In the bull market, trends around Google searches for the word “NFT” were often cited as a proxy for adoption and popularity, but ironically, this term fading out of the lexicon entirely will likely be the real signal of mass adoption. We’ll know meaningful progress has been made when the implementations of NFTs are so widespread and generalized that the term itself ceases to be useful, as it could be referring to… anything.
In the bear market, NFT “utility” has become a popular topic of reflection, with many complaining about the lack of non-speculative use cases and applications that exist with six years having passed since the ERC-721 standard was first proposed on the Ethereum Github.
While important, these debates often become circular and run the risk of missing the forest from the trees, so the intention of this piece is to revisit the fundamentals of NFT utility and highlight the innovations extending the capabilities of NFTs to create meaningfully richer user experiences.
Zooming Out: The Big Picture
Much like how the government can freeze your bank account, seize your funds & disrupt your ability to engage with the (legal) banking system, centralized content platforms & data monopolies posses the power to do the same to you in the digital realm. Not only does this have harrowing implications for the future of censorship resistance online, but it also comes with very challenging 2nd and 3rd order effects such as extremely anti-competitive market dynamics that hamper innovation across the board and new questions around data privacy (and monetization) in-light of increased demand for valuable AI training data. This is the big picture.
Why has NFT utility primarily been centered around provenance for (expensive) art & collectibles?
It’s very often the case that more skeuomorphic use cases for new technologies are the first to take off, because it takes time for people to experiment and understand them enough to imagine truly novel possibilities. Another major reason that NFT utility and applications have been slow to evolve is that the blockchain scalability challenges of the last few years are actually themselves a constraint on NFT utility. Consider, for example, the new ERC-6551 standard which allows any ERC-721 token to own a smart contract account — added functionality can often come with added costs. So long as creating, distributing and engaging with NFTs remains cost prohibitive to most, it simply won’t be economically rational for businesses or individuals to invest in lower-cost and/or “non-speculative” applications of NFTs.
This, however, is beginning to change as a result of the enormous, industry-wide investment in scalability finally starting to pay off. L2s are leading the way with the Ethereum ecosystem, while Solana doubles down on its single-shard architecture and leadership in token standard innovation.
Expanding NFT Utility: Novel Token Standards
(note: these standards aren’t necessarily mutually-exclusive)
NFTs as applications — xNFT
The xNFT (or “executable” NFT) is a Solana-native non-fungible token standard built in conjunction with the Backpack wallet, which serves as an operating system and key management layer for interacting with xNFT-based applications. xNFTs can be used to build either collectibles (i.e. PFPs such as the Mad Lads collection) or applications — however because they represent ownership over the execution of some code, the experiences developers can build with xNFT are significantly more expressive.
Perhaps most uniquely, application xNFTs resemble onchain software licenses — making it easy for developers to retain provenance over their code, enforce how many times their xNFT app is installed and by whom, how much it costs to install, as well as making & keeping track of upgrades and user interactions.
The team at Backpack also recently released a new feature they’re calling Soul Abstraction, which not only enables NFT-Escrow-like features for xNFTs, but also allows developers to permissionlessly build additional features and/or airdrop perks to xNFTs and their holders without needing permission or technical support from the Backpack team. Think iOS, but open.
Dive Deeper: Click here to watch a developer walkthrough for building xNFTs.
NFTs at scale — Compressed NFT
Compressed NFTs (cNFTs) are made possible by state compression — an innovation developed by a group of engineers across Solana Labs, Solana Foundation and Metaplex. The idea emerged out of conversations around what it would require to bring an application like Instagram onchain, and was designed for the expressed goal of bringing “the marginal storage cost per unit as close to zero as possible.”
Simply put, state compression works by storing a merkle root of an NFT’s data onchain while keeping the actual data itself off-chain. Security is maintained by the fact that even if the off-chain data is tampered with, the merkle root will then differ from the one stored onchain. (Metaplex’s Bubblegum contract can be used to verify the correctness of NFT data).
Dive Deeper: Click here to check out the Concurrent Merkle Tree whitepaper, and here for a fantastic explainer courtesy of Helius Labs.
