs provide in the near future.
I’m particularly excited about how NFTs can let people easily share fractional assets. Imagine that you buy an NFT that grants access to 5 car washes. You use 3 and then sell the NFT to a friend who can use the remaining 2 washes.
How is using an NFT better than just paying $50 for five car washes?
The buyer benefits because they can sell the NFT on the open market to someone else — like being able to get a refund at any time based on the number of uses left.
The car wash benefits in several ways:
Marketing: Selling NFTs for something as traditional as a car wash will get a lot of attention, good or bad.
Royalties: The car wash can collect royalties when customers trade the NFTs.
Loyalty program: The car wash can airdrop additional benefits to their most loyal patrons who hold the NFT.
I think there are actually two categories here - IRL (in real life) and the metaverse. Can you explain the latter category?
If you buy an NFT, you could get digital airdrops as well:
If you bought a Moonbirds NFT and staked it, you received an Oddities NFT for free that’s now worth 1.5 eth ($2,400).
If you bought a Bored Ape NFT, you might get a plot of land in the Otherside metaverse. This virtual land sale raised over $320M back in May 2022.
But what’s the underlying value of something like metaverse land? Is this a Ponzi where new holders fund the profits of existing holders?
It is similar to a Ponzi in some ways. But let’s say you buy land 100 years ago in what’s now NYC. You and the city founders build a business on top of this land which attracts new people to settle nearby. Before you know it, the land has become incredibly valuable because everyone wants to live there.
Are you saying NYC is a Ponzi?
NYC did a great job growing its brand as the culture and financial capital of the world so more people wanted to move there.
I think an NFT project also needs to attract new people to survive. The value could come from the flex, financial returns, or some cool utility that you get for holding.
If the Bored Ape metaverse becomes an MMO (massively multiplayer game) with millions of players, I can see how owning virtual land there would be valuable. Bored Ape has billions of dollars in funding so lets see if they can pull this off.
To wrap up, I think the key challenge with NFTs is the following:
If the asset can 1) go up and down and 2) be traded on the open market, it’s very hard to focus on long-term utility vs. short-term speculation.
I bet every NFT founder struggles with this.
Yeah, as an NFT founder, you can’t control the price. You can only control the utility that you give to holders.
The Bored Ape founders mentioned in a recent podcast that they don’t look at the floor price because it’s a losing game. You can only pump it short-term for so long before it crashes again. Instead, they’re focused on building cool experiences and a long-lasting brand.
I think that’s great advice for all NFT founders:
Figure out your mission and your utility
Choose your initial holders carefully
Ignore the short-term price fluctuations and stay focused on the long-term
Thanks for the conversation Azf! Be sure to follow Azf on Twitter if you enjoyed this interview.