🔑🌊🤞 The “Promise Effect” - Why Functional Non-Fungible Tokens (NFTs) Must Work Harder

There are five categories of NFTs:

• Collectibles: Assets with little to no utility 

• Game Assets: Assets with high levels of utility within their “universe” 

• Virtual Land: User-owned social, e-commerce, and gaming platforms

• Crypto Art: Art that has been tokenized and put on a blockchain 

• Other: Domain names, property titles, insurance, etc. These are variable definitions because they contain multiple categories

  ---

This month’s sponsor is WhaleStreet 🔥🔥🔥

WhaleStreet are the DeFi engine that powers NFT economics. On a massive scale. They make huge currency swaps happen - or Whale Swaps as they're called - with very small slippage costs and without crashing the system. They also engineered the largest ever NFT bundle and fractionalized it into the historic B20 tokens. WhaleStreet is all about upside, so dip into their liquidity pools for rich rewards. For B20, join Discord.com/whale. And follow WhaleStreet at Twitter.com/whalestreetoffl

---

After a founder launches a collectible NFT project, they don't need to do much else. They can make a cool website, launch the project, and if it’s great and people love it, it will grow and become a true collectible (much easier said than done). This process is similar to launching crypto art NFTs. Art has no functionality; thus, users are not expecting an amazing experience to pair with the asset. They typically accept it for what it is and either buy it or move on.  

But if an NFT has functionality, like a game asset or plot of virtual land, then users expect more from that asset, and value accrual towards that NFT could be much slower than NFTs with no functionality. I call this the “promise effect.” 

In summary, the Promise Effect means that the more functionality an NFT has, the more the user expects from that asset, making the speed of the asset’s potential value accrual slow compared to assets with little to no functionality.

This is not a “good” or “bad” thing - it simply is the truth of what I have experienced play out in the markets. It is easier for people to nonchalantly bid on a piece of art compared to a game asset. The art bidders must simply like the art, but the game bidders must like and enjoy the game, which is an entirely more niche experience. 

For example, if I purchase an NFT for a newly launched game, I will play the game, and if it’s a great experience, I will consider myself satisfied with the purchase. But if I end up disliking the game, then the negative experience will turn me off to the game and asset - probably for good.

Let’s look at Axie Infinity, for example. For those who don't know, Axie Infinity is a Pokémon-like game where people can collect, breed, and battle creatures. When it first launched in 2018, Axie Infinity was an entirely different game than today. The gameplay was much simpler, and the game was not nearly as “deep.” In my opinion, this is why Axie Infinity was not charting high in the early days of the NFT markets. Only after years of the team iterating multiple times and grinding to create a great gaming experience did the market respond, and their NFT assets began to accrue incredible amounts of value. When users purchase assets from Axie Infinity, there is an implicit promise that the asset will accompany a top-notch gaming experience. Although it took Axie Infinity some time to achieve this, they eventually succeeded: the Promise Effect in full force.

Let’s look at the project ArtBlocks. ArtBlocks is a platform where people launch Ethereum-based generative art projects. As art, the functionality of the asset is extremely low, thus the Promise Effect is very weak. People will buy art on ArtBlocks if they like the art and if not, move on. There is no associated experience or overhead to launch an art project: buyers are not expecting a game, and the art creator does not have to hire employees to build an exciting experience. In summary, the asset creators promise nothing to users when they sell their art. As mentioned, this lack of an implied promise means that value tends to accrue to these non-functional assets much faster than functional assets. 

My overall thesis can be distilled to this: Because of the Promise Effect, NFT projects with high levels of functionality (games and virtual worlds) will accrue value at a slower pace when compared to NFT projects with little to no functionality (art and collectibles). I would like to add one caveat. In the long run, I believe that highly functional NFTs will accrue greater overall value than projects with zero or minimal utility. If an NFT game ends up becoming the next World of Warcraft, for example, the NFTs in that ecosystem will accrue billions in value. But even if an NFT collectible becomes ultra-successful (CryptoPunks is a great example), achieving multiple billions in total asset value is unlikely. This could be because games and virtual worlds are designed to be more scalable than art and collectibles, but we will have to wait and see how this plays out.

---

If you liked this content, please subscribe to my newsletter Zima Red.

and give me a follow on Twitter. Stay tuned for more articles on NFTs and all things virtual. 😎