NFTs: Beyond Art and Collectibles

Currently, we are deep in an NFT bear market, and data from Nansen (Fig 1) shows that all categories of NFTs are suffering from reduced interest compared to a few months ago although the art category is showing relative strength. Despite this, several recent research reports forecast significant growth in the NFT market size over the next decade. Between them, SkyQuest Technology, Verified Market Research, and FactMR predict a $120-320 billion NFT market within the next 5-10 years, perhaps driven by art but more likely driven by a much broader spectrum of tokenized assets. What follows is a look at the major categories for these NFT-based assets.

The five major categories we’ve seen emerge recently are: membership tokens, financial NFTs, legal documents, real world assets, event tickets, and media.

Most of the development of these new use cases came during and soon after the 2021 bull run in NFTs, where opportunities were in the spotlight and there were ample resources to fund development. If some of these use cases prove themselves, we could see huge interest in new applications next cycle.

One of the first use-cases for NFTs beyond collectibles was as membership tokens. This was seen as early as 2017 when the HAIRPEPE Rare Pepe card gave holders access to a Telegram group called The Salon. Since then we have seen several NFT-gated member clubs. Although many of them are simply for NFT collectors, such as Proof Collective, MetaverseHQ, and Grailers DAO, there are some which are beginning to push the limits of this definition, such as Crypto Packaged Goods, which is more akin to a business club and startup incubator.

At the crossover of NFT-gated online members clubs and decentralized governance is Nouns DAO. With a treasury of over 27,000 ETH, they are a DAO that exists to manage the treasury and ultimately use it to bring value to Nouns holders. One Noun is one vote and also gives access to private chats to discuss proposals and coordinate how the treasury is used.

As better tooling and user experience is built to make it easier for users to interact with NFTs without the need for advanced knowledge of wallets and self-custody, we can expect to see an increase in NFT-gated membership clubs. As the technology advances and becomes more accessible, we may see more diverse use cases and a wider range of industries adopting this model of membership and governance.

One application that is closely adjacent to membership tokens is brand loyalty rewards. Although several existing brands have explored NFT and Web3 use cases, including Reddit, Nike, and Adidas, one of the most interesting explorations comes from Starbucks.

In December 2022, Starbucks launched a new loyalty program called Starbucks Odyssey that allows members to earn and purchase digital collectible assets, called Journey Stamps. These stamps can be used to unlock new benefits and immersive coffee experiences. For example, members can use their stamps to get discounts on coffee, access exclusive content, or even win trips to Starbucks coffee farms.

Starbucks' Odyssey program is still in its early stages, but it has the potential to revolutionize the way brands interact with their customers. By using NFTs, brands can create a more personalized and immersive experience for their customers, and importantly, customers can sell these rewards if they aren’t of interest to them personally.

Beginning with Uniswap V3 positions, financial NFTs entered the mainstream consciousness of the DeFi world. Using NFTs as receipts for a user’s position in DeFi protocols allows more information to be encoded within metadata than would be possible with just an ERC-20 token denoting their position.

For example, in Uniswap V3, the NFT acts as a receipt that stores information relating to the LP position: LP pair, min and max tick for the concentrated liquidity, size of LP position, and importantly the rewards accrued to the LP. As the rewards to the LP are accrued to the NFT itself, this opens further possibilities for DeFi applications building on the NFT as a base asset, although we haven’t seen much of this as of yet.

Other examples of financial NFTs are Liquity Chicken Bonds, Superfluid streaming payments, NFTfi promissory notes, BendDAO bNFTs, and veNFTs pioneered by Solidly. Chicken bonds recently launched, using NFTs as deposit receipts for bonding positions in Liquity’s new economic mechanism. With this launch, Liquity also said they wanted to experiment with the appearance of the bond NFTs, and some have even sold above face value for their collectible value.

Superfluid allows users to stream payments, and recently made the streaming payments into NFTs, which allow better transparency and composability. Although these money stream NFTs are just a display currently, they will be transferable in the future.

While traditional legal documents are often paper-based and difficult to manage and verify, NFTs provide a unique opportunity to create secure, immutable, and verifiable digital documents.

