Today a majority of NFTs are cute jpegs that have no intrinsic financial value outside their exuberant price tags. The value is placed on them because market participants see them as high status digital goods to flex on social media profiles. This property makes jpeg NFTs Veblen goods.
What is a Veblen good?
A Veblen good is any item that increases in demand when the price increases. Think of luxury goods like gucci belts & lambos. The more expensive they are, the more of a flex it is to purchase and show them off. It is precisely this perceived high status from possessing these goods that drives the value. So in a sense, Veblen goods are backed by the envy of others & the appearance of “coolness”. Unironically strong fundamentals. Successful PFP projects become Veblen goods if PMF (product-market fit) is achieved.
The PFP market is oversaturated with every project vying to become the next Bored Ape or CryptoPunk making it hard to differentiate your product. I see the new wave of NFT mania come in the form of financial NFTs.
The New NFT Primitive
NFTs are a technology, it’s interesting that we immediately think of monkey jpegs when the subject is brought up. This perception is being challenged by projects that are changing the nature of NFTs from Veblen goods to financial assets. The protocols below utilize NFT tech to create cash flow generating bearer assets.
Protocols building NFT 2.0
Berachain 🐻⛓️
Berachain has a three token ecosystem consisting of $BERA (gas token), $HONEY (stablecoin) and $BGT (governance token). BGT is a non-transferable NFT that accrues $HONEY by simply holding it in your wallet. This model makes valuation of $BGT using a DCF approach relatively straight forward.
Prologue NFT allows users to deposit $ETH into their pfp NFTs & receive a yield in native $ETH. On the back end, the Ether deposited into the NFT is being loaned out to whitelisted protocols. Spice is using a hybrid model where the NFTs are cool pfps with varying rarity in addition to their cash flows. This will give the collection a Veblen premium on top of the base value of $ETH deposited in the NFT.
Dyad is a stablecoin protocol that combines NFTs with game theory to achieve decentralization & scale. Each dNFT allows users to deposit $ETH and mint the $DYAD stablecoin. Users can lever up by borrowing more $DYAD against their collateral. Every dNFT has metadata that tracks user activity (minting & borrowing). A higher “xp”, which is a function of user activity, results in higher yield. Now, the game theory element kicks in and rewards the top 20% of dNFTs with higher yield at the expense of the bottom 80%. It will be an interesting experiment to see this play out once the protocol is live.
Limitless Possibilities & The Future
The utility of NFTs are as broad & narrow as the imagination of builders who are iterating on them. They are infinitely composable and can facilitate many applications in DeFi. I’m merely scratching the surface of the potential use cases here.
