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Are NFTs a Scam? Looking Beyond JPEGs to the Latent Potential of NFTs

Are NFTs a scam? In January, OpenSea, one of the largest NFT marketplaces, tweeted that 80% of NFTs minted through its NFT creation tool were plagiarized, fake, or spam. The truth is that NFTs are still in their infancy, and there are a lot of scams present in the space today. Despite that, there’s a long list of potential use cases for NFTs that will cement their place as a legitimate asset class in the long run.

Deep dive
June 9, 2022
Content Marketing Manager
The Potential of NFTs

Beyond being collector items, NFTs have potential practical use cases that we’ve only just started to explore. Let’s dive into the world of NFTs and examine how this nascent technology could be used in different industries. 

The Potential of NFTs in Art

NFTs are already popular in the art industry, and the industry is already being transformed by this technology. NFTs ensure scarcity and verify the authenticity of digital art, helping boost the popularity of digital art as an asset class. In 2021, the total volume of art NFTs sold was over $2.79 billion across 774,307 sales at an average price of $3,282.

Through NFTs, artists have new ways to monetize their work and ensure residual income by getting a percentage of the sale every time the work is resold. NFTs also help art buyers access additional utility, such as using the art as their profile picture and granting immutable proof of ownership. Most importantly for collectors, NFTs enable increased liquidity from a global market because of the permissionless and democratized nature of NFT marketplaces.

NFT marketplaces serve as new sales pipelines for art. The digital nature of these marketplaces enables disintermediation to fast-track sales between artists and collectors without the need for gatekeepers. Buyers and sellers can find each other in a public forum, and these marketplaces are gaining ground as a result. In 2021, dealers and auction houses recorded aggregate sales of an estimated $65.1 billion for art and antiques. In the same year, NFTs accounted for additional sales of $2.6 billion for art-related NFTs and $8.6 billion for collectibles.

How NFTs Can Streamline Identity

NFTs have important use cases for digital identity in a Web3 world. In Web3, identities are linked to wallets; for instance, to “log in” on a DeFi app, all you need to do is connect your wallet. However, as simple as that sounds for crypto natives, it makes it harder to onboard new people into the crypto economy — managing the long string of alphanumeric wallet addresses is poor UX.

Services such as Ethereum Name Service (.ETH) and Blockchain Name Service (.BTC) provide a human-friendly way to manage identity in Web3. These services offer NFT domain names associated with a wallet that can be used to log into Web3 applications and let users imbue their Web3 presence with personality.

The Potential of NFTs in Finance

Starting with DeFi, NFTs could be used to manage participation in Initial DEX Offerings (IDOs), which are public token offerings that take place on decentralized exchanges (DEXs). For example, Mech Master used an IDO to sell tokens on a first-come, first-served basis. However, early supporters could win, earn or buy different classes of NFTs that would guarantee token allocations. The project used NFTs as a way to reserve access to those holders, and you can imagine a whole host of finance use cases leveraging NFT-gated features.

NFTs are also being used by Uniswap to manage liquidity provider (LP) positions and facilitate greater liquidity in traditionally illiquid assets such as real estate. For example, Propy demonstrated how NFTs could potentially work in real estate with the sale of a Kyiv, Ukraine, apartment.

We are also seeing emerging markets where valuable NFTs can be used as collateral. NFTfi, for instance, already enables people to unlock value from their NFTs by using its platform to put up NFTs as collateral to secure loans. When the loan is repaid, you get back the NFT; and if you default, the lender receives the NFT instead.

The Success of NFTs in Gaming

Axie Infinity was the first popular gaming use case for NFTs. In Axie Infinity, players breed Axies that are represented as NFTs. These axies are used in gameplay, and the NFTs representing them can be traded on the game’s marketplace for different cryptocurrencies. Sorare is another popular NFT gaming platforms. On Sorare, users play fantasy football in which the footballers are represented as NFTs, and players can trade those NFTs with each other.