The first example of NFT legal documents I came across was the work being done at Wrappr. With a focus on transparency, Wrappr allows quick US-based company setup with NFT-based company incorporation documents. These facilitate secure record keeping, quick incorporation, and easy to find paperwork. By leveraging the security and transparency of the blockchain through NFTs, Wrappr has created a more efficient and secure process for forming and managing crypto-native corporations and legal structures.

Another interesting example of NFTs as legal documents is the case of RBB Labs, who airdropped NFT court summons to defendants in a copyright infringement case. As reported in a Cointelegraph article, RBB Labs used NFTs to create a verifiable digital document that could be easily distributed to defendants, even if the real world identity of the defendants was not known and only a wallet address was available to identify them.

The trend of NFTs as legal documents is closely related to the broader trend of using blockchain technology for transparency and on-chain identity, in this case, for legal entities. By leveraging the security and transparency of the blockchain, NFTs provide a unique opportunity to create secure and verifiable digital documents that can be easily managed and distributed.

The consulting firm BCG estimates the tokenization of illiquid real world assets to be a $16 trillion business opportunity by 2030. Some of these tokenized assets will be ERC-20 tokens but some will also be ERC-721 or NFTs. The current range of assets being tokenized through NFTs is fairly limited, mostly luxury goods such as high end watches, real world collectibles, and real-estate.

While NFTs have historically been used to denote only ownership of a real world asset, Silta is a good example of a project in which more data is at play. In this case, NFTs are used to store and update important information about infrastructure projects that users have funded through the platform. Structural, financial, technical and sustainability information is stored within an NFT, which allows easy access to the data whilst ensuring that it cannot be modified or tampered without leaving a record of doing so.

4K is offering the ability to tokenize any object you want, with the physical object being stored by one of their partners in a secure facility, allowing the NFT owner to redeem the NFT for the material good whenever they want. One of the most popular types of objects to tokenize is high end watches, with several tokenized Rolexes already used as loan collateral. Collectible sports cards have also been tokenized by 4K. As the user base for this expands, it is expected that the types of objects being tokenized will expand beyond jewelry and collectibles.

Perhaps one of the largest and most obvious assets to tokenize as NFTs is real-estate. The global real-estate market was worth $326 trillion in 2020, and so represents a hugely valuable market if it can be brought on-chain. Attempts are already underway to achieve this goal, with several high profile real estate deals having already happened on-chain.

As this use-case is proven and legal uncertainties ironed out, it has the potential to grow into one of the largest use-cases for real world asset backed NFTs. Legal costs for real estate transactions are high and the process is time consuming, meaning both buyers and sellers are well-incentivized to explore this route. Perhaps we will see this first take place in commercial property transactions, where sophisticated participants can agree on systems to make transactions legally enforceable. The greatest benefit, however, will be felt when the complexity and technicality is abstracted away and the average person can cut out the middlemen from these transactions.

Issuing event tickets as NFTs offers several compelling advantages. They provide exceptional security, making counterfeiting nearly impossible, a vital feature for event organizers looking to reduce fraudulent activities and ticket scalping. NFTs also facilitate seamless transfers between buyers and sellers, significantly simplifying the process of buying and selling tickets, even in last-minute situations.

Perhaps most interesting is that these tokens can provide a more personalized and immersive experience for fans. Event organizers can employ NFTs to offer fans access to exclusive content or experiences, enhancing engagement and fostering a stronger relationship between audiences and event organizers.

Several companies have been using NFTs for their event ticket systems. For instance, YellowHeart has collaborated with artists like Kings of Leon and Grimes to sell NFT-based tickets. In 2021, Grimes used NFT tickets for her performance at Art Basel, giving fans the ability to customize their tickets with their own photos or artwork. In 2022, the Kings of Leon used NFT tickets for their tour, giving fans access to exclusive content, such as behind-the-scenes videos and photos. Similarly, Live Nation, in partnership with Ticketmaster, has developed a platform for NFT ticket sales.

The use of NFTs for event tickets is still in its early stages, but it has significant potential. By using NFTs, event organizers can offer a more secure, efficient, and personalized experience for fans.

