🕵️♂️📊💰Exploring Non-Fungible Token Business Models
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🕵️♂️📊💰Exploring Non-Fungible Token Business Models
The most common way for businesses to make money in the non-fungible token (NFT) ecosystem is by selling NFTs. This business model is an obvious choice because there seems to be no shortage of demand for virtual goods - and luckily it works very well, but I want to explore more inventive methods that companies in the NFT industry can use to create revenue.
Directly Selling NFTs
First, let’s cover selling NFTs directly to users, which as I mentioned is the most common way startups in the NFT space can earn money. Even massive video game publishers make most of their income from selling digital goods to users. Fortnite, the free to play game created by Epic Games, brought in a whopping $4.2 billion in revenue in 2019, and a large portion of their income derives from selling fully digital items called “skins.” Although selling NFTs directly to users works for now and will for the foreseeable future, blockchain technology opens up even more economic opportunities. Let’s examine some other methods gaming companies can use to earn income.
Fees From Secondary Sales
Game developers can earn income by charging secondary fees any time their developed items are traded. For example, developers on OpenSea are able to set secondary sale percentages ranging from 0-99%, but there is a fine line. If secondary fees are too high it will incentivize users to bypass them and privately sell to each other.
Transaction Fees From In-World Economies
Generating revenue using transaction fees from in-world economies is also a secondary fee model in essence, but it focuses on user-generated NFTs. For example, in the virtual world of Cryptovoxels users can create their own accessories called “wearables.” This economy and market are totally native to the game, so Cryptovoxels developers could charge a small transaction fee each time a user buys and sells these digital items in the world.
Today within the NFT universe, transaction fees from in-world economies make up just a small percentage of the overall economy, so it would be difficult for companies to earn meaningful revenue from them. However, once the NFT world grows and has millions of users these types of transaction fees could have a major impact on revenues.
DeFi Models
DeFi is a hot topic lately. DeFi stands for “Decentralized Finance,” and I am using it here as a catch-all term for a number of business models that utilize crypto tokens or DeFi protocols.
Governance Tokens: Game developers can make income from selling governance tokens to community members. I find the idea of launching a governance token for a game or virtual world extremely exciting. How many times have you played a game and thought to yourself, “I really wish they would create X feature.” Well, with governance tokens that dream can become a reality. Users who hold these tokens will be able to vote on new features and even propose new features to build. Today, voting power is proportional to the number of governance tokens held but perhaps we will see interesting governance models come out like quadratic voting.
The major downside to a governance token business model is that it's not very sustainable. Game developers would likely create a fixed number of governance tokens, so eventually, the revenue generated from selling the tokens would be zero. Likely the best way to employ this model is for developers to sell governance tokens in over a longer period of time while holding a significant portion some for themselves: thus the team is incentivized to continue to execute their vision because doing so would increase their own tokens’ value.
Revenue-share Tokens: Game developers can also launch tokens that have a revenue-share component. For example, a virtual world platform could release a revenue-share token that receives 50% of all in-world transaction fees, and the other 50% goes to the game developers. This incentivizes both parties to increase in-world economic activity. Suddenly all users would be evangelists for the game, encouraging other users to join and create goods and services. Because this token model is clearly a security, there are regulatory concerns to consider. Nevertheless, I hope to see this type of token model play out soon.
Subscription: Lastly, there is a DeFi subscription model where users input cryptoassets into a DeFi protocol or staking pool and give the produced yield to the game developers. For example, users could put 100 DAI into the money market protocol Compound, and the yield (currently around 3% APR) could go to the game developers.
Another business model that is a bit more involved is for game developers to set up their own staking service that users must employ to play the game. I could imagine game developers requiring users to stake XTZ, the native token to the Tezos protocol, or ETH when ETH 2.0 launches. Again, all yield would go directly to the game developers as compensation for playing the game. When the users are finished playing the game they could unlock their XTZ, ETH, etc. - meaning they didn’t actually have to spend anything! This type of model does not work great with 100 users, but as users increase so does the revenue.
Native Token: Of course, an NFT project could just launch their own token as a business model. They could require all assets within the game/virtual worlds to be bought and sold with their token, giving it a use case. The team could also force the token to be staked in some manner. With DeFi showing users and developers that native tokens can work, this type of native token model might become much more popular in the NFT ecosystem.
Getting More Esoteric
Let’s explore a few more unexpected ways teams could create income.
Fractionalization: The NFT fractionalization platform NIFTEX allows users to put up a high value NFT and fractionalize it into 10,000 ERC20 tokens. These fractions will then trade on the NIFTEX marketplace. In theory, a team could create high-value NFTs, fractionalize them, and then launch them to trade on NIFTEX with the hopes that the asset fractions increase in value. This method would likely only work with NFT projects that are already established and have large, vibrant communities. If a new project were to fractionalize an NFT and put it on the market, then there likely would be very few participants. For this method to work its best to build something great first.
Loans: Today with NFT collateralized loan platforms like NFTfi, game developers can receive loans from their created assets. Instead of receiving a short term loan through the antiquated banking system, which could take weeks, they can simply put their assets up as collateral and instantly receive loan offers. Obviously this is not exactly a “business model,” but it is a viable method for teams to gain short term cash flow if they have an unexpected expense and are in a pinch.
I am sure we will see more interesting and exciting business models arise within the NFT ecosystem, but even now it’s incredible to see what is available. I am most excited about any business model that gives users some sense of ownership over a game or platform. What we need to focus on now, of course, is more experimentation and building.