As is clear in both Axie Infinity and Sorare, the power and appeal of NFTs in gaming is largely in the commodification of in-game assets. Gamers spend considerable time, effort, and often money to complete levels and acquire trophies, new items, and more. In fact, there is a $50 billion gray market for the primary and secondary sales of these assets, despite the fact that most gaming assets are locked inside the game.

NFTs commodify these assets by enabling peer-to-peer public marketplaces where users can trade in-game items with each other and trust the authenticity of what is available on the marketplace. This could greatly increase liquidity and help tie real world value to those assets, allowing gamers to cash out for different cryptocurrencies.

As a result, NFTs increase player interest and attract more gamers willing to spend more money. Unsurprisingly, 63% of gamers say they’ll spend more on virtual goods if they have real-world value, and institutional gaming companies like Ubisoft are already exploring how to introduce NFTs to their games.

The Appeal of NFTs for Luxury Brands 

The potential of NFTs for luxury brands starts with the authentication of luxury goods. Fake goods are the bane of luxury brands: they rob the brand of revenue and dilute the exclusivity of the brand. 

Through NFTs, consumers can authenticate that they are buying genuine luxury brands. Forty-one percent of luxury consumers say they are excited about the possibility of digital traceability of luxury products, and 21% would like to see more NFT engagement from their favorite brands.

The potential of NFTs in luxury brands also extends into digital fashion across online personas, avatars, and potentially in the metaverse. Luxury fashion brands are already exploring opportunities to collaborate with developers to dress up avatars in high fashion.

Last year, famed watchmaker Jacob & Co. turned its SF24 Tourbillon timepiece into the first watch NFT that sold for $100,000 at auction. Gucci is also expanding its successful collaboration with Roblox in the virtual wearables market into the NFT market with NFT sneakers. Vogue also reports that several other luxury fashion houses are close to releasing NFTs. It is not a matter of if more luxury brands release NFTs, but when.

The Potential of NFTs in Music

One potential use of NFTs in music is that NFTs help fans support artists directly through an entirely new medium. Today, the music industry is skewed in favor of record labels at the expense of the artist. When Linkin Park’s Mike Shinoda raised about $10,000 from an NFT containing one of his songs, he tweeted that it was impossible to earn a similar amount from streaming platforms when you account for cuts from the label, marketing, and Digital Service Providers (DSPs), and other stakeholders. NFTs allow artists to sell unique copies of their songs directly to fans, giving their fans a new way to support their favorite artists and helping those artists earn more in the process.

Innovators are also using NFTs to change the structure of music royalties. For example, Royal enables musicians to sell a percentage of a song’s royalty as an NFT. The owners of those NFTs, in turn, earn pro-rata part of the streaming royalties alongside the artist. The holders of the NFTs can also sell their NFTs, in which case the IP rights are transferred to the new buyer.

Beyond song ownership, NFTs are entering the music industry through events and exclusive perks from artists. The music industry is experimenting with leveraging NFTs for events, something Coachella explored with its NFT collection bundled with lifetime access festival passes. Similarly, the British-based band The Amazons also released a “Fan Pass” project that gave NFT-holders access to exclusive content from the group, including unheard demos and more. In a world where artists struggle to make ends meet (Spotify pays artists $1 for every 250 streams), NFTs offer a possible solution for artists to find new ways to monetize their art and make ends meet while creating new experiences for fans in the process.

Are NFTs a Scam? We Don’t Think So

NFTs have potential utility beyond being speculative assets or status symbols for the crypto-rich. While today NFTs primarily have explored the concept of digital art, we will see NFTs transform a number of industries in the future.

Check out our article on Bitcoin NFTs to find out how you can build NFTs secured by Bitcoin, and if you're interested to learn from NFT entrepreneurs on Stacks, learn how Gamma is empowering NFT creators with its Create Portal and how Byzantion built an order book for an NFT marketplace.

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