A Beginner's Guide to Utility NFTs: What are they, how they work, and real-life examples
- Token gating is a method for using blockchain technology to grant exclusive access to content, services, product, and events.
Adding utility to NFTs: The hype is not over yet
If you have learned one new acronym when reading about crypto, it is probably NFT since the hype had a wide impact. NFT stands for non-fungible token. As the name suggests, such tokens are not fungible – each of them is unique.
Traditionally, digital assets have always been easily replicable taking into account they represented merely pixels on screens. For example, think of an emoji. No matter who and how designed it, as soon as it is shared on the web it loses its initial value because any user could take a copy that is the same as the original. Before NFTs came to the scene, this was the reality for all kinds of digital art, videos, and similar.
An NFT is a digital record that proves ownership of an asset, either physical or digital. Imagine a token that has something as a blockchain certificate assigned to it; it encompasses ownership and authenticity. The immutable and fully transparent nature of blockchain technology means that it is simple for NFT holders to prove that an NFT is stored in their wallet and that it doesn't belong to anyone else.
We have written several times about non-fungible tokens; before jumping on to utility NFTs, we suggest reading this article to obtain more insight: ‘How does an NFT have value?’.
In this article, you will learn about utility NFTs or NFTs with actual use cases and real market value. It is supposed to be a driving force that will transform the whole NFT market and invent a new way of working, creating, and interacting. Let’s find out.
What are Utility NFTs?
Utility NFTs are merely non-fungible tokens that include real-world use cases beyond the fact that they are unique digital assets with ownership rights. Utility is the layer that has been missing. From the emergence of NFTs, no one actually bought these tokens for a particular use. For example, digital art and collectibles are valued because of their reputation and scarcity, but it represents a relatively small niche with a limited audience.
Unlike traditional NFTs, where the token itself represents the artwork, Utility NFTs encompass practical applications within specific platforms, applications, or real-world events. However, we are still in the early stages of realising the full potential of such tokens, but it seems that utility NFTs are likely to play a vital role.
A utility NFT refers to an NFT that grants its holder particular rights, privileges, or rewards which couldn’t be accessed otherwise. For example, you are organising an upcoming sports event with 1000 spaces available. Therefore, you have to issue 1000 paper tickets to fill the venue. Each paper ticket has its ticket number and therefore it is unique and belongs to one person. All these tickets provide the same utility to their holder – the ability to attend the event. Instead of issuing 1000 paper tickets you could easily issue 1000 NFTs.
A. What is special about utility NFTs?
NFT utility refers to the way NFTs can be used in the real world and how NFT technology, along with blockchain technology, could be further commercialised to eventually become a part of everyday life. Whether it's access to special features, bonus content, entrance to events, early access, or something else, an NFT utility is the real-world value that turns tokens from pretty pictures into something useful.
However, traditional NFTs played a crucial role in empowering all sorts of artists. You can find more about their role in this article: 'How NFTs might revolutionise the music industry'. The decision to add utility is only a natural sequence of events.
Unlike regular NFTs, the core focus of utility NFTs is not based on their collectability or rarity, yet on the real-world value and applications, rewards, or perks they provide token holders. Regular NFTs carry their value in relation to market demand, such as fine art, but utility NFTs offer direct value to the buyer through immediate access to specified privileges or exclusive rewards.
Technologically speaking, there is little difference between utility NFTs and their traditional counterparts since both of these asset classes are cryptographically represented as unique digital assets built onto a blockchain.
If you are new to the crypto world, we recommend reading our article on buying regular NFTs: 'Guide to buying NFTs'.
B. How do utility NFTs work?
In essence, utility NFTs work similarly to their standard counterparts. Both of these asset classes are based on blockchain technology and the use of smart contracts to operate. As we have mentioned many times before, blockchain can be defined as a decentralised public ledger that records and stores transaction data in a transparent, auditable, and immutable manner, while maintaining a high degree of security.
Utility NFTs operate mainly on the Ethereum blockchain, which enables the creation of smart contracts that can offer specific privileges, exclusive rights, or rewards to their token holders. Utility NFTs are still NFTs – they encompass unique metadata and it is not possible to duplicate or alter them in any way. These attributes are here to ensure the authenticity of each token and provide proof of digital ownership.
