What are utility NFTs, and why do they matter?

What are utility NFTs?

Utility NFTs are digital assets that offer owners value through attached perks, specified privileges, rewards and experiences.

Nonfungible tokens (NFTs) became massively popular in 2021, initially captivating imaginations with their association with high-priced artwork and exclusive collectibles. Though NFTs have been around since 2014, 2021 was the year that they broke into the mainstream, disrupting digital collectibles and the art world. 

They further caught global attention when Beeple sold his NFT “Everydays: The First 5,000 Days” for $69 million at Christie’s. However, NFTs were criticized by many as being worthless with no intrinsic value. This ushered in the era often dubbed NFT 2.0, value-added NFTs, or functional/utility NFTs. It is about attaching tangible value and practical applications to digital assets, transforming them from collector items into powerful tools that unlock access, rewards and unique experiences.

Utility NFTs represent a paradigm shift in the NFT space beyond digital art and collectibles. Unlike traditional NFTs, utility NFTs have practical applications on specific platforms or applications. They derive their value not solely from their inherent scarcity or artistic appeal but from the practical functionalities and real-world applications they offer. 

For example, owning a utility NFT grants exclusive perks and benefits within a particular ecosystem, be it a blockchain game, a members-only community or even a loyalty program. 

This prompted trending artwork and collectible NFTs to add utility to their artwork. For instance, the Bored Ape Yacht Club (BAYC) was not launched initially as a utility NFT. Yet, evolving today, BAYC has real-world benefits for its holders; it grants access to exclusive social events, merchandise drops and even opportunities to mint rarer NFTs within the BAYC universe.

Similarly, CryptoPunk holders can get a unique handcrafted pendant modeled after their NFT from Tiffany & Co. NFTiff is a utility NFT that acts as a digital pass and a physical pendant with a pixelated image of the punk in Tiffany & Co.’s signature blue jewelry box. 

How do utility NFTs work?

Utility NFTs operate on the premise that they extend beyond the conventional scope of digital ownership, offering practical functionalities and tangible benefits to their holders.

Utility NFTs are similar to any other type of NFT but with the added consideration of how one may fulfill the token’s utility. Utility NFTs are built on blockchain platforms that support self-executing smart contracts. The utility is predefined and encoded into the smart contract associated with the NFT. These contracts enable the automation of certain functions, such as the distribution of rewards or access to specific features tied to the utility NFT.

Like NFTs, utility NFTs are minted and tracked on the blockchain. While some utility NFTs may be single-use, such as an event pass, most others have continuing functionalities, such as the utility NFTs of tokenized ecosystems, where they become an integral part of a broader network of digital assets. These ecosystems can include gaming platforms, virtual worlds or even decentralized finance (DeFi) projects, creating a seamless interaction between elements within their blockchain space.

Most utility NFTs have long-term commitments, such as reward distribution on achieving milestones or distinctive engagement by community members, etc. This is where utility NFTs come with dynamic attributes, allowing them to change or evolve over time. These dynamic attributes can be programmed into the smart contract, triggering changes based on specific conditions or events and adding an engagement element for the token holders.

Many utility NFTs are designed to be interoperable, allowing them to interact seamlessly with various decentralized applications (DApps) and platforms within the blockchain ecosystem. This interoperability enhances the versatility of utility NFTs, augmenting their utilization across different services and ecosystems.

Use cases of utility NFTs

Utility NFTs can be used in various applications, such as digital collectibles, virtual real estate, in-game items and more.

Utility NFTs create practical applications that add value beyond aesthetics or scarcity. Below are some use cases for building new forms of ownership with utility NFTs:

Gaming

Utility NFTs are gaining significant traction in the gaming industry, where they can represent in-game assets and characters or even provide special playing powers. Players can buy, sell and trade these NFTs within the gaming ecosystem, fostering a vibrant virtual economy.

Exclusive access rights

Some utility NFTs, such as digital collectibles, offer holders exclusive access to events, services, real-world merchandise or governance rights. Integrating digital ownership with tangible benefits adds a layer of practicality and value to the NFTs.

Tokenized physical assets

Utility NFTs have also found applications in tokenizing real-world assets, such as real estate, housing projects, livestock or luxury goods. This allows for fractional ownership and streamlined transactions, making traditionally illiquid assets more accessible to a broader audience.

Music and concerts

Smart contracts linked to music utility NFTs can automate royalty distribution. Apart from unlocking gated content, they have utility in enabling holders to become an integral part of the record label, music studio or streaming platform and access numerous benefits, including an opportunity to work with musicians and their teams. 

Why do utility NFTs matter?

From brand building and loyalty to investor interest, utility-driven NFT projects garner interest from all stakeholders in NFTs and blockchain functionality. 

Utility NFTs hold a significant role in shaping the future of the digital asset landscape. One of their primary contributions lies in fostering broader adoption, extending beyond the traditional audience of collectors and enthusiasts. By offering tangible benefits and real-world applications, utility NFTs become more than just digital artifacts — they become accessible and appealing to a diverse range of people.

Furthermore, utility NFTs are pivotal in brand building and fostering customer loyalty. By incorporating practical functionalities into the digital assets associated with a brand, utility NFTs create a unique and engaging brand experience. Offering exclusive access to events, premium token-gated content or limited-edition products, these utility NFTs enhance the perceived value of the brand but also establish a direct connection with the audience. 

The tangible benefits create a sense of exclusivity and social belonging among tokenholders, cultivating a community of loyal supporters. As individuals engage with the brand through these utility-driven tokens, they develop a deeper connection and commitment, contributing to long-term loyalty. In essence, utility NFTs become not just a symbol of ownership but a dynamic tool for brands to build meaningful relationships, drive engagement, and establish a strong foundation of loyalty within their customer base.

Utility NFTs are redefining how investors and users perceive the inherent worth of NFTs. The enhanced value proposition contributes to the growing interest and recognition of NFTs as valuable assets in the tokenized utility on the blockchain.