Utility NFTs Part II: As Revenue Producing Assets

Utility NFTs Part II: As Revenue Producing Assets

In previous posts I have talked about how NFTs provide social and emotional benefits for collectibles as well as access.  NFTs also can provide functional utility by producing a constant revenue stream.

Revenue Producing Virtual World Assets

We are seeing our first successes in revenue-producing NFT assets via virtual worlds and games.  Crypto Kitties started this in 2017 with the ability to buy two kitties, breed them and then sell the offspring.  Since then we’ve seen a ton of digital games emerging that offer a chance to make money on using NFTs you own. Some include:

  • Zed.run - Buy, Sell, Race and breed digital racehorse NFTs.. Zed horses are NFTs that have their own hidden DNA that gives them abilities to race fast or slow over certain distances and surface conditions.  Horses can breed and offspring carry some traits of their parents using a genetic algorithm.  All the horses have different traits, colors and bloodlines that indicate different behaviors.  Horse owners can pay money (currently $5-$250) to enter their horses into multiple races of 12 horses where they can win a 700% return if they win the race (300% for second and 100% for third).  Horse owners can also mate male and female horses to produce and either race or sell offspring.  Top horses have made around 5-10ETH ($10-$20K) in the last 30 days and can sell for 3X that value.  Most horses sell for at least $200 and transactions using the NFT are currently $50-$100K a day and growing quickly.  
  • Decentraland property - Decentraland is a blockchain based virtual world. Think of it as a Second Life or 3D viewing space connected with crypto.  Every piece of land or property is an NFT that you can buy and sell.  People are buying spaces, building experiences (like haunted houses) and charging crypto to enter.  So far, one person managing these decentraland experiences is making over $1000 a week.  Prime spots of land are selling for millions of dollars. Other people are buying up land in popular areas and renting it to brands to make a profit.
  • Axie Infinity - think of this as a digital combination of Pokemon and Crypto Kitties. Players own, trade, grow and battle cute animated creatures with specific powers.  Each creature has a set of over 500 attributes so all are unique and different and can be bred to make even more combinations.  Axie Infinity is already generating full-time incomes for people in the Philippines with transactions generating $125K-$250K a day.

The future of Virtual world assets.

Obviously some of the above will fail and new games will enter, but the proof of concept is pretty compelling;  NFT are a perfect fit for decentralized virtual worlds. They provide an easy way for creators to create and monetize properties and for others to buy and use those properties. Virtual world platforms that allow for marketplaces will quickly build a huge ecosystem of partners including toolmakers with analysis tools to help players, creators to create custom digital items, developers to hack together new innovative virtual products and more.   The ecosystem will form a virtuous cycle as more parties become invested in the final project.

Non-distributed platforms like Roblox already have some of these tools/ecosystems, but expect more distributed platforms to emerge at 10x the scale when people feel their item is not “locked in” to the platform’s marketplace 10x as many people feel invested.

Non-virtual world Digital Revenue Producing NFT Assets

Beyond virtual world goods, almost any digital asset can become an NFT.   Instead of dealing with existing producers,  An artist could pre-sell NFTs of an upcoming song where they share a percentage of the royalties of the song with the NFT owner. Since it would be an NFT, the entire chain (play song, get royalty, go to wallet) could be on the blockchain and the owner of the NFT could easily resell it on a marketplace.  Platforms like Spotify may actually prefer this model as they could go direct to artists, getting rid of middlemen.

Obviously the music industry has its own complications, but there are a bunch of other industries where this is being tried.  A few include:

Domain Name NFTs - Unstoppable Domains is creating NFTs of website domain names.  ETH wallet holders can buy NFTs of a particular domain name and either use it themselves or rent it to others.

Font NFTS - font.community is creating a marketplace for NFTs of Fonts. Creators can create fonts and sell them as NFTs.  Others can buy and use them or (eventually) rent them out for royalties.

For creators NFTs can serve as an easy way to pre-fund bigger projects like videos, movies, or artwork.

I can imagine in the next two years we will see NFT-marketplaces in at least some of the following:

  • Digital Song NFTs -Artists sell their song as an NFT and share the royalties.
  • Stock Photo NFTs - Photographers can create and sell NFTs of their stock photos.  Others can buy them and earn royalties on sites like Getty or blockchain versions of these.
  • Video Course NFTs - Teachers/educators can pre-sell NFTS of courses and share in the royalties.
  • Holiday Card NFTS -> Imagine creators creating digital holiday cards which could generate revenue as they are used.  If the creator wanted out, they could sell the card (and its future royalties) to another owner as an NFT.
  • Trademark and Patent NFTs. I can imagine people selling trademarks/patents as NFTs where royalties go to the NFT owner.  Sales and transactions could potentially become much easier if they are set up appropriately with the USPTO.
  • Ownership of pretty much any revenue-generating digital asset has the potential to be handled by NFTs.

Why should digital property creators want to use NFTs as opposed to existing systems? The main reason is liquidity.  An artist can create a Holiday card, or course video and sell it as an NFT to get money upfront instead of slowly collecting royalties over 2 years or take the risk that it won’t sell.  A buyer can seize the opportunity and take a chance on an unproven asset.

Physical Asset NFTs

Finally, there is the opportunity for physical revenue-generating assets to become NFTs.

Companies like Realty are currently purchasing homes, fractionalizing them and selling “shares” of them as EC20 tokens.   The NFT protocol has huge potential to divide up large assets into smaller ones and provide liquidity on a much smaller increment.  Doing so would potentially allow people to 100% own mini-assets as opposed to shares in a security.

What do I mean?

  • Solar Farms could divide up and sell the royalties of each individual panel as a separate NFT, providing immediate capital and giving the NFT owner new diversification
  • Individual electrical charging stations could also be sold as NFTs where the NFT holder can choose a manager.
  • Apartments within apartment buildings could be split into NFTs
  • Farmland could be divided up into NFTs where the NFT-owner gets to decide what to plant.

Why do this? Each NFT could represent a unique and different asset which can add a personal attachment. (Instead of owning 1/10000 of a solar farm, you own solar panel 5346 which you name “Sunny Day” and can see that individual solar panel’s production. You own it!).  Also, by dividing the asset and giving 100% ownership,NFTs may be able to steer clear of SEC security classifications as the assets would not be fractionalized into securities and could be managed by the owner.

In all of these cases there are major issues that still need to be addressed.

  • How will these fit US regulations?
  • Who manages the operations of these assets and who chooses which manager operates them?
  • What is the royalty split between the operator and the NFT owner
  • What say does the NFT Owner get?
  • How do you trust the manager?

In the coming 24 months I predict revenue-producing NFTs are going to explode in growth both in terms of active assets (where the owner/manager needs to do work) as well as passive assets.  In 3-5 years I believe revenue-producing and  access based Tokens will dominate the NFT landscape with collectible-only NFTs providing a small minority of the total sales and value.  Collectible NFTs will start moving in this direction and new utility-based NFTs will open up.  We are in the beginning of exciting times.

NOTE: I am working on a number of ideas in this space. If you are interested, please contact me!  

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