You may be wondering if 1000x cost reductions are truly necessary — however it’s important to consider the scale necessary for NFTs to become truly ubiquitous. The “tokenization of everything” has become somewhat of a meme, but cNFTs are beginning to make it economically viable to bring the internet’s data onchain and convert its artifacts into “persistent sovereignly owned digital objects” at scale.
This is one of the major reasons why continued work on the scalability front to bring down minting and issuance costs is so important. L2 solutions like Arbitrum and Optimism have already made impressive progress bringing down transaction costs by around 10x relative L1. These improvements are by no means trivial, but as is often the case, the devil is in the details. We know based on the sheer scale of applications like Instagram that even $0.10 - $0.50 fees can still be prohibitively expensive for many use cases, and that extreme improvements in cost are actually needed to unlock this next level of “utility” and accessibility. It’s also worth noting that L2s are still relatively nascent and may take longer to get there, but we will highlight some early signs of L2 NFT innovation below.
DRiP
Brought to you by the team that previously created Solana Spaces, DRiP is building out a crypto-native, creator-first content distribution platform. By subscribing to their main channel, Showcase, you’ll get a free item curated by the DRiP team airdropped into your wallet every Wednesday. For more direct and engaged access to your favorite content, you can also subscribe to a (rapidly growing) number of creator channels, including Degen Poet, Degenerate Ape Academy, Vault Music, Floor and more. Users can expect to receive collectibles of all kinds packaged inside their cNFT airdrops, from video games to music videos & more.
With hundreds of thousands of subscribers already, dripping content to users at this scale would be significantly more expensive without cNFTs. DRiP Season 2 saw over two million NFTs distributed to subscribers, including over 500k just in the last few days.
Dialect
Web3 messaging platform Dialect has also minted hundreds of thousands of cNFTs for use as tradeable sticker emojis. Users can leverage Dialect’s smart messaging features to buy & sell assets from directly inside the messaging interface, powered by Tensor under the hood.
Helium
As part of their migration to Solana away from their own L1, Helium is now using cNFTs to represent its nearly 1M unique physical hotspots onchain. Hotspot operators are able to claim the NFT upon logging into the wallet tied to the hotspot.
Metaplex
After their Mailchimp account was expectedly suspended, NFT Infrastructure provider Metaplex resorted to instead using cNFTs for sending out invites to its new Creator Studio tools. Metaplex is now collaborating with Underdog Protocol on a cheaper and more crypto-native replacement tool.
NFTs with superpowers — Dynamic NFT, Private NFT, NFT Escrow, NFT Fusion
Dynamic NFT
The ability to update metadata, particularly based on specific on or off-chain events is a subtle but game-changing superpower that makes dynamic NFTs significantly more useful than their static counterparts in almost all cases. Additionally, as we’ll explore below, dynamic NFTs also highlight the urgent need for crypto-native databases & storage infrastructure that make the deployment and management process much more seamless and standardized.
Private NFT
One of the earliest examples includes the Secret Network’s SNIP-721 standard, which was used by Quentin Tarantino in 2021 to drop an unreleased Pulp Fiction scene as an NFT. Other solutions include leveraging Lit Protocol access controls in conjunction with Arweave to enable permissioned access to encrypted metadata. Solana-based music platform Vault Music uses this solution to offer private NFTs to its user base.
NFT Escrow & NFT Fusion
Another Solana-native standard, NFT Escrow is an extension of the Metaplex Token Metadata contract that allows any NFT to function as a wallet and hold its own tokens. It enables two different types of escrow accounts — Token Owned Escrow (TOE) which is managed by the NFT holder, and Creator Owned Escrow (COE), which is managed by a specific creator. This functionality is also now coming to the EVM ecosystem thanks to ERC-6551 and the team at Future Primitive.
Alternatively, NFT Fusion is a feature built to extend the functionality of NFT Escrow by enabling NFTs to be bundled together to create new NFTs, to change based on the assets it’s holding and more.
Both of these standards are extremely powerful primitives for building immersive game-like experiences such as token inventories and level-ups.
