Revenue Strategies for NFT-based Businesses


Overview

Businesses make money by providing a product or service valuable enough that people are willing to pay for. The details of how the product/service is delivered, and how a customer can pay, determines a lot about the nature of the transaction and business.

NFTs enable new ways in which businesses can do business. But first, I think it’s worth taking a look at some history.

One-time payments in the digital era

Things used to be real simple. If you wanted to play a game or listen to some music you’d pay a one-time fee and the product was yours, forever.

But technology evolved fast and with it came digital products. No longer did businesses have to spend money on producing physical copies, it was just a bunch of 1s and 0s stored on a computer that could be replicated and distributed an infinite amount of times with no cost, besides the initial investment.

This raised a lot of questions.

Was it stealing if you downloaded a digital copy of a game? Is it really piracy or is it just modernized sharing? Who was losing and what were they losing?

From the consumer’s perspective, there was 1 copy and then he downloaded another and then there were 2. Magic!

But, of course, this is one-sided and it’s not sustainable for the creator. If people had the choice to pay for something or get it for free, with no consequence, most people would rather get it for free. People love free stuff. Good will only lasts so long and it gets harder to give a damn when everything’s behind a screen.

Convenience and Subscriptions

It turns out that telling people they can’t do things just because you don’t like it doesn’t really work, especially when you can’t enforce it.

As much as they tried, businesses and lawmakers couldn’t eliminate the piracy problem. Peer-to-peer file sharing/torrent sites like Pirate Bay persisted. Games, movies, music, and anything else that could be turned digital were out in the open and available for free, if you had the know-how.

And then came Gabe Newell with Steam (a gaming platform) completely changing the course of things. He proposed that piracy was an issue of service, not price. And he was right. People did pay for things, even when a free option was available–you just needed to provide a better service that was easier to use.

Steam prospered and we saw other platforms like Spotify and Netflix rise from doing similar things, offering better, easy-to-use, services. But providing a service is an ongoing process with ongoing costs, so subscriptions were a natural fit for these types of businesses.

Non-Fungible Tokens (NFTs)

The problem with subscriptions is that no one likes paying for them. They’re like mosquitoes sucking your wallet dry, one month at a time.

As a creator, builder, or business, NFTs offer new ways of getting paid. It’s still extremely early, though, and there’s lots to be explored.

Minting

NFT collections are essentially digital products with limited supply. Minting looks to be the blockchain equivalent of one-time payments.

This creates a huge payout upfront, and many projects rely on minting the same way startups rely on VC funding–investors pay upfront for a promise of a future return on investment. The difference is that investors immediately get a product (NFT) they own and that acts like their ticket, or shares, to the project.

But, what ends up usually happening is that many people don’t care about the project at all, they just like trading JPEGS the way kids used to trade pokemon cards, and making money off it. They get in early, often through a limited whitelist that must be grinded for, minting out the project in record time. Then, FOMO kicks in and others buy in hoping to make a profit while the early traders ride the hype train to the next project, holders get dumped on, and the cycle continues.

It’s actually a lot of fun, except for the fact a lot of people lose money.

This isn’t ideal because all the time and energy is focused into hype and short-lived pleasure (of flipping). Project owners, often playing a large role in generating hype, aren’t held responsible if they don’t follow through with the project, and investors (holders of the NFTs) are left with useless JPEGs and empty promises.

After the mint, there’s little to no incentive for builders keep building.

Royalties

But what if there was a way to incentivize project owners to keep building, even after the mint?

Royalties are one way to accomplish this. Upon every NFT traded the owner can set a royalty such that a small percentage of the trade is paid to them. This way, it’s in the owner’s best interest to keep the floor price high, and this is usually done by continuing to deliver on the project’s initial promises.

So now we have funded projects, owners who keep building, and holders who have a reason to hold. But is everything great? No. Not even close. Well, maybe. But we could do better.

A project that relies on royalties is a project that relies on their NFTs being traded.

But why would a holder trade their NFT if it was a truly good project that keeps generating value? And if the owner keeps building then the project should get better, so there’s even more reason to hold, which means as time goes on there should be less trades going on and more holding, ultimately leading to less royalties and the owner getting paid less.