In the previous sections we looked at some emerging applications and use-cases for NFTs beyond collectibles. But what’s the point of tokenizing things which already exist? Sure, there are financial NFTs which bring entirely new functionality which didn’t exist in DeFi before - but why make event tickets into NFTs, and why tokenize your Starbucks rewards or your house? Many critics would say that it's a waste of time to just put things that already exist on the blockchain, and so here we discuss some of the benefits and what opportunities may emerge for NFTs beyond collectibles.

Broadly speaking, the new NFT use-cases can be split into two categories. The first of which is things with value, such as real world assets, event tickets, membership tokens, and even brand loyalty rewards. The second category is information and documentation. Things like company formation documents, procedural documents like subpoenas and summons, and information like the use-cases which Silta is exploring by providing project metrics through an NFT which is easy to view and has a record of all changes made.

For the first category, the “things with value,” NFT finance and incorporating NFTs into the broader DeFi ecosystem looks set to be a fundamental driver in making it worthwhile tokenizing assets. There are five main NFT finance primitives that are widely available at the moment: collateralized loans where NFTs can be used to secure a loan and access liquidity without selling the asset, fractionalization where NFTs can be divided into smaller pieces, allowing for more investors to participate in the ownership of the asset, derivatives where NFTs can be used as the underlying asset for options or futures contracts, renting, where an NFT can be loaned out to someone else for a fee, and liquidity pools where NFTs can be used in automated market makers (AMMs) to provide liquidity for trading and earn transaction fees in return. This NFT finance ecosystem brings many benefits. Ease of transaction, removing middlemen, capital efficiency, and transparency. Alongside this is the potential for building brand new financial products that would not be possible to create in the traditional financial system.

On the more vanilla end of the spectrum of NFT finance application, you can imagine a world where markets are made significantly more efficient for a broad range of goods and services. Removing middlemen and the transaction fees that they incur would be beneficial by itself, and perhaps justification enough for tokenizing a broad range of assets. If smart contracts are able to carry out legally enforceable transactions for things like houses, commercial property, or airplanes, this could save significant sums on fees charged by lawyers and intermediaries.

Think about the benefits of transparency that these systems would bring - imagine for a moment if NFT based real-estate ownership and debt had been widespread during the subprime mortgage crisis. The lack of transparency and accurate information about the underlying mortgage assets within mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) was a key contributor to this crisis. If NFTs had been used to record ownership and debt for these financial products, anyone would’ve been able to inspect the underlying mortgages, and perform much better risk assessments of MBS and CDOs, which may have revealed the levels of risk in these systems before they blew up.

When thinking about the benefits of decentralized ownership and self custody, imagine renting out your Starbucks rewards, or a membership that you don’t get round to using as often as you’d like to. Or how about being able to get quick access to competitive loans against almost anything that you own, your house, car, watch, a collection of sports cards, or physical art on your walls.

There are also several common DeFi products that could be attractive when applied to new NFT assets as well. Options that use individual properties as the underlying asset could allow property price speculation within certain specific neighborhoods, or even individual houses. They could also allow homeowners to insure the price of their property by buying put options. Covered call vaults like those offered by Ribbon have become a popular product in DeFi. For the most degenerate of those amongst us, how about selling covered calls on your house?

Perhaps for an individual this wouldn’t be very attractive. But for institutional size landlords, this could be a way to generate additional yields, or by buying calls, a way to purchase properties at attractive prices. In general though, it is possible to imagine a world where many DeFi native products could come to be applied to real world assets and through doing so create truly novel financial products that we would not have been able to imagine before blockchain technology existed.

In conclusion, NFTs show great potential beyond their traditional use cases in art and collectibles. The greatest promise is shown for applications where representing assets as NFTs help to unlock previously illiquid assets, improve transparency and auditability, offer more personalized and customizable services to customers, or reduce transaction and middleman costs.

However, there are still challenges to overcome, including legal and regulatory clarity around NFT representation of these assets and the technical sophistication required of end-users. By addressing these challenges, the potential of NFTs to revolutionize industries such as real estate, legal documentation, and financial assets can be better realized. Furthermore, it is important that the ecosystem around NFTs continues to develop, with NFT finance being a particularly important area for developing the value proposition for tokenizing new classes of assets.

With continued innovation and collaboration, we can look forward to a future where NFTs play an even greater role in transforming industries and creating new opportunities beyond art and collectibles.