Articles

While the legacy of Non-Fungible Tokens (NFTs) is still being debated, what is clear is the growing revenue stream opportunities they present to startups and established companies, by providing a solid business model aligned with their current strategy.

When Twitter founder, Jack Dorsey, auctioned his first tweet as an NFT for SAR 10.88 million ($2.9MM), other NFTs quickly emerged across art, fashion, gaming, music, and other sectors, with the same eagerness to make similar returns. Fast forward 12 months and the same tweet has failed to attract similar level bids and instead, dropped in value by more than 80 percent. Why? The tweet turned NFT lacks utility, and its value is in the eye of the beholder.

Despite such disappointing outcomes, participation in the NFT market has grown with 2.7 million unique active wallets (registered users) and SAR 86.25 billion ($23B) in NFT trades in 2021, according to the DappRadar 2021 Industry Report. In fact, at the end of April, Coinbase Global, a US crypto exchange, launched the beta version of its own NFT marketplace. The market also saw investors such as VCs allocating resources to this fast-growing market. After investing only SAR 300 million ($80MM) in 2020, VCs have invested a record SAR 15 billion ($4B) in blockchain games in 2021, according to DappRadar 2021 Industry Report.

Many critics agree that the value of NFTs are only based on the ability to sell to a greater fool until there are no fools left, a humankind shortcoming known as the greater fool theory. However, for startups to successfully integrate NFTs into their business, it is vital that they carefully consider whether they want those NFTs as a new business model, a value addition to products and services, or as a feature to fuel expansion into a new market.

A lesson from history

When oil was first discovered, it bore no utility other than making asphalt. In fact, when people drilled wells searching for water and would find oil they would be disappointed. However, all this changed in the late 1850's when new applications were discovered, with the real game changer being the discovery of the internal combustion engine, that oil became the most valuable commodity to power industry after coal. NFTs are analogous to oil before the invention of the internal combustion engine.

As more sectors begin to explore the application and benefits of NFTs, there is a marked transition away from pure digital art collecting into mainstream product development, showcasing their limited but meaningful real-world uses.

Some of the prominent use cases that have been explored thus far are as follows:

• Digital art: NFT platforms provide an avenue for artists to showcase their work, in some cases directly to the public with new or no intermediaries and lower associated costs - connecting the artist directly to the public.
• In-game assets: With a market cap above SAR 375 billion ($100B) for the gaming industry, NFTs bring about an additional source of revenue for gamers who can buy/sell the collectibles, obtain in-game rewards, and other assets
• Content ownership: Content in the art and music industry auctioned out by artists via NFTs to raise funds for new albums, sell out old records, whereby the NFTs depict a fractional right of ownership of the content and any proceeds earned from the resale of underlying assets will be distributed proportionally to the NFT token holders.
• Tickets: Tickets to events in the form of NFT serve as memorabilia to be part of a collection.
• Certificates: NFTs are utilized for transparency, provenance tracking and to facilitate the authenticity and verification of records.
• Metaverse: NFTs are the building block for the metaverse, a future state of the internet, designed to replicate the physical world in a digital format.

Despite the evident NFT market growth, we are still very early in the development and real adoption, hence the highly subjective valuation of NFTs. As a result of the early market development, early adopters may not be able to distinguish the short-term hype from a sustainable, utility conferring and mature market. Despite the debate on whether the current hyper-growth of NFTs is sustainable in the short-term or not, real applications are starting to emerge. As NFTs can be applied to several types of digital assets, the trillion-dollar question of the moment is how will NFTs transform the nature of assets, their ownership and management, as this is not limited to digital assets but traditional physical assets as well.

As the infrastructure and market continue to mature, NFTs will record further growth through 2022 and beyond. The correct implementation allows for NFTs to be utilized as a solution to problems around asset ownership, attracting increasing attention from VCs. Entering the NFT space is not something that startups should take lightly. Careful consideration needs to be made to navigate the evolving nature of regulatory frameworks since NFTs involve cryptocurrencies such as Ethereum, requiring the hiring of the brightest talent and developing a strong community around your business.