It then makes most sense, profit-wise, for the owner to focus on activities that encourage trading and drive the floor price higher. This, to me, is the equivalent of trying to entertain a bunch of kids when you should be working. It may be fun, but unless you’re a babysitter, it’s not the type of work that pays the bills in a sustainable way.

The people who win from this model are flippers, people who buy low and sell high. But flippers don’t contribute to the project nor community in a sustainable way. It’s not healthy when the majority of your community is only there to flip.

Royalties, alone, do not incentivize healthy business practices.

Staking, Raffles, Auctions, and things that go Brrr

For a while, in early 2022, staking was the new hot thing and if your project didn’t have it then it wasn’t going to make it. And the projects that did have it skyrocketed in value. It’s calmed down a bit since then.

The idea is that holders lock up their NFTs for a period of time and in return they get some shitcoin. The coin can then be used to purchase a whitelist to another hyped project, or other NFTs. Sometimes it’s a combination and shitcoins can be used in raffles or auctions to win NFTs.

It’s a nice idea because it provides value to holders and incentivizes them to keep holding, which drives down the supply of listed NFTs on the market, driving the floor price price up.

But (smart) investors don’t buy into a project just to stake–at least not anymore. It’s a handy tool at best.

Revenue share

It seems to me that, with blockchain technology, we are coming closer to the day where anyone can create systems that rewards all members, in a passive and sustainable manner.

The idea, in a nutshell, is this:

The owners provide a valuable product/service. Holders invest in the project by holding the NFTs, but anyone can come and use the product/service. Fees can be charged for certain features and those fees are used to pay the owner and the holders. Owners/businesses benefit from holders because large numbers of people gathered around a single purpose naturally create a community and word-of-mouth marketing that increases brand awareness and trust, while holders benefit through revenue share.

A couple examples:

One, a free-to-play game where players compete for fun and prizes. Profit (for the business) can be generated through cosmetic microtransactions, ads, and sponsorships, as usual.

The differentiator is that players can earn tokens through playing, and these tokens can be used to craft NFTs that customize their weapons and characters. Furthermore, these NFTs are owned by the players, who can then sell them, trade them, craft them into rarer NFTs, or stake them for other tradeable digital assets.

Players have fun and can make actual money earned through playing, holders of NFTs benefit from passive-earning mechanisms like staking, and the business benefits as the game grows, because the only thing better than a fun game is a fun game that pays you to play it.

Two, an online poker service where anyone can play, and a small percentage of each pot is taken and re-distributed at the end of the week to reward the people who played the most, along with the owners and holders of the NFT. The project also offers services to other projects by providing a platform where their community can play poker and win prizes, and holders can get free access to some tournaments.

People love to play poker, it’s not going anywhere. The main difference here is that NFTs and blockchains allow for efficient redistribution of profits–to the players, the holders, and the owners. Payment processors like Stripe charge a 2.9% fee and have many rules and regulations for how payments can be made, or services that are allowed. Blockchains like Solana charge a 0% fee and anyone can send or receive money.

Like I said, it’s still extremely early and whether this model is truly sustainable is something only time will tell.

But these projects already exist and they’re building the next generation of businesses. The 1st example is based off Panzerdogs and the 2nd example is based off Sol City Poker Club.

Disclaimer, I don’t mean to shill my bags, but I hold NFTs in both these projects. Panzerdogs is still in alpha so we’ve yet to see the essential pieces come together. And Sol City Poker Club isn’t generating anywhere near enough profit to retire from but since its inception a few months ago it’s been nothing but good vibes and steady progress.

I’ve also seen other NFT projects that offer revenue share but I have nowhere near as much confidence in them.

Where they seem to falter is the NFT collection size is too large to provide any meaningful amount of revenue share, or the community-fit is off. The best projects I’ve seen are where the holders are aligned with the project’s vision for reasons beyond just profit.

I think we’re witnessing the start of something revolutionary, where builders can build something near and dear to them, holders can take an active role in helping shape the project, and everyone can win. It actually feels more like a community rather than just business.