In a nutshell, the process is the same as with traditional NFTs. When the NFT is minted, the smart contract is executed, and the information is stored on a blockchain. The procedure includes the creation of a new block that verifies the unique data and then enters it on the blockchain. Smart contracts are here to enable creators to put into code their rights such as the right to royalties.
So where precisely is the difference between utility NFTs and standard NFTs?
Well, instead of representing an authentic digital asset with royalty rights, utility NFTs encompass another function – the right to access a particular service or obtain a particular product. The terms of use can be specified for each NFT due to the use of smart contracts.
C. How to convert a standard NFT to a utility NFT?
An interesting part of the ongoing discussion about utility NFTs refers to the addition of utility to standard NFTs. To transform a standard NFT into a utility token you will need to modify the smart contract that governs the non-fungible token. As explained above, a utility NFT typically encompasses additional functionality beyond just being a valuable digital asset.
The approach for the insertion of utility into non-fungible tokens focuses more on technological changes than technological improvements. Keep in mind that converting requires a certain degree of technical knowledge and a deep understanding of smart contracts and blockchain technology.
Here are the general steps you can take to convert a standard token to a utility token:
- Check the Smart Contract: The first step requires you to identify the smart contract that governs the NFT and determine whether it can be modified to add utility.
- Add Utility: In case the smart contract can be modified in that manner, you will have to add the necessary code to enable the preferable utility functionality. This may include, for instance, setting up additional functions that grant access to particular services, content, or products, or modifying the manner in which the particular NFT interacts with other smart contracts. However, if the NFT has already been minted, you will probably need to create a new version of the token that includes the utility perk. You can do that by minting a new token with the modified smart contract and then transferring ownership of the original token to the new one.
- Deploy the Smart Contract: Once the modifications have been successfully made, your last step includes the deployment of the updated smart contract to the blockchain.
Utility NFT use cases
Utility NFTs are currently a very promising feature of the blockchain industry with the capability to level up a bunch of business endeavours. In the future, they could replace everything from health insurance cards to loyalty cards and season tickets, making NFT holders being able to access healthcare, entrance to events, and all sorts of discounts and promo codes.,
Therefore, utility NFTs are practically able to cover all physical products and services. For this reason, we will use this subsection to explore a number of general use cases with everyday benefits.
A. Digital artwork and fashion
Starting off this list with the most popular NFT use case; the first thing that comes to people’s mind when talking about NFTs is digital art. Since NFTs contributed broadly to the creation of digital art marketplaces, this is not surprising at all. NFT digital art collections have received a lot of media attention since it is widely known that a number of digital collectibles have been selling for millions of dollars.
For example, the well-known Bored Ape Yacht Club first launched only a series of NFT images. Now they have been adding utility to their tokens such as access passes to exclusive events and offering rewards in the form of the ability to mint a new NFT.
While the use of NFTs in the digital art world is evident and doesn’t need further explanations, the fashion domain welcomed utility NFTs through the launch of several projects. NFTs are able to represent real-world items such as clothes, jewellery, and many more things in a digital manner. Fashion brands decided to use NFTs to hold online auctions where users can place their bids.
In the future, augmented reality technology may even potentially enable customers to try out different looks through virtual clothing in the Metaverse. To learn more about the Metaverse and the possibilities it brings to the table, we suggest reading this article: ‘What is a Metaverse?’.
B. Ticketing and events
We have already explained the use of utility NFTs as opposed to paper tickets on a simple example. However, since many functionalities can be built in and executed by a smart contract, one utility NFT as a ticket can provide multiple functionalities and exclusive access to more than one event.
Imagine you are buying a ticket in the form of a utility NFT that costs $100. Apart from the fact that it looks like a piece of artwork, imagine that it also provides additional functionalities to its primary objective.
For example, it can serve as concert memorabilia and even double its value in the future. When you enter the venue, the NFT can encompass the utility as a means of getting drinks or snacks. Since paper tickets may differ depending on their price, buying a VIP ticket for $200 can unlock access to backstage or exclusive access or discount to predetermined future events.
Finally, when it comes to paying artists, smart contracts come in handy. For example, the revenue of your utility NFT may be distributed automatically without any intermediary. You paid $100 for a regular ticket and now imagine that 40% of the value goes to the artist, the lighting crew gets 2%, and so on.
