NFT Collections

NFTs are reaching mainstream consciousnesses with the NFT market swelling to $41B in 2021. While we have heard many stories of how people profited from NFTs, there are even more stories of people who lost money in NFTs. What utility does an NFT have and what are the challenges faced by NFT collections?

The success stories of several blue-chip NFTs have inspired many other NFT collections, many of which offer no utility and are looking for a quick cash grab. In this bear market, these collections will be weeded out as collectors like us turn to collections that offer real utility. Here, we examine different categories of utilities and challenges faced by NFT collections.

NFT Utility 

Generally, NFTs’ utility can be classified into these main categories:

  • A gateway to in-real-life experience. This can be access to a private networking event, a private party, or a concert. We use NFTs as a form of ticket to access these events and create memorable experiences with like-minded people in the space.
  • A gateway to future rewards. Holders of the NFTs can receive other rewards such as airdrops. These airdrops can be in the form of NFTs that you can trade on a secondary exchange. BBRC Ivy Boys holders received an airdrop of an Ivy Trunk which contains a continental coin, a merch pass, and another Ivy Trunk.
  • IP license. One of the most attractive selling points for owning an NFT. Most collections do not provide their holders with IP rights. Some NFT collections like IVY BOY provide us with full IP rights over the NFTs. This means that we can commercialize the NFT and use them as we see fit. Examples of collections that offer holders full IP rights: BBRC Ivy Boys, BAYC etc.
  • Merchandise. Probably one of the most common utilities we have seen in NFTs’ project roadmaps. Some collections reward their holders with either free merchandise or early access to merchandise at a discounted price. For example, holders of the genesis BBRC Ivy Boys collection will be able to claim a free jacket.
  • Integration with AI capabilities. These types of collections are called AI NFTs and are attached to a Generative Pre-trained Transformer 3 (GPT-3) language model prompt. One notable AI-integrated NFT is Alice, the world’s first intelligent NFT that was sold at a Sotheby’s auction last year. Alice is able to develop new knowledge from its interaction with others. In the future, with more investment in AI, we might see the prevalence of AI NFTs that are able to interact with one another in the metaverse.
Challenges

Now that we understand the different types of utility, let us understand the challenges faced by NFT collections.

  • Lack of users. Aside from popular blue-chip collections that have a huge community, most collections do not have a strong community. This means that interest and liquidity of the collection are low. If you hold one of those collections then you probably can relate to the lack of liquidity. You can buy it but you have a hard time selling it. If a collection has a partnership or is created by an established brand, then it will be easier to build communities. With a strong community, it will provide strong liquidity and allow accurate market pricing of NFTs. It would also send a signal to non-crypto native people and attract them into the space.
  • Unnecessary use of NFTs. Let’s be real, there are too many collections out there trying to hop onto the bandwagon. Just name it NFT and your collection will get lots of attention. However, many of these NFTs fail to sustain the hype because there is actually no need to have NFTs at all. Most of the time, it requires endorsement from large brands to create a strong community. In the end, NFTs merely become an innovative way to raise funds for many of the projects even though there are alternatives such as seed rounds or Kickstarter. NFTs that offer lifetime discounts may also not be a viable business model since the boosts in royalties may not be sufficient to cover the loss in profits from the discounts.
  • Returns on NFTs are lesser than the cost of capital. As an NFT collector myself, I would want my NFT to be able to generate a stream of benefits that would cover the cost of mint/purchase. Generally, collections that can provide a net positive return would attract investors’ interest. However, there are many that do not generate enough benefits for holders, making them unappealing. Therefore, it is important for us to be able to identify good projects that can generate net returns for us and avoid projects with red flags.
Conclusion

In essence, NFTs’ utility comes in one of 5 main categories. Depending on your own preferences, some utility might hold a greater weight than the other factors. It is important for us to be able to identify good projects as there are many projects that fail to sustain. These projects often do not understand the purpose of creating an NFT and did not take adequate measures to address the challenges.  Moving forward, I believe several key trends will drive NFT’s next leg of growth.

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