NFTs are amongst some of the most controversial technologies available.
Some people love them. Some people hate them.
And with good reason. While some people see immense potential in NFTs, others have raised valid concerns about scams and fraudulent practices in the NFT market.
YouTuber Logan Paul recently came under fire for an alleged “rug pull” scam by promoting an NFT game called CryptoZoo, which allowed users to cross-breed NFT animals to earn money.
However, Paul and his team sold millions worth of NFTs and tokens and subsequently abandoned the projects, without any prior warning to holders and investors.
After being exposed by famous cryptocurrency scam investigator Stephen Findeisen, better known as Coffeezilla, in a three-part series on YouTube, Paul stated he would be “taking accountability” and apologized to the CryptoZoo community.
This is not to say that NFT projects are all scams, despite the fact some certainly do exist.
After all, NFTs saw tremendous public adoption for the first time in the NFT boom of 2021.
CryptoPunks, for example, are an NFT project that gained immense popularity, with the project being unofficially dubbed as the “Mona Lisa of the metaverse.”
With some CryptoPunks selling for millions, high-profile celebrities such as Jay-Z, Mark Cuban, and Odell Beckham Jr. purchased and still hold their CryptoPunks today.
The success of Crypto Punks led to other NFT projects, including Bored Ape Yacht Club and Vee Friends, gaining momentum and dedicated followings.
OpenSea, the largest NFT marketplace, was doing over $3.5 billion in monthly trading volume at the beginning of 2022.
However, exactly one year later, that figure had plummeted by more than 86%, dropping to just $495 million.
So what happened?
There was no public outrage that caused people to stop using NFTs entirely.
The entire reason for the huge NFT market correction was scarcity-based speculation.
Scarcity-based speculation is a phenomenon where the value that something of limited quantity (i.e. Bitcoin, gold, NFTs, etc) is based on its perceived scarcity rather than its utility.
People believe that an asset will increase in value based on increased demand.
However, the demand for an asset can only increase for so long before reaching equilibrium.
This hypothetical project will use his money to invest in marketing, bringing more potential buyers to the project.
At first, the marketing efforts are successful and the demand for the NFT collection continues to increase while the supply remains stagnant.
This causes the floor price of the collection to increase.
Each new investor only purchases an NFT under the presumption that the demand will grow and others will want to do the same, making his asset more valuable.
Eventually, the NFT project will reach a saturation point where there are no longer any interested buyers left to target with marketing efforts.
Thus, the project will inevitably come to a point where it no longer has any way to maintain its value or retain its holders.
Unlike cryptocurrency, NFTs cannot be automatically exchanged and require a buyer.
In this circumstance, however, there are no buyers.
So the value of their asset becomes essentially worthless.
In the recent NFT market correction, this became the fate of almost all NFT projects.
While some bigger projects took large hits, the majority lost all value.
This also damaged the reputation of NFTs, with many people claiming they’re Ponzi schemes with no actual valuable or real-world application.
And when only looking at them in the context of scarcity-based speculation, that’s a very reasonable conclusion to arrive at.
However, this completely ignores the real value of NFTs, which lies in their potential to be used for utility-based applications.
Utility-based NFTs derive their value from their practical application or utility, rather than from scarcity-based speculation.
Instead of huge price fluctuations, which are unsustainable and harmful to the NFT market as a whole, the value of these NFTs depends on the value they can bring to the user.
There are endless ways to implement this kind of technology into our world today.
One of the biggest use cases for utility-based NFTs is in authentication.
Luxury brands can utilize NFTs to guarantee buyers of second-hand products that their purchases are authentic.
The same concept can be applied to purchasing sports memorabilia, digital artwork, and concert tickets.
Royalties on these NFT sales can help to support the original artist by ensuring they are fairly compensated from second-hand sales.
With the digitization of our society, the potential applications for NFTs will continue to expand.
However, it is important to note that utility-based NFTs can still derive value from speculation.
The difference between the two is that a utility-based NFT derives its value primarily through its utility, rather than perceived scarcity.
This approach helps to build a healthy and sustainable NFT ecosystem.
Doing so will allow for more practical applications of the technology to flourish, while also eliminating the negative connotations that come with it.
However, there is one use case that is almost guaranteed to change the world as we know it.
GameFi combines gaming and decentralized finance, where gamers can earn real-world value by playing video games.
In 2023, gaming has never been more popular.
There are almost 3 billion gamers in the world across all platforms.
However, we are approaching a radical shift in how we approach games.
This shift will be ushered in the application of NFTs to gaming.
This means that the development studio behind a game must relinquish some control to allow the virtual economy to run itself to some extent.
Or put simply, players actually own their in-game items.
This allows for the exchange of digital goods, creating value where it did not exist before.
Doing so will blow the doors of the gaming industry wide open, unlocking massive potential for gamers and game developers.
It will revolutionize the way we think about gaming and virtual economies.
NFTs can pose some challenges, however, particularly in competitive games.
The term ‘Pay to Win’ is most often used to describe this kind of situation.
As the term suggests, whoever puts the most money into a game will be at an unfair advantage in these types of games.
This ruins the fun of the game and hurts gamers while attracting the same crowd who are looking to make money with ‘pump and dump’ schemes.
It is up to game developers to implement best practices to avoid these kinds of situations.
One way is designing games that reward skill over financial investments.
Developers must incorporate NFTs in a way that balances their utility with in-game mechanics.
For example, a particular weapon or character in video games will often become the ‘meta’, or the de facto choice amongst most players, due to unbalanced game mechanics.
This bothers players and game developers alike, who may not enjoy that particular playstyle or want to see the full spectrum of their game enjoyed.
In Web3 gaming, the negative impacts of imbalances like this are severely exacerbated.
In addition to the problems found in traditional gaming, these items fall victim to scarcity-based speculation, and their value inflates beyond their utility.
This creates unfair gameplay which rewards financial investment over skill.
It is therefore the responsibility of the game designers to constantly balance the game mechanics so that the value of the NFT is determined by utility, not speculation.
This leads to a more fun and fair gaming experience across the board.
Doing so will reward long-term gamers who are dedicated to that particular game while disincentivizing those looking to abuse the game to make a quick buck.
While NFTs have been subject to controversy and scams, they hold immense promise for utility-based applications such as GameFi. To realize this potential, we must stray away from scarcity-based speculation in NFT value and transition to a more practical application.
Doing so requires careful consideration of balancing utility and value, none of which is more pronounced than in Web3 gaming. It is up to game developers to use best practices to avoid ‘pay to win’ gameplay and create enjoyable experiences that simultaneously bring real-world value to players.
Here at 0101 Labs, we strive to be an industry leader in creating fun, fair, and free games that reward the communities that comprise them. If you’re interested in following along on our journey of creating the future of gaming, please consider joining our email list!