NFTs for trust & provenance over AI-generated content — AIGC NFT
EIP-7007 proposes an ERC-721 wrapper which includes a function for checking the validity of prompt & proof combinations using zkML techniques. The metadata schema would also provide structures for storing information about the AIGC-NFT, such as prompt, content, proof-of-ownership, etc.) In practice, creators of ML models could publish their models and accompanying ZKP verifiers to Ethereum, where users can claim an input prompt, publish an inference task and eventually receive the output as an NFT. The proposers of this EIP theorized it was a way to help monetize smaller models.
NFTs for finance — DeFi & Real World Assets
While DeFi might seem like an unlikely place to find novel NFT use cases, it turns out that many financial assets, especially derivatives, are non-fungible (hence Uniswap using the ERC-721 standard for representing V3 LP positions). To this effect, NFTs have many non-obvious use case in DeFi:
Panoptic (Concentrated Liquidity Market Makers & NFTs)
Built on top of Uniswap V3 LP positions, Panoptic is a crypto-native perpetual options protocol. Options can be very capital inefficient due to the need to post collateral, so in an attempt to enable under-collateralized options, the team turned to NFTs for a solution.
Pantopic essentially replaces Uniswap’s Non-fungible LP position manager with a Semi-fungible position manager that uses the ERC-1155 interface instead of ERC-721. This allows them to combine several options into a single NFT to create “defined risk positions,” which then makes it easier to calculate the collateralization requirement of a set of interlinked options. This is especially useful for multi-leg option strategies that have a holistic risk-defined profile even though individual options inside of it may theoretically be exposed to infinite losses.
Homebase (Real Word Assets)
Homebase, a platform that allows users to invest in tokenized residential real estate for as little as $100, uses NFTs to represent the assets traded on the platform. Each token has its own unique metadata URI in which information about the asset is stored and regularly updated. New home data may include the addition of new bedrooms or bathrooms.
While Homebase and other RWA / NFT finance platforms may resemble toys today, they actually highlight exactly why financial infrastructure built specifically for NFTs is so important. Most assets and many financial positions are actually non and/or semi-fungible. Examples such as these also highlight the possibilities that could be unlocked by bringing more financial metadata onchain (more on this another time).
Infrastructural Challenges
As exciting and inspiring as the use cases explored above are, the severely fragmented current state of NFT metadata remains a major barrier to realizing the full potential of NFTs not only as incentives mechanisms, but also as data standards. Today, NFTs exist on various different L1s and rollups, some with onchain metadata, some with off-chain metadata, some with hybrid models, across EVM and non-EVM ecosystems, some leveraging centralized storage, others decentralized storage, and on and on.
The point is that as NFTs become the container for more and more content, assets & experiences, the need for a decentralized, web3-native database that brings composability and feature-richness to the metadata layer becomes increasingly important. This would ideally enable a world where much less data is locked inside centralized walled gardens, and more importantly, where data can be more granularly and permissionlessly exchanged between entities without the need for rent-seeking intermediaries. Brands and creators could cease spending billions of dollars annually on Google analytics & Facebook ads just to understand and engage with their own fans and customers, while allowing ownership and control to flow back to the user.
Promising examples of such a product include Tableland, a SQLite database solution built specifically for web3 development. You can think of Tableland as a layer that sits between Filecoin storage and EVM smart contract logic, enabling databases that are programmable directly from smart contracts. For example, developers can allow certain cells and/or rows to only be changed by the owner of a specific NFT or as a result of some on-chain event. This is exactly the right direction to be building in, although there remains much to be done around accommodating newer token standards and ecosystems.
Dive Deeper: Click here to check out Tableland’s curated list of databases and metadata solutions.
The demand for data is not slowing down anytime soon, and as AI & digital economies come to the forefront of human life, it will become increasingly difficult to thread the needle between extracting / controlling data and preserving digital property rights. NFTs might just be our best chance.
If you’re currently building anything related to the topics discussed above or simply want to jam out / collaborate on fleshing out these ideas further, please don’t hesitate to reach out! As always, my DMs are open for ideas & feedback!
