The Rise of NFTs and What It Means for Marketers

Exploring the potential marketing applications of non-fungible tokens 

If you’ve been online these days, you’ve probably come across some incessant buzz about something called non-fungible tokens (NFTs). Lindsay Lohan and YouTuber Logan Paul both created some sort of digital collectibles based on NFTs; Post Malone teamed up with a startup called Fyooz to launch a celebrity beer pong league using NFTs, and the first NFT artwork just went on sale at major auction house Christie’s.

So what exactly is an NFT? How do they work? Why are they suddenly everywhere? Looking beyond the intensifying hype and investment frenzy, is there something about NFTs that may actually be useful for brand marketing in the long run?

NFTs 101

Non-fungible tokens are a special type of cryptographic token that represents a unique digital asset. It is based on blockchain technology and works similar to bitcoin (and other cryptocurrencies), with networked computers racing each other to solve complex mathematical functions to encrypt a set of data and generate a private cryptographic key, except that they are non-fungible, meaning that the tokens are not mutually interchangeable.

Think about it this way: if bitcoin tokens are like blockchain-verified dollar bills, then NFTs are like blockchain-verified artworks. No one cares which particular five-dollar bill they own, since all five-dollar bills hold the same value and are therefore interchangeable, but we’d sure care which particular piece of artwork we own, since different artwork has a drastically different value, both monetarily and artistically. So, during the encryption process, each NFT is assigned a digital hash that distinguishes it from every other NFT of its kind. They are like snowflakes, each one unique in its own way.

NFTs have been around since at least June 2017 when CryptoPunks, a collection for 10,000 unique digital characters, launched on Ethereum¹, but CryptoKitties, a virtual cat trading game, was the first project that made NFTs widely known among the crypto crowd when it went viral later that year. Since then, people have spent $174 million on NFTs. OpenSea, an NFT marketplace, has this detailed chronicle of NFT development if you wish to dive into its short yet storied history.

The brilliant thing about NFTs is that they turn the most popular use of blockchain on its head and use the cryptographic ledgers not for logging transactions, but for registering a particular piece of digital assets to a particular cryptographic token. NFTs are often created to represent image files in various formats (jpeg, gif, etc.), although they can also be attached to tweets, MP3s, or any other type of digital file. With NFTs, people can own and trade digital assets, which are typical, by design, easily copyable, and widely shareable.

In a way, NFTs are like the serial numbers that a luxury brand would issue for each of their products to verify their authenticity². Except in the case of NFTs, there’s no central authority (aka, the luxury brands) issuing those serial numbers, just like there’s no central bank issuing new bitcoins. Instead, most NFTs in circulation today are built on Ethereum, and each NFT is created to represent a particular piece of digital asset and verified by the network. When people sell and buy NFTs, their unique identifier gets encrypted into the token to denote ownership. This is then encrypted and distributed throughout the entire network, meaning that everyone with access to the network can see the ownership information, but can’t access the NFTs without the cryptographic key that the owner has.

NFTs are like the serial numbers that a luxury brand would issue for each of their products to verify their authenticity.

For brand marketers, the rise of NFTs brings exciting new possibilities in the realms of digital goods, digital media distribution, and access management. Let’s look at the impact NFTs have on each of these domains one by one.

Creating Scarcity and Value for Digital Goods

Digital goods have been around for a while and are especially popular in video games. Fortnite, a free-to-play game, generated $1.8 billion in revenue in 2019, a big portion of which came from selling in-game items. Yet digital goods have not been seen as carrying much value to collectors because they can be easily copied, until now.

In short, NFTs make digital collectibles possible. In a digital world of abundance, where copies are easily created and distributed, NFTs make it possible to create digital scarcity. And scarcity, as the economic principle goes, creates value. An NFT also makes digital goods easily tradable, which, in turn, makes them more likely to accumulate value through trading. Interestingly, because the chain of ownership is also visible to everyone in the network, the value of NFTs may change depending on who previously owned them.

NFTs have started to break out of the crypto crowd and garner broader attention over the last year as more celebrities got into the space. Besides crypto ambassador Elon Musk, people such as Mark Cuban and Linkin Park guitarist Mike Shinoda started minting their own tokens for charity. At the beginning of this month, 70 artists sold a big stash of digital artwork for 9 million dollars via Hashmasks, a new Ethereum project. From BBC-branded Dr Who trading cards to NBA Top Shot collectible cards featuring videos of memorable moments, some media companies are getting in on the NFT hype by licensing their own content and IP to Ethereum projects to be minted into digital collectibles. Overall, Dr Who trading cards over last year, reaching about $250 million in total.

