NFT As A Yield-Generating Asset

I always have different pitches about NFTs to different types of people – whether it's an art collector, a sneakerhead, an artist, or a savvy investor. To the latter, I love to tell them how NFTs can be yield-generating assets.

Wait a minute, aren't NFTs just JPEGs? Well, here's how it works.

Staking NFTs For Yield

The first type of yield is through staking. Basically, you lock/stake the NFT, and for doing so, you get a token proportionate to the duration of the staking/lock-up.

CyberKongz was the first and the most popular example of this model, where Genesis Kongz generate +10 BANANAs a day. BANANAs later became on-chain tokens that can be traded, but more importantly, they are used to breed Baby Kongz. When Baby Kongz subsequently hit a high of over 10ETH, there was pent-up demand for BANANAs and they were trading at a premium of over $100.

That means, each Genesis Kongz generated $1,000 a day or $30,000 a month! Clearly, those numbers aren't sustainable, especially if there's no demand for BANANAs. And the Kongz holder are cognizant of that fact, which is why they've also set up a fund to build applications and utilities that require BANANA as a currency.

Then there's Cool Cats and $MILK, Mutant Cats and $FISH, Anonymice and $CHEETH and many others that came along. All of them promise some form of value being accrued with the tokens you get, and these tokens being tradeable meant that your NFT can generate passive income. As to whether these tokens are worth anything at the end of the day, that's another question.

Play-To-Earn NFTs For Yield

Then, there are NFT games that generate yield, most typically Axie Infinity. In the game, you can fight or you can breed Axies, which are the required NFTs to play the game, and can be sold. You can earn AXS and SLP by playing the game, which serves different purpose – governance and breeding.

Some players battle for AXS, while others farm SLP, which they then resell to breeders or other players. Therein drives a circular economy, and AXS and SLP can easily be traded for ETH, and then for fiat currency. This play-to-earn model has become incredibly popular in poorer countries like the Phillipines, where the potential in-game earning far exceeds their average salary.

Many more games have since adopted some form of play-to-earn mechanism. Most commonly, it requires you to lock a character or several characters to earn some coins, and the coins can be used to upgrade the characters to increase the farm rate, or to sell to other players.

Most recently, the Wolf Game has hit the Twitter space by storm, where your Sheep can be sheared for $WOOL to exchange for more Sheep or Wolf, or be sold. What's interesting is that Wolves can steal $WOOL from Sheep either by taxing or by stealing the newly minted Sheep.

Regardless of the game, and how interesting the mechanisms can be, what you should ask if there is any value for the tokens beyond the game. Case in point, while people are keen to play the game, they'll be happy to pay for $WOOL, or AXS, or SLP – but why are they even keen to play the game? Is the game really fun or are they out for the monetary rewards?

If it's the latter, all games will inevitably hit a point where the total reward issued per day divided by the number of players becomes less and less attractive. Sure, you can argue that players will strive to be stronger to eat up a lion's share of the pie, but that would also drive other players out, and with less demand for the tokens, inevitably the perceived monetary reward dwindles.

Overall if the game cannot generate new demand, it will die. This is the same for all games, play-to-earn or not, which is also why I remain on the side lines of most play-to-earn NFT games, not to mention that a good number of them are ponzi schemes.

Loaning NFT For Yield

If you hold a Punk or BAYC NFT, you can command a clout on Twitter. Consider the fact, and then consider the possibility of someone "renting" one of these premium NFTs to build an audience. The very fact that these social symbols have social value, creates the possibility of them being monetised.

Also, consider the idea that if you hold a 10ETH or 50ETH NFT, and yet you're stuck in liquidity and cannot participate in a relatively safe lending program or a new NFT drop. What if you can collateralise these NFTs for ETH, in which you have to pay an interest on top, or lose the NFT entirely if you fail to repay the loan.

There is such a demand for liquidity. And when there is a demand, there is also the potential to monetise it.

Creating Derivatives Around An NFT

For me, the most bullish case of passive yields come in creating derivatives. Let's say there is a collection of 10,000 unique characters, and it's turned into a comic, an animated series, or physical collectibles e.g. Toki Doki.

The take off of the derivative works would create an entirely new market segment – revenue around the franchise, the merchandise, licensing deals. Traditionally, all IPs were kept by the company – but in the case of NFTs, what if the IPs are tagged to the NFTs i.e. holders of the NFTs have all licensing rights?

This means that any revenue generated from the comic/animated films/collectible sales will be paid out accordingly to the NFT owners. You holding an NFT becomes holding a celebrity, which gets you yield. Further, the more popular a celebrity becomes, the more valuable he is – which means that your NFT in this case will become more valuable.

Having said that, this is a scenario contingent on derivatives being created around the NFTs – totally feasible, but all serendipitous. If you're able to create these derivatives, this is a way you can monetise your NFTs. Otherwise, as an NFT holder, these opportunities are what you should be looking out for.

All in all, NFTs are really dynamic because they are more than just a piece of digital file. They represent ownership, and with the smart contracts baked into them, there's so much possibilities you can build around NFTs.