You know how to amass a $1 million fortune investing in NFTs? Start with $5 million. If you are trying to “get rich quick,” stop reading now. There’s nothing here for you. If, on the other hand, you want to dig a little deeper into the most popular use cases for NFTs and the transitional technologies empowering web 3, read on.
While there are an unlimited number of ways to use an NFT (non-fungible token), four general use case categories have emerged: Digital Collectibles, Gaming, Digital Identities, and Tokenization of Physical Goods and Services. The underlying technologies, smart contracts and distributed ledgers (AKA blockchains), are common to each use case. But each is inspiring innovation in slightly different ways.
Digital Collectibles
You are undoubtedly aware of the hype surrounding NFTs. Back in December 2020, a .gif of Nyan Cat sold for $590,000. In March 2021, a .jpg of Beeple sold for $69 million. The list of sensational sales is long and, to some, insane. From CryptoPunks to Bored Ape Yacht Club, the idea of purchasing a file that anyone can right-click and copy is hard to understand. Many financial professionals eschew digital collectible NFTs citing the Greater Fool Theory, which suggests that making a profit by buying an overvalued asset during a bubble is possible because you will be able to find someone (a “greater fool”) who will be willing to pay a higher price. But the super-hot NFT marketplace doesn’t seem to be paying much attention to the theories of financial professionals.
Leaving the finances out of it, the digital collectible use case is home to all kinds of exceptional innovation. Aside from NBA Top Shot (which is the benchmark for sports NFTs), we are seeing interesting work from marketers and consumer experience specialists (check out Sweet’s work on the Macy’s Thanksgiving Day Parade and McLaren Racing Collective) as well as new markets for fine art such as Christie’s x OpenSea.
Because almost anything that can be embodied and communicated in a digital file can be uniquely identified and bought and sold using an NFT, digital collectibles are transforming and disrupting venerable business models. Time has a nice article about a musician named Daniel Allan who has “flipped the script” on his centralized music overlords. It’s worth the read.
Gaming
In-game currency and digital collectibles are a staple of PC and console video games. NFTs have taken it to a new level. The “play-to-earn” paradigm is here, and there’s no better example than Axie Infinity. You earn $SLP playing Axie, and they can be swapped on a DEX (decentralized exchange) for fiat currency. FXStreet reports, “There are costs that players incur every step of the way – buying Axies (about $800), breeding them, and so on. [But every] time a user sells an Axie on an NFT marketplace they can earn an average of $270. Traders play 50 to 80 days to recover their initial investment of $800, and then they can expect to earn anywhere between $10 to $15 a day by playing the game.”
Digital Identities
Decentralized identifiers (DIDs) is one of the most exciting use cases for NFTs. W3.org defines Decentralized identifiers (DIDs) as “a new type of identifier that enables verifiable, decentralized digital identity. A DID refers to any subject (e.g., a person, organization, thing, data model, abstract entity, etc.) as determined by the controller of the DID.” There are several approaches to blockchain-based digital identity. Another is known as Self Sovereign Identity (SSID). RSK has a nice blog post about it. Digital identity is the key to web 3, the metaverse, and hybrid centralized/decentralized finance. It’s my favorite NFT/Blockchain use case.
Tokenization of Physical Goods & Services
There are more than a few interesting projects linking physical goods to smart contracts via NFTs, from album drops (where an NFT gets you a chance to purchase a limited edition vinyl record) to real estate listings. This is uncharted territory, but it’s easy to imagine registries could be used to validate the authenticity of physical goods. It is also easy to imagine how various service industries could use NFTs (smart contracts) coupled with external databases to enable trustless secondary marketplaces for their services.
There Are No Limits
We may be in an NFT bubble. There may be a huge crash coming. There may not be. But it’s important to remember the lessons of the dot-com bubble. Almost $8 trillion of wealth vaporized when the dot-com bubble burst in 2000. There were companies on the NASDAQ with billion-dollar market caps that not only were not profitable but had no chance of ever being profitable. These financially engineered valuations were, in fact, fictitious. But that didn’t stop speculators, newbies, and “get rich quick” thrillseekers from taking the NASDAQ up over 5,000 in March 2000, and by January 2001 it was just under 2,300. It didn’t matter who you were or what your startup was about; by Q2 2000 you could not raise a dime if you even mentioned the idea of a “dot-com.”
But what did any of Wall Street’s insanity or the motivations of the professional wealth-creators on Sand Hill Road have to do with the value of the internet? No one would invest in a company that leveraged it. Did that mean the internet was dead? Was it valueless? Look around you today. Everything and everyone is connected to the internet. We could not function without it. And yet, just 20 years ago, no one would invest a dime into it.
There are at least four valid, awesome use cases for NFTs. Study them. They are not going away.
Author’s note: This is not a sponsored post. I am the author of this article and it expresses my own opinions. I am not, nor is my company, receiving compensation for it. I am not a financial advisor. Nothing contained herein should be considered financial advice. If you are considering any type of investment you should conduct your own research and, if necessary, seek the advice of a licensed financial advisor.