What is an NFT?
NFTs are a new concept in the digital space. Non-fungible means something is a cohesive and unique thing—it cannot be broken up or split up into pieces. Tokens are the parts built on the blockchain to ensure security, proof of origin, and identification or true ownership in the digital realm.
Even before the digital days, there were already lots of non-fungible things out there, such as products with unique serial numbers, like TVs. While there are many copies of the TV type, each one has its own serial number, and that makes it unique. The one you bought is non-fungible since you bought the TV as a whole and not its individual components.
We built entire economies in the digital world on making, sharing, and transmitting copies of digital content. But who really owns all these digital products? Take a song, for example: Did you own the song you downloaded from Napster in 1999? No, you only had a copy of the song. NFTs don’t prevent the copying of digital assets, but they do solve the question of who truly owns them. When an NFT is purchased or transferred, the record of ownership transfer is recorded in the blockchain, which cannot be forged.
As NFTs are minted through smart contracts, understanding how they come into play is critical. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller written directly into lines of code. That agreement exists across a decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible. For example, when you sell an NFT, the smart contract can automatically credit a portion of the sale to the original author’s digital wallet as royalty.
Understanding the utilization of NFTs
Once you grasp the non-fungible and ownership concepts, the next step is understanding how to use NFTs. Why have them? What value can they bring? What can they do?
There is a lot of artwork bought and sold as NFTs. Through those sales, the buyer owns the digital art—just like any physical piece of art—and it has value. In many ways, artwork is the perfect vehicle to help people accept the NFT concept because we can all see and understand art; we never see the blockchain, smart contracts, or anything behind the scenes.
The true value of NFTs and digital ownership is their power to impact all business areas.
A brand is most successful when it leads to value for customers. So, where is the value in NFTs to provide far-reaching impact?
NFTs have seven key aspects of value:
- Verified ownership. There is digital proof, backed by the blockchain, of who owns the NFT.
- Scarcity. Traditional digital assets are replicated easily and quickly, meaning there is an infinite supply. NFTs have limited quantities, which means they’re rare and scarcity can be introduced.
- Utility. Smart contracts are the base of this technology—perhaps the most important component. Looking past the “utility” aspect of an art piece, NFTs have many use cases, such as membership, loyalty, and the ability to create marketplaces.
- Decentralized Autonomous Organizations (DAOs). A DAO is a member-owned community without centralized leadership. There is a monetary value to an NFT, part of which can be royalties from NFT trading. The DAO is a way for everyone in the project to agree, for example, that the royalty will be equally divided by everyone who owns an NFT in the project. The more valuable the project, the more money it can generate.
- Ownership history. As with physical art, the more people trade NFTs, the more valuable they are. This action creates momentum and a flywheel of value.
- Future value. There are speculative value opportunities for NFTs, just like with stocks. Future value is a major driver of their marketplace development.
- Liquidity premium. As we’ve seen, NFTs can be bought, sold, and traded with cryptocurrencies and other non-traditional payment forms. However, when it's time to cash in an NFT for standard currency, there’s another value to consider: conversions create a transaction premium. Think credit card transactions—we swap digital representations of dollars around all day long with our credit cards and vendors pay (and pass that cost onto consumers) about 1% to 3% of the transaction to the issuing corporation. With the concepts of smart wallets and low-gas fees for Layer 2 blockchain (as opposed to the hundreds of dollars in fees from Layer 1) we can see transactions becoming incredibly cheap—putting a real threat out there to those credit card companies today. This again will drive value to the exchange of NFTs.
How NFTs can benefit brands
At every step along the customer journey, there’s an opportunity to evaluate the utility of NFTs and bring value to the ecosystem. Consumer expectations are continuing to rise, and particularly Gen Z is looking for innovation and being able to engage with a community when it comes to loyalty to specific brands. A focus on increasing participation with your brand and moving customers along the participation curve can generate higher levels of advocacy and even a shared identity with your brand.
AMC Theatres successfully experimented with engaging its community through the use of NFTs in 2021, when the company issued them for the Spider-Man: No Way Home movie release—giving the first online ticket buyers an exclusive NFT. The result? AMC recorded its second-largest single-day ticket sales ever. Some believe NFTs are a novelty that will wear off, but real value happened for AMC—more brand loyalty and affinity. Even leaving any secondary market for their NFTs aside, their utility drove incredible value.
Other brands who want to see similar benefits are exploring how they can use NFTs to connect with consumers. Whether it’s building loyalty by augmenting the value exchange beyond earn-and-burn points, or transforming their CX programs, NFTs are impacting the future for both brands and consumers.
NFTs may be new but there are many business partners who already know how to implement NFTs beyond the art-based market that’s currently dominating the space. Your brand can get a jumpstart on the NFT learning curve, too. Take advantage of the momentum to implement strategies and cultivate value from NFT utilities before they become mainstream by partnering with an organization with a deep bench of experience. Now is the time to prepare for launch.