Before we take a look at what NFTs in the Metaverse mean, let’s take a look at what both the terms mean.
Explaining The Terminology
A solid grasp of the two concepts is crucial for taking advantage of their strengths.
- The metaverse. This is a theoretical concept of a digital 3-D world that you enter via a virtual reality headset. In this virtual world, you have a “body” (avatar) that you can customize, a home to fill with the stuff you like and hundreds of spaces to visit. You can interact with other users, do work, play games and basically perform most of the activities that you do in everyday life. The metaverse is useful because it greatly reduces our need to travel and use physical resources. In a 3-D world, we can visualize and interact with any object without putting in much effort and time. We can cycle between activities, chats, locations and data with a simple gesture. Instead of switching between apps and a web browser, everything is connected and accessible in this digital world.
- NFTs. These are nonfungible tokens — tokens that are 100% unique. You can think of them as certificates of ownership that exist on the blockchain. They are created when a digital file (commonly an image, video or GIF) is minted. This means that a certificate of ownership and originality is generated via cryptocurrency (usually Ethereum) and sold/granted to the new owner. NFTs are useful because digital art and assets are notorious for being easy to steal and copy. While NFTs cannot stop somebody from stealing digital assets, they provide a neutral and unbiased confirmation of the designated owner. If we ever see NFTs integrated into copyright law, they may also serve as evidence against the misuse of digital goods.
Also Read: The weird NFT obsession
One way people are using NFTs in the metaverse is to buy virtual land, such as LAND – a digital piece of real estate in The Sandbox. These virtual spaces use NFTs, as opposed to a physical deed, to reflect ownership of specific locations within a virtual world. In the Sandbox, LAND comprises about 300 square feet in the game world. In Decentraland, the size changes to 50-square-foot land parcels. If users hold enough plots of land, they can combine them to create a single estate. One example of that is “The Secrets of Satoshi’s Tea Garden” – an estate on Decentraland made up of 64 separate plots of land. It sold for 1.3 million MANA in 2019 (about $80,000) because of its size and location. The “land” is completely surrounded by digital roads, making it convenient to access. In 2021, the Metaverse Group bought an estate in Decentraland for 618,000 MANA, which was equivalent to about $3.2 million at the time. Just as in the real world, location is everything in digital real estate, and plots that are close to entry points or to places such as virtual arenas that promise virtual foot traffic tend to increase in value.
Renting and lending
Depending on market demand, people can rent their NFTs to earn passive income. Landowners in the metaverse can do that through PARSIQ’s IQ Protocol, a decentralized finance (DeFi) platform that provides ways for game developers to make money. Similar to the dynamics of traditional property and real estate, the IQ Protocol helps virtual landowners earn yield and rent fees through predetermined conditions that are negotiated with renters and enforced by smart contracts.
Along with royalties that creators can earn when NFTs are sold or resold on secondary markets, NFTs can also help investors earn passive dividends. One example of this is a segment of a digital Monaco racing track in the F1 Delta Time game that was auctioned for $222,000 in December 2020. The NFT representing the digital track allows the owner to receive 5% dividends from all races that take place on it, including entry ticket fees for races and yields from “Elite Events” that require participants to stake REVV for entry.
Play-to-earn, in-game assets and rewards
Through games like Axie Infinity and Aavegotchi, the play-to-earn (P2E) model has created entirely new virtual economies that reward users with assets like NFTs and in-game cryptocurrencies that can be swapped, sold or borrowed. In addition, other games like Battle Racer help further utility by releasing car parts as separate NFTs. Users can then buy these parts to build their vehicles or sell them separately on secondary marketplaces like OpenSea.
Although it is still years away, the ways people are using NFTs in these blockchain networks can also be applied to skins and cosmetics in more mainstream games like Fortnite. Not only would that help players better reflect the ownership and originality of their assets, but it would increase global in-game spending, which is projected to surpass $74.4 billion by 2025. Epic Games, the software developer and owner of Fortnite, welcomes any game that supports NFTs to its store, but it won’t directly release or engage with NFTs because of what is perceived as scams in the market.
Total spending on NFTs was reported to be more than $12.6 billion by the end of 2021, and some of the ways that buyers are earning passive yields (residual income) and maximizing the potential of their investments include:
Yield-generating NFTs: Timing markets in Web 3 can be next to impossible, even for the most seasoned investor, and so to create more practical incentives and mitigate against the volatility of the NFT sector, a number of projects generate passive returns by issuing governance tokens to holders. Notable among these collections include the Genesis Cyber Kongz, which is set to produce 10 $BANANA tokens every day for the next 10 years. Other examples are SupDucks (($VOLT) and Mutant Cats ($FISH). While the use case is still unclear, Bored Ape Yacht Club was also expected to launch its own token in the first quarter of 2022.
Staking: Together with collecting NFTs that generate passive yields, investors can also reap the combined benefits of NFTs and DeFi protocols by staking, or locking up their assets in a smart contract to receive rewards. Considering the strict regulations around securities, most of these rewards are in the form of tokens specific to the project and used for standard features like governance or voting rights. That said, if the tokens are listed on decentralized exchanges like SushiSwap or Uniswap, stakers can sell them in the market.
Nested NFTs: In the past, NFTs were fairly static. For the most part, what somebody minted or bought in a secondary market couldn’t be changed. With platforms like Charged Particles, however, people can now layer NFTs onto other NFTs and transform one NFT into a virtual basket that can hold multiple ERC-based tokens. This new type of nested NFT helps add intrinsic value to a collectable and turn what would be a speculative investment into something like a yield-generating asset – with a scarce NFT attached to another scarce NFT, ad infinitum.
Overall, nested NFTs helps to provide value for users in the metaverse by customizing and adding new functionality to virtual items. Ben Lakoff, co-founder and business lead of Charged Particles, highlighted in a webinar some use cases. They include weapon that gains power as the contained NFTs accrue interest and a painting that can shift depending on the amount of tokens deposited in it.