Coinspeaker
What Are Utility NFTs and How Do They Work?
Of the many blockchain-based products that have hit the market over the years, non-fungible tokens (NFTs) are some of the most controversial in the world. Some critics claim that NFTs don’t ‘do’ anything useful, have no value, and thus, are not worth buying. Meanwhile, NFTs fans usually counter these claims by pointing to utility NFTs as evidence of their use. Indeed, utility NFTs have been some of the most profitable types of NFTs and have gained mainstream adoption. In this guide, we will explain what utility NFTs are and how they work.
Utility NFTs Defined
A utility NFT is an NFT that is designed to give the holder access to specific utilities. This utility can be real-life or virtual perks, the power to make decisions in certain ecosystems, or can be used to redeem an experience. A lot of the most famous NFTs are collectibles, meaning that their value is subjective.
Take NFT art, which could be sold for millions at auction but could also be seen as worthless by some. But utility NFTs are tied to specific utilities so whoever buys them knows what they are worth. Naturally, utility NFTs have been used to deliver value by companies and specific projects.
How Utility NFTs Work
To understand how utility NFTs work, you need to understand how NFTs work in general. To create an NFT, its digital signature is recorded on a specific blockchain and this keeps a record of the asset’s creation and its ownership. By doing this, the creators know which NFT was given to whom.
After the NFT has been created, the developers can assign benefits to specific batches of assets and distribute these benefits based on the information on the blockchain. If a certain collection of NFTs gives the user access to an event, these benefits are given to whoever presents them with proof of ownership.
Ultimately, once an NFT has been created, its developers can assign whatever benefits they want to them and manually or automatically distribute these benefits. And as these NFTs change hands, these are also recorded permanently on their underlying blockchain.
All in all, utility NFTs work similar to any other type of NFT except that they have a specific utility associated with them.
Types of Utility NFTs
As more utility NFTs are introduced into the market, a few distinct types can distinguished here, depending on their use:
- Event access utility NFTs
A popular way that utility NFTs are used is by offering access to specific events. By owning one of these NFTs, customers can gain access to all sorts of events. The appeal of these types of NFTs comes in two ways. First, there is the ease of access. Many of these NFTs only need the user to scan a barcode or receive some sort of wristband to physically access the event (or digitally, in the case of virtual events). This allows the event organizers to keep track of attendees and streamlines the process of admission. Another angle is the exclusivity.
Being able to enter exclusive events has been appealing to the public for centuries now and utility NFTs are yet another way that this can be done. The world has seen exclusive restaurants with months-long waitlists offer tables through the purchase of NFTs, as well as the Coachella music festival. These high-in-demand events tend to have a tech-forward target audience that is happy to buy an NFT to gain access to them. And in the case of Coachella, multi-year and even lifetime passes were sold as NFTs and this demonstrates the potential longevity of these utility NFTs.
Examples of event accessibility NFTs include the Coachella Music Festival and the Scope Art Festival in Miami.
- Content utility NFTs
Another way utility NFTs have been used is by offering content to users. Think of some of the most popular NFTs- many of them were tied to entertainment projects like art, videos, music, and so on. As more creatives began offering NFT collections, attaching them to exclusive content became a major way to sell these digital assets.
A prime example is a musician 3LAU who sold his album exclusively as an NFT and made millions from it. Music fans are always excited to get to hear tracks no one else has and NFTs have been a way to do this. These types of utility NFTs are not limited to albums alone; many creators have sold movies, pictures, and so on as NFTs. And for consumers, there is security in knowing what they will be getting when buying an NFT.
Notably, the albums and pictures being sold as NFTs are usually not being released to the public in any other format. So when consumers buy one of these NFTs, they are getting something that no one else can. This is one of the reasons why NFTs have found adoption within the world of entertainment and this shows no signs of stopping soon.
An example of such an NFT is Joy Division releasing never-before-heard audio and animated versions of previous album artwork as NFTs.
- Royalties utility NFTs
Believe it or not, some NFTs are used to sell royalties to a piece of intellectual property and allow holders to profit from them. An example is a song by Rihanna that was tokenized at the beginning of 2023 and had the royalties sold as NFTs. This means that anyone who bought the NFTs would get a portion of the song’s profits.
Musicians and other creatives have been exploring this use of NFTs to not only connect with fans but also offer them an investment opportunity by owning a piece of intellectual property. Fans, in response, seem to have taken very well to them.
Some examples we’ve seen are a song by Rihanna and one by Agoria that had royalties minted as NFTs.
- Governance utility tokens
Many digital projects issue NFTs to users that come with the rights to governance within the project. For example, some projects release NFTs that entitle their holders to vote on future decisions to be made in the ecosystem. This incentivizes users to invest both time and money into the community and is particularly popular with decentralized autonomous organizations (DAOs).
K-pop girl group TripleS, for example, launched a Polygon-based voting system to allow fans to pick the songs listed on future albums.
- Gaming utility NFTs
NFTs have been used within many gaming ecosystems for trading in-game characters and items, leveling up, and so on. This type of utility NFT appeals to the gamer crowd who knows what they get for each NFT and how they can enhance their gaming experience.
Ecosystems that use such NFTs include Axie Infinity, Niftyville, and Loot.
- Physical Goods Utility NFTs
These NFTs can be used to redeem physical items by the buyer and some of these have included Prada’s NFTs which are tied to physical collections.
- Membership NFTs
These NFTs grant membership to clubs and establishments for their holders. The Flyfish Club, for example, sells membership via NFTs and this grants users access to the restaurant.
- Discount Utility NFTs
These NFTs, such as the ones issued by Planet Watch, give discounts to their holders for purchasing certain goods and services.
Bottom Line
One of the criticisms that NFTs have consistently gotten is that they don’t have any value. However, utility NFTs help to counter this narrative by showing many different applications of these digital assets. So far, utility NFTs have been used to redeem physical goods, access events, claim royalties, and even vote within specific ecosystems.
While there has been and will continue to be debate about the value of NFTs attached to art pieces and other assets of subjective value, it is hard to deny that utility NFTs are beneficial to consumers. And even as NFTs’ popularity comes and goes, utility NFTs seem here to stay.
