Gateway to the metaverse economy: 5 transformative functions of NFTs

As nonfungible tokens (NFTs) step into the mainstream, they are nearing a ‘coming of age.’ In this next phase, investors are rapidly discovering new use cases for NFTs beyond the initial frenzy of digital artwork and collectibles. A prime example is NFTs’ seamless connection with the metaverse industry, a fast-paced development which will inevitably shape NFT application and exponentially grow adoption in the long term.  

Significantly, metaverses hold great promise for a more open and fair economy – one that is decentralized and backed by the blockchain. But, in essence, NFTs will serve as the gateway to a metaverse, as they empower the identity, community and socialization the metaverse economy is being built upon. 

While the first NFT was minted in 2015, it is safe to say recent developments in the metaverse industry are now setting NFTs on a new path to the future. As a result, an abundance of speculative opportunities are emerging for businesses, investors and entrepreneurs alike. In particular, the metaverse is relying on NFTs to fulfill the five following transformative functions. 

Opening the next frontier of gaming

The gaming industry is already outpacing every other form of entertainment spending, including amusement parks, movie theaters, concerts and live spectator sports. Therefore, it should not be too surprising that when Mark Zuckerberg announced Facebook’s name change, he specified gaming as one of the leading motivators for the rebranding. 

Gaming has long been associated with virtual reality (VR) so consumers are already familiar with 3D avatars and world-building. VR gaming today is largely conducted via standalone applications on a desktop, mobile phone or VR headset. This offers a more immersive experience compared to traditional video games. But in a metaverse, which is essentially a unified and interoperable VR space, players can interact with each other and play games through human-computer interaction (HCI). 

The single interoperable environment opens the next frontier of gaming, enhanced by social gaming, play-to-earn (P2E) and portable game assets. Notably, NFTs hold the keys for unlocking all of these concepts. For example, NFTs serve as the in-game currency for P2E. Basically, the more value you add to the game, the more you earn. Moreover, the P2E game itself is largely impartial and more democratized than traditional platforms. Thanks to the ownership capabilities afforded by NFTs, players fully own their assets, instead of the earnings being controlled by a centralized game operator. 

Advancing the creator economy

NFTs are intended to virtually represent innovative or unique assets. While they are not formally a currency, items minted as NFTs can be sold and traded on virtual platforms. Armed with this transactional power, NFTs are ushering in the next wave of the creator economy.

The creator economy is technically as old as mankind itself, built by artists, writers and other creators across physical mediums. But the term ‘creator economy’ was only officially coined amid the digital age. Today over 50 million independent content creators, curators and community builders are part of the creator economy in the United States. 

With NFTs pegged to the decentralized blockchain, each asset contains codes and features that cannot be replicated. Furthermore, the asset cannot be stolen and its value is exclusive to the owner. The code can embed additional rights and obligations, such as sell-on fees that afford the creator a percentage of any subsequent transactions of the digital asset. The key mechanisms of ‘smart contracts’ and ‘copyright tracking’ enhance IP rights and ownership, solving major problems creators have faced in the cyberage. 

The metaverse industry is a major step forward for the creator economy, offering a virtual world where content can gain value and creators can gain equity for their work. These defining features are only possible because the product is tied to secure, transparent and decentralized NFTs. 

Unlocking new social experiences  

NFTs will play a leading role in enabling the communities, personal identity mechanisms and social experiences that will define the metaverse. For example, users could explore a specific hobby or show their support for a project by purchasing NFT assets. As a result, like-minded NFT owners will be able to come together to form communities, share their experiences and collaborate on relevant content creation.

NFT avatars are also a critical concept in the socialization system of a metaverse, representing not just a player’s actual self but also an identity they imagine. Users could use NFT assets to build out this identity and gain access to new experiences in a metaverse. 

In a metaverse, NFTs can be perceived as the extension of our real-life identities, granting us each complete ownership, control and flexibility for creating our virtual persona. 

Bridging physical and digital worlds

It’s necessary to note the social experiences of the metaverse model can be transitioned offline as well, with NFTs effectively bridging the gap between physical and digital worlds. For example, the Bored Ape Yacht Club (BAYC), a conglomerate of primate avatars created by four pseudonymous founders, is making inroads in connecting VR and physical reality. Owners of BAYC NFTs gain admission to exclusive clubs and features of the community, such as first-access to new NFT collections, NFT enhancements and even ‘in-real-life’ private events. In November 2021, BAYC hosted an exclusive yacht party and warehouse rave at ApeFest in Manhattan. 

Building up the virtual real estate market

The metaverse industry is also bringing real estate into a new realm, with some “parcels” of virtual property spaces being assessed to the tune of millions of dollars. For example, in the browser-based metaverse Decentraland, an asset of virtual land recently sold for $2.4 million by crypto investor Tokens.com. Additionally, in December 2021, a user spent $450,000 to become a neighbor of the rapper Snoop Dogg’s Snoopverse, an interactive world he is developing in the Ether-based platform Sandbox. 

Effectively, NFTs represent the virtual plot of land and allow for it to be transacted. To maintain the value of a meteverse’s digital real estate market, space is inherently limited. For instance, Decentraland is comprised of 90,000 parcels of land that each measure around 50 feet by 50 feet. This maintains ‘digital scarcity,’ a concept that has long been discussed in relation to cryptocurrency. 

A recent position paper by JPMorgan found the average parcel of virtual land across the four main metaverses doubled in the six-month period from June to December 2021, shooting from $6,000 to $12,000. Virtual land is growing in value just as fast as physical land, yet there are no interest rate increases that will curb or slow down price acceleration.

Looking ahead

The metaverse industry is still in its infancy and continuously being shaped by cryptocurrency trends and then reshaped evolving digital behaviors. NFTs are on a similar track.

While it may be fairly straightforward how NFTs enable ownership and virtual identity, the metaverse model creates an interoperable environment with seemingly endless possibilities for consumers to gather, socialize, play, earn and transact. Therefore, looking forward, businesses must move the needle on their NFT investments from exploration to activation, as NFTs are the linchpin for creating value and engaging users in the metaverse economy. 

Jonathan Teplitsky is the CEO of PipeFlare, a platform aimed at helping game developers monetize their work.