To date, most NFTs are attached to collectible items like digital art and virtual goods in video games, but they could expand to include more digital assets. Real estate, event ticketing, brand licensing, and even tokens of real-world assets are also all possible use cases being explored. Nike, for example, has patented shoes as NFTs called CryptoKicks in December³, which allows users to ‘breed’ different shoes to create custom sneakers that may then be manufactured in the real world. This implementation of NFTs smartly blurs the line between physical and virtual, yet capitalizing on monetization opportunities in both.

To date, most NFTs are attached to collectible items like digital art and virtual goods in video games, but they could expand to include more digital assets. Real estate, event ticketing, brand licensing, and even tokens of real-world assets are also all possible use cases being explored. Nike, for example, has patented shoes as NFTs called CryptoKicks in December³, which allows users to ‘breed’ different shoes to create custom sneakers that may then be manufactured in the real world. This implementation of NFTs smartly blurs the line between physical and virtual, yet capitalizing on monetization opportunities in both.

In their 2021 Outlook, Medium laid out how gaming technologies are laying the foundation for a new interactive layer for online platforms that would eventually evolve into the metaverse. And digital goods are a key ingredient of the metaverse. As gaming eats the world and more parts of our lives happen in these digital spaces, it is important for brands to start thinking about digital ownership and how to leverage NFTs to issue limited editions of brand assets and generate buzz.

Unlocking New Monetization Models for Digital Media

Another potentially revolutionary aspect of NFTs is that they could upend the way digital media is distributed and monetized. Right now, most digital content is being monetized via platforms, be it ad-supported ones like Facebook or podcasts or subscription-based ones like Netflix or OnlyFans. These platforms act as the middleman between content creators and consumers, and make a cut by the virtue of being the distributor. Although creators still own the copyright to their work, they relinquish part of their ownership and control over the said work to the platform owners and, in today’s meme culture, its consumers as soon as they upload it for distribution.

The rise of NFTs has renewed the chatter on developing a new media ownership model to make it more creator-centric. In the summer of 2017, NFT was only a budding concept that few had heard of. But even then, some have envisioned that, with blockchain-powered smart contracts, a new distributed model of media ownership would be possible and allow creators of the digital assets to directly profit from them without intermediaries.

As Jesse Walden from Variant Fund puts it succinctly:

In media, NFTs make it possible for creators to retain ownership of their content, without limiting the propagation of their files across the internet. As a result, NFTs have the potential to invert the ownership model of media — offering creators, their audiences, and developers who build for them, a viable alternative to monetization.

Take the Lindsay Lohan NFT for example. Last week, the Mean Girls star minted an NFT on Rarible, a marketplace for digital assets. The token is attached to an image of herself with an earring featuring the word “LIGHTNING” in the shape of a lightning bolt⁴. As soon as the token was put on sale, it was bid on and bought by a user named “Loopify” for 10 ETH (the unit for Ethereum-based cryptocurrencies, which is worth about USD $1,922 per unit at the moment.). An hour later, it was sold to another bidder for 33 ETH ($63,447), and the trading continued from thereon. And because of the way that Rarible operates its marketplace, with each transaction, portions of resale value increase will go back to the actress, who has said she’ll donate it to charities.

Zora, another crypto art marketplace, has a similar structure for monetizing digital media. Instead of creating artificial scarcity by selling copies of digital goods, they make the original copy openly accessible to everyone no matter who owns it, and allow consumers to sell that original token over and over again. Each time the work is resold, the original creator gets a cut of the sale price. And logically, the more popular a piece of digital content becomes, the more people would bid to own it. This is why some investors would spend $35,000 on the ownership of an NBA-license video that everyone can watch on YouTube, and also why the Nyan Cat, a decade-old meme, is being sold as a one-of-a-kind digital art piece, despite its ubiquity around the internet.

Exploring this new distributed model for owning and monetizing digital media points to an interesting direction for the future of digital marketing. Right now, the value of a digital asset is measured not only against how many copies they sold, but also how many memes they inspired. Part of the value of digital assets comes from the fact that they are easily remixable. For example, the value of any particular TikTok video is not just measured against how many views they garner, but also how many copycat versions they inspired, each slightly different from the original as people put their unique spins on it. The more those meme’d versions pop up, the more popular and valuable the original version becomes.

