HOW NFT CREATES VALUE (5)

To maintain ongoing community engagement, NFT project teams must generate confidence that they can continue executing.

In the world of crypto, where many people engage partially or completely anonymously, crises of confidence in a project can cascade quickly, which means it’s particularly important that the team communicate frequently and transparently about how they intend to evolve the project. (Many NFT teams have frequent “community calls” for this purpose.)

Here NFT projects can also lean on established brands or institutions, as well as explicit promises of real-world utility. For example, a sports team or popular music artist selling tickets through NFTs can use their existing reputation and events infrastructure to convince people that the NFT tickets really do have value. That said, an existing company releasing an NFT without any specific purpose or value can look gimmicky and thus fail to create engagement.

NFT projects need accessible “on-ramps” for new users. 

NFTs also face a number of challenges that are general across crypto entrepreneurship. Most crypto technology at the moment is not user friendly to engage with, requiring interfacing with a number of abstruse cryptocurrency exchanges and wallet providers.

NBA Top Shot has benefited tremendously from submerging most of the underlying crypto structure in its NFT market, and enabling users to purchase moments in fiat with credit cards, rather than requiring people to transact in cryptocurrency. Other projects have recruited onboarding directors to help first-time NFT consumers navigate the process of purchasing.

And an NFT project needs to be able to weather crypto market swings.

Additionally, crypto markets are volatile and the surrounding regulatory frameworks are still being sorted out. These market swings can dramatically change the demand for NFTs — which again underscores the importance of building community and other sources of direct value for NFT ownership.

Outlook

As with any novel asset class, the future of NFTs is uncertain. In the long run, the market will need to contend with the transaction and environmental costs currently associated with using crypto technology. We will also need to establish more explicit legal frameworks around NFT ownership, and clarify how NFTs relate to existing forms of ownership rights — especially around intellectual property. At the same time, it’s likely that the most valuable applications of NFTs haven’t even been envisioned yet.

Nevertheless, the community-based NFT projects that have taken off so far give a hint of what may be to come.

NFTs enable new markets by allowing people to create and build upon new forms of ownership. These projects succeed by leveraging a core dynamic of crypto: A token’s worth comes from users’ shared agreement — and this means that the community one builds around NFTs quite literally creates those NFTs’ underlying value. And the more these communities increase engagement and become part of people’s personal identities, the more that value is reinforced.

Newer applications will take greater advantage of online-offline connections, and introduce increasingly complex token designs. But even today, it’s less surprising than you might think that people are making money selling pictures on the internet.

Disclosure: Both Kaczynski and Kominers own NFTs, as well as other crypto assets. Additionally, Kominers provides market design advice to a number of marketplace businesses and crypto projects, including Novi Financial, Inc., the Diem Association, koodos, and Quora.