Since the non-fungible token (NFT) market numbers hit the news back in 2021, many web3 enthusiasts and tech experts have dedicated posts and articles to explain what NTFs are and how they work. So significant was the hype that NFT was named the Word of the Year by CollinsDictionary and soon became one of the most discussed topics worldwide. The massive market growth, with individuals making millions of dollars on trades, and huge valuations with a 69 million dollar art auction made the tech community, creators and investors wonder about new emerging use cases that will reflect these market values. In this article, I will focus on expanding the concept of utility NFTs, a feature that experts have suggested to be the key to the NFT’s development for retaining their value and increasing their adoption in the long term. To this end, I present an NFT utility classification that includes most of the current use case trends in the NFT space, briefly describing each.
We can start by discussing what utility is. When we refer to the utility definition, we find that utility refers to the state of something being useful, profitable, or beneficial. In some cases, it may refer to the economic value; in other cases, it could be primarily functional.
In the case of the NFTs, it can help to make the following two questions:- What benefit does it provide?- What are you getting when you purchase the NFT?
In general, the utility refers to what type of values, benefits, or rewards an NFT offers to its buyers and holders. For instance, the most straightforward utility that, by definition, an NFT can provide is the digital ownership of a digital asset. However, the utility of NFTs can be quickly extended in both the digital and physical realm by linking the NFTs to use-cases like memberships, discounts, ticketing, intellectual property, and copyrighting or connecting them to DeFi projects as an asset.
Utility NFTs classification
There are undoubtedly different attempts to classify the utility NFTs. However, there is yet no consensus about a final classification that the community has accepted. Probably due to the flexibility of the technology and the numerous novel use-cases that constantly emerge in the NFT space. Looking at the current applications of the NFTs in different industries, utility NFTs can be broken down into the following use case categories and sub-categories.
A description of each of the categories and sub-categories is given below.
1. Access NFTs
Access NFTs grant their owners entry and access to communities, events, or experiences in both the digital and physical world.
Community NFTs: These NFTs provide exclusive access to member-only channels like Discord channels or different types of content stored on other platforms, such as blogs, NFT-gated websites, or the metaverse, where only NFT holders of the community are allowed. It is common to see creators organizing meetups and parties for their community members; all these drive up the project’s perceived value and make it worth owning.
Events NFTs: These NFTs are among the most popular use cases for Access NFTs, with several companies implementing different protocols to use them. They grant access to live experiences, both online and offline. One of the most common types is the NFT-based tickets, where the NFT holds your access credentials to a specific event.
Membership NFTs: These NFTs allow holders to enter exclusive programs that use NFTs as access keys to unlock various services and rewards. They can rank from merch discounts, free entry to events, or new product drops. Projects and brands may sometimes permit their NFT holders to participate in voting decisions.
2. Engagement NFTs
Engagement NFTs are used to engage with brands and other users within the community. Collectibles are usually included in this category too.
The Bored Apes Yacht Club (BAYC) became a famous example of engagement NFTS, being used on several social media platforms and considered by many as a digital symbol of social status. The company behind the BAYC collection, Yuga Labs, also announced its intention to bring their Bored Apes characters into the metaverse in the form of NFTs.
Social NFTs: These NFTs can be used socially in the form of badges, emblems, GIFs, and emojis that can be used in social contexts and social platforms and are available to be used within that community or across 3D worlds.
Identity NFTs: These NFTs enable individuals to demonstrate and have an identity across platforms that they can use in different ecosystems in the form of avatars or interactable characters.
POAP NFTs: The Proof of Attendance Protocol (POAP) NFTs are employed by communities and brands to offer proof of attendance to an event or experience that took place virtually or in the real world. Institutions also use them to issue digital certificates after the successful completion of a program.
PFP NFTs: The Profile Picture (PFP) NFTs are typically collections designed to be used as profile pictures in social media circles. Their popularity helped them to be adopted not only by the NFT communities but also by celebrities and companies around the world.
3. Gamified NFTs
Gamified NFTs are a specific collection of elements that are part of the activities in a gaming universe and can be purchased and sold on external peer-to-peer marketplaces.