C. Gaming
NFTs, either traditional or utility ones, have proven to provide holders with many benefits within the gaming industry. A while ago, NFTs started to demonstrate their potential to enhance the gaming landscape. Now we're seeing more examples of utility NFTs rising in the world of gaming.
Play-to-earn games are linked to the chance of earning passive income by monetising gaming talent. If you’re not familiar with the term Play-to-Earn within the blockchain gaming industry and its common incentive system, take a look at this article: ’What is Play-to-Earn?P2E blockchain games that let users earn money’.
Main use cases of standard NFTs have been associated with imposing a right to ownership on in-game digital assets such as avatars, weapons, clothes, and similar. However, the emergence of utility NFTs aids players in owning assets and gaining subsequent benefits after they quit the game.
For example, gamers can store these assets on the blockchain, trade them on NFT marketplaces or gain access to other games, events, exclusive content or rewards.
D. Virtual real estate
Due to the emergence of the Metaverse, virtual land already gained popularity. At the moment, NFTs are used to represent ownership, but their utility may also be redirected to other activities such as storing land deed data, completing sales more efficiently, marketing highly liquid virtual land, auctioning off or providing passive income opportunities such as renting assets.
Popular Utility NFT projects
There are already a number of utility NFT project examples. Let's take a look at some of them.
A. Exclusive NFTs for exclusive memberships - The Bored Ape Yacht Club
The Bored Ape Yacht Club provides an NFT utility token that grants exclusive membership to a special yacht club. These utility tokens are known as apes; each ape is unique and randomly generated. Once you buy an ape, you can access art, avatars, and a community with certain privileges.
Membership provides access to members-only spaces such as the Mutant Apes Yacht Club, the merch store with exclusive members-only products, or the Bored Ape Kennel Club.
B. From VeeFriends to VeeCon
Created by the popular entrepreneur Gary Vaynerchuk, the NFT project VeeFriends has provided utility within their NFTs by allowing token holders to participate in the VeeCon conference. The event is an NFT-ticketed conference hosted around the globe that welcomes NFT enthusiasts.
C. Fighting off the climate crisis with carbon credits
The novel NFT project IMPT has been utilising blockchain technology to fight the climate crisis. It is based on turning carbon credits into NFTs to aid users in offsetting their carbon footprints and fund ecological projects worldwide.
The project is still in its early stages, but it was deemed as a broad real-world utility program. Carbon credits should essentially serve as permits that enable companies to emit a particular amount of carbon dioxide into the atmosphere, with one carbon credit equivalent to one ton of carbon dioxide.
The main objective is to make carbon credits fully tradeable, meaning being able to be bought, sold, or held as an investment on the open market to obtain a wide community engagement.
D. Golf and other benefits: LinksDAO
The LinksDAO is a utility NFT project that wants to recreate the gold and leisure club experience. By owning NFTs, you can also get to play a particular role in the administration of the club. These tokens resemble governance tokens, similar to those used by any decentralised autonomous organisation (DAO).
Members get access to a number of benefits for community members, such as access to exclusive merch in the LinksDAO shop, community events, a special members platform, and a peer-to-peer reciprocity program.
E. Investing in the music industry
The Royal.io platform introduces a new form of investing through its utility NFTs. Basically, as an NFT owner, you are able to claim a percentage of a particular son’s royalties for yourself.
This is a new way of connecting with artists and investing in the music industry. It might pique the interest of users with good knowledge of the industry and trends. As the royalties grow, payouts may come through the years.
F. GeoNFTs and Lost Worlds
Lost Worlds is an NFT project that created limited edition NFTs that can only be bought at specific locations. The ability to obtain such individual pieces unlocks with the GPS position of the user’s device.
As for their utility, these location-based NFTs can serve as digital collectibles, concert tickets, vouchers, and scavenger hunt items.
G. The Flyfish Club: dining for members only
The Flyfish Club is the first NFT restaurant. NFT owners get exclusive access to a dining club experience at the 10,000-square-foot place set in the heart of New York City.
Membership is purchased in the digital format as an NFT. Membership provides many culinary, social, and cultural experiences in the restaurant, cocktail lounge, or outdoor dining area.