This long-tail, collaborative creation is cool for user-generated content, but tends to scare off brands who are understandably more protective of their branded assets not being altered as they spread. What the NFTs bring to the table then is the ability to make branded digital assets both remix-able and non-fungible. This may seem paradoxical, but NFTs can verify brands as the rightful owner of their digital assets and therefore debunk other copies of the said assets as fan-made content. It allows brands to maintain complete control of their digital assets without limiting its spread, or fearing that a maliciously altered version, such as one manipulated with deep fake technologies, will be incorrectly attributed to the brands. Ownership entails responsibility, and NFT makes it possible for brands to be only responsible for the original content they put out without sacrificing the potential for it to go viral.

What the NFTs bring to the table then is the ability to make branded digital assets both remix-able and non-fungible.

Tokenizing Access to Services & Experiences

Beyond encrypting digital goods and media assets, another emerging use case for NFT is for authenticating access to digital experiences. Earlier this week, Microsoft launched a game that celebrates women in science and rewards players with NFTs that unlock secret games inside Minecraft. $RAC, a social token issued by recording artist RAC, grants token owners access to a private Discord group and gives them early access to merch drops. And because access has been tokenized with NFTs, they became something that fans can trade amongst themselves.

The Post Malone NFT, mentioned at the beginning of this article, provides an interesting example on how service brands may be able to use NFTs to market themselves. Teaming up with Fyooz, a platform that issues NFTs in the name of music and sports celebrities, Post Malone is dropping his own “Celebrity World Pong League” NFTs, named after the Facebook Watch series he has been doing since last fall. Fans who collected enough of those NFTs on Fyooz will be able to enter a beer pong match against Post Malone.

For brands, this use case opens up a new way to think about access management. Typically, digital tickets are easily transferable and interchangeable, since they all perform the same sole function of authenticating access to exclusive experiences and events, both online and offline. What NFTs add to the equation is that it makes each individual ticket unique in and of itself beyond their functional value, like a ticket stub autographed by a celebrity. Therefore, access itself becomes tokenized and commodified, free to be bought and sold without needing a third party to intermediate.

What’s Next for NFTs

As NFTs continue to garner mainstream attention, we expect to see more brands jump in and start to experiment with releasing digital collectibles based on IP to generate additional revenues and engage with core fanbase, or create exclusive experiences with tokenized access that may become sought-after collectible items, thus boosting the profile of the said experiences. New business models will be tested for digital media creators, helping them bypass platforms and monetize directly from their audiences.

Of course, NFTs alone are not going to bring digital collectibles into the mainstream; there are still plenty of questions to be answered in terms of how to transfer them across digital platforms, how to measure and offset the massive carbon footprint they generate, and how to properly display them both in virtual environments and in the real world.

Besides digital goods and tokenized access, new use cases of NFTs are also emerging in the form of “social tokens” that seek to tokenize more abstract concepts than digital goods. Reuben Bramanathan, who previously worked at Coinbase, tokenized his time where 1 $CSNL token equaled 1 hour of his time and was freely traded. Brooklyn Nets guard Spencer Dinwiddie reportedly plans to release a digital token for others to invest in his contract, essentially creating NFTs for his future income.

Needless to say, the current laws and regulations have not been updated to reinforce the transaction of such abstract items as time or future income, and the sales are purely based on the goodwill of parties involved. After all, ownership is a social construct that only works when everyone involved all agrees to it. In the real world, we have laws and deeds to prove and protect the ownership of valuable assets; in the virtual world, we now have NFTs. Like most man-made objects, the value of NFTs ultimately derives from the number of people believing in its value and agreeing to uphold it.

Quick Notes

• Ethereum is the second-largest blockchain (after blockchain) and optimized for smart contracts that make NFTs possible.
• NFTs are, in most cases, just tokens for proving ownership of digital assets, not the assets themselves. Just like knowing the unique serial number for a particular Rolex watch does not necessarily mean I am in possession of the said Rolex, if I buy a NFT for a piece of digital art, I don’t always get the original file of the said art, which may still belong to its creator. However, there are digital assets that are now being created on Ethereum projects, which means that their NFTs are more like encrypted files of the assets themselves that live natively on the blockchain. People can’t access them without using a dapp, because the assets themselves don’t exist outside the blockchain, unlike a traditional piece of the digital asset.
• Nike has yet to officially release any CryptoKicks sneakers, but the patent is there, whenever they are ready.
• Some have speculated this is a reference to the Lightning Network, which is a network built on bitcoins to facilitate faster transactions.

At Aleada Media Group we are always looking ahead at new emerging technologies. If you are interested in learning more about NFTs or any other aspect of our business please reach out to us!