Reality First, Digital Second

What’s stopping NFTs from reaching mainstream adoption? In my previous article, “NFT Utility Standard,” I emphasized the need of “utility” to capture the attention of the average consumer. Yet, not every form of utility suffices.

The majority of NFT projects in web3 adopt a digital first, reality second approach. This implies that most projects commence as pure NFT initiatives, assuring the public of the provision of real-world utilities, such as merchandise, movies, intellectual properties, and more. This approach highlights arguably the only proven use case of NFTs: a fundraising platform. It is then up to the core team members of a project to steer it towards success.

Ironically, despite the crypto industry’s ethos of eliminating the need of trust, we find ourselves gambling on pre-launch NFT projects, hopeful they will deliver on their proposed roadmaps. Consequently, many initiatives fail due to unfulfilled promises or the team’s inability to execute. This isn’t to say trust isn’t necessary in web3; it’s just paradoxical on face value.

To catapult crypto into mainstream adoption, the industry must transition to a reality first, digital second approach, where the technology is broadly used by mainstream incumbents — real-life businesses catering to the average Joes. This utilitarian phase will onboard millions of individuals and unleash the true potential of digital first, reality second projects. This shift is analogous to the internet’s early days when cypherpunks dominated the space until real-world businesses recognized the internet’s true value, propelling the sector to a new frontier. In this article, we delve deeper into understanding what it takes to surpass the speculative players with utilitarians, sparking a Cambrian explosion of NFTs.

Utility was less of a concern during the 2021 bull market, where much of the adoptions came from the liquidity and marketing buzz aspects of NFT. However, in today’s bear market, when the public has lost interest in NFTs, no brands are incorporating NFTs. NFT projects hoping to partner with brands find themselves ignored. Moreover, the introduction of NFTs might negatively impact the brand in this climate. Marketing buzz is an adoption amplifier that is naturally bound to return with the bull. But what will be the catalyst this time? What will be the equivalent of the “PFP” that initiated the previous bull market?

The NFT space is at an impasse, where the community and utility selling points are insufficient to convince traditional businesses to adopt the technology. Most customer retention objectives can be achieved through standard reward programs and social media platforms such as Instagram. Although reward programs suck, they do work to some extent.

Avichal from Electric Capital also posits NFTs as an effective social signaling mechanism. For instance, purchasing a physical Rolex for $200,000 might be seen by 10,000 people in your lifetime, yielding a cost per acquisition (CPA) of $20. However, if Rolex were also to provide you with a digital copy of the watch in the form of an NFT, which is seen by 1,000,000 people online, the CPA would be only $0.2. This is a worthwhile investment.

This makes perfect sense. But, the strength of Avichal’s argument lies in Rolex issuing NFTs as proof of ownership and reaching 1,000,000 online viewers. Here, brands and social media are caught in a chicken-and-egg situation because brands have no purpose to gain exposure with NFTs without social media support; and social media platforms are unlikely to back NFTs if brands are not utilizing the technology.

This raises two questions:

1. Does supporting NFTs on centralized social media platforms conflict with their advertising models and, crucially, the ethos of web3?
2. What about decentralized social media platforms like Farcaster and Lens Protocol?

One possible scenario is that advertising verticals and wallet data are managed independently, meaning wallet connections will not share asset data with centralized servers. ZK-proofs can facilitate this. However, why would social media companies create something that doesn’t directly benefit them?

The integration of NFTs would enrich digital social connections because an individual’s NFT collection serves as a comprehensive digital representation of them. If these social media companies fail to adapt, they risk being disrupted by newcomers. Modern companies have been known to spend millions chasing the faintest trend, so I’m confident they will adapt.

As for decentralized social media, I remain skeptical. Platforms like Lens and Farcaster are popular due to their tight-knit communities of crypto enthusiasts. The challenge lies in maintaining that network strength once they open to the public. Differentiating factors will be required to transition from a niche to mainstream, which will likely involve some degree of luck and missteps from incumbents.

Sorry to go off a tangent, but the point here is there must be a unique value proposition that web3 can offer, compelling brands to adopt the technology. After that, the race among social media platforms begins, and the quickest to adapt will capture the market. Efforts before this step are futile; the second-mover advantage is real.

Determining when this will happen, if ever, is the question. However, if we don our optimist hats and assume this will happen in the near future, how might it unfold? Let’s examine the current use of NFTs by brands:

• Starbucks Odessey: Customers participate in “Journeys”, a series of interactive activities (game-like), and when completed they earn NFTs. The NFTs can be sold in the secondary market or used to get exclusive rewards & experiences. (link)
• Coca Cola: In late 2021, the company sold a batch of collectibles in an online auction for $575,883.61. It was purely a marketing act.
• Budweiser: The company first launched its NFT collection in parallel with the Heritage Collection in 2021. The collection features 1936 unique digital designs of beer cans as digital assets. The last NFT play was in collaboration with the World Cup 2022, where holders of Live Board NFTs got exclusive Budweiser Football merch kit, access to holders-only discord channel for an always-on game time community and the Budverse Penalty Kick Mini Game.
• Adidas: Launched Into the Metaverse Project in late 2021. The NFTs was sold for $800 USD. The holders gets access to a tracksuit worn by Indigo, a hoodie with a blockchain address on it, and an orange beanie. In Phase 2, the NFT holders got a chance to mint Adidas Virtual Gear.
• McDonalds: In 2021, while introducing McRib to the menu, McDonald’s started a campaign on Twitter, giving away a McRib exclusive NFT to 10 lucky people. The condition is retweet the tweet. This marketing act was successful as it received more than 85k retweets.
• Nike: The company bought an NFT art project called RTFKT in 2021. The holders of CloneX get access to exclusive products like the RTFKT Air Force 1 and Rimowa luggage. Additionally, Nike also ventured into digital items.

From these examples, it’s evident that most NFT initiatives occurred during the 2021 bull market. These brands sought instant liquidity and marketing. Another observation is that almost all brands followed the digital first, reality second approach to attract an brand new audience with the NFT collection. Again, this strategy is proven effective in a bull market, but not in a bear market.

In a bear market, when the excitement behind NFTs cannot generate publicity, attract a new customers, or procure new liquidity, there is little reason for a brand to use NFTs when existing solutions are adequate. The challenge is to come up with an exciting use case for NFTs that benefits brands more than existing solutions. Identifying the X factor is key.

There are three ways NFTs can be adopted by traditional businesses:

• Proof of Ownership: Rather than issuing physical certificates, businesses can issue digital proof of ownership in the form of NFTs.
• Metaverse Play: Companies issue digital assets to prepare for an imminent entry into the Metaverse.
• X Factor or Non-skeuomorphic Innovation: The use of NFTs to solve the chicken and egg problem, presenting a unique and superior method to grow a business.

Personally, I find the first approach mundane and the second passive. This leaves us with the X factor — the non-skeuomorphic innovation that can propel NFTs into the mainstream. The ripple effects of this X factor will reverberate through other web3 verticals. It will bring reputation and identity to DAOs, further solidifying trust between digital citizens. Moreover, it will boost liquidity in the space and foster more creative DeFi use cases.

The quest to identify this X factor begins now.