Digital clothing is among the latest fashion trends, and several fashion brands and designers are selling various types of NFT wearables to be used in digital worlds or metaverses and interact with them in the real world through augmented reality. The image on the left is courtesy of Auroboros. The image on the left is courtesy of Wikipedia.
Wearable NFTs: These NFTs are usually pieces of virtual garments or digital accessories like dresses, shirts, jeans, sunglasses, or bags that you can use to dress up your avatar in a virtual world. They also refer to the Augmented Reality (AR) filters, which are clothes or accessories visible only in augmented reality, and can be worn in the “real world.”
In-game NFTs: These NFTs, also termed Play-To-Earn NFTs, provide gamers with special characters, abilities, weapons, and various other in-game items that can be later used as assets to generate income by trading them to other players or collectors or by holding them as a form of passive income.
Betting NFTs: These NFTs are used to power betting exchanges by providing their owners additional bonuses and benefits on specific betting and gambling sites.
Fantasy Sports NFTs: These NFTs are fantasy sports trading cards that can be traded and used in different Online gaming platforms and gamified scenarios.
4. Asset NFTs
Asset NFTs encompasses the ownership of a unique value-based digital or physical asset that can be sold, rented, licensed, or transferred to other users.
A new developing trend lies in the intersection of NFTs and DeFi. This combination has opened up various possibilities for NFT holders by making their NFTs a much more liquid asset — in a safe, secure, and anonymous way. NFTfi does an excellent example of this type of utility NFT. Image rights belong to NFTfi.
DeFi NFTs: This novel category of NFTs is connected with DeFi schemes and ecosystems that allow owners to stake, yield, and collateralize NFTs to access the liquidity they need or earn attractive profits efficiently via different DeFi mechanisms.
Fractionalized NFTs: These NFTs have the ability to divide the ownership of an NFT into smaller fractions, offering owners the possibility to fragment their NFTs and sell fractionalized shares. They also allow you to collectively buy an NFT that otherwise would be difficult to buy due to its high price.
Physical/Digital NFTs: These NFTs are associated with the ownership of physical and/or digital assets. They act as a guarantee of ownership over real-life, physical or digital off-chain assets and items that the buyer can redeem.
Copyright NFTs: These NFTs confer copyright ownership and involve a transfer of trademark rights or licensing to the item with which the NFT is associated. This gives NFT holders commercial usage rights over their NFTs and in some cases, includes sub-licensing rights. All the given rights terminate automatically when the NFT is sold.
5. Dynamic NFTs
Dynamic NFTS commonly involve some form of metadata change encoded within the NFT smart contract based on external conditions. The smart contract provides instructions to the underlying NFT regarding when and how its metadata should change. The changes can be also triggered through specific off-chain user interactions. This functionality can be useful for character progression to reflect the character’s growth, but also in the tokenization of real-world assets, where changes in the asset might be reflected with changes in the metadata.
The metadata of Dynamic NFT representing a real state property can change to reflect maintenance history, past sales, and detail. Image rights belong to Chainlink.
Interactive NFts: These NFTs have the capability to interact with the holder or with a different set of actions within an environment producing changes to its attributes and features.
The given utility NFT classification, although attempts to be comprehensive, should by no means be taken as complete nor definitive. The utility NFTs ecosystem is constantly growing, and new utility use cases will keep popping up in many industries. Innovators, experts, and organizations have an excellent opportunity to define which roads they take to provide NFTs with more meaningful utilities. However, the entire ecosystem, including the holders, will be the ones to judge and decide which NFTs they choose to purchase and hold in the long term. It is likely that prospective utility NFTs trends include every time more innovative utilities as well as a combination of several types of them.
About the author
Miguel Cienfuegos is currently participating in the DeFi Talents program (Cohort 2 — Spring 2022) organized by the Frankfurt School Blockchain Center. He is co-founder & CTO at a stealth startup in the web3 and NFT ecosystem. Besides, he helps companies to build their digital strategies to transition into the web3. You can contact him via LinkedIn.