Brief description of the popular business models of NFTs: DeFi governance tokens and revenue sharing, etc

This article is sourced from: andrewsteinwold.substack.com

Author: Andrew Steinwold, Partner at Polynexus Capital

The most common business model for generating revenue in the non-fungible token (NFT) ecosystem is the sale of NFTs. This business model is an obvious choice, as the demand for virtual goods seems to be ever-present and works well. However, I want to explore new ways for NFT businesses to generate revenue.

1. Direct Sale of NFTs

First, let's discuss the method of selling NFTs directly to users. As I mentioned, this is the most common way for startups in the NFT space to generate revenue. Even large video game publishers derive most of their income from selling digital goods to users. The free game Fortnite, developed by Epic Games, generated up to $4.2 billion in revenue in 2019, a significant portion of which came from selling fully digital products known as "skins." While selling NFTs directly to users is a viable revenue stream for the foreseeable future, blockchain technology has opened up more economic opportunities. Let's examine other ways game companies can earn revenue.

2. Secondary Market Transaction Fees

Game developers can charge fees from secondary market transactions of the items they develop. For example, developers on OpenSea, known as the "eBay of blockchain games," can set secondary market sales commissions ranging from 0-99%. However, there is a clear boundary: if the secondary market commission is too high, it will incentivize users to bypass it and sell to each other privately.

3. Transaction Fees in In-Game Economies

Essentially, charging transaction fees from the in-game economy to generate revenue is also a form of secondary market fee model, but it focuses on user-generated NFTs. For instance, in the virtual world of Cryptovoxels, users can create accessories called "wearables." This economy and market are entirely native to the game, allowing Cryptovoxels developers to charge a small transaction fee on each trade of these digital products within the game.

Currently, transaction fees from in-game activities account for only a small portion of the overall economy in the NFT space, making it difficult for companies to generate substantial revenue from it. However, once the NFT world grows and attracts millions of users, this type of transaction fee could significantly impact corporate revenue.

4. DeFi Models

DeFi, or "Decentralized Finance," has recently gained significant traction, and here I refer to DeFi as a collective term for various business models that utilize crypto tokens or DeFi protocols.

Governance Tokens: Game developers can earn money by selling governance tokens to community members. I find the idea of launching governance tokens for games or virtual worlds very exciting. You may have played many games and thought to yourself, "I wish they would create feature X." Well, with governance tokens, dreams can become reality.

Users holding these tokens will be able to vote on new features and even propose new features to be built. Currently, voting rights are proportional to the number of governance tokens held, but we may see interesting governance models emerge, such as secondary voting.

The main drawback of the governance token business model is its poor sustainability. Game developers may create a fixed number of governance tokens, and eventually, the revenue generated from selling governance tokens will drop to zero.

The best approach to adopting this model may be for developers to sell governance tokens over a longer period while retaining a significant portion of the equity themselves. This way, the development team is incentivized to continue executing their vision, as doing so will increase the value of the tokens they hold.

Revenue Sharing Tokens: Game developers can also launch tokens with revenue-sharing features. For example, a virtual world platform could launch a revenue-sharing token that receives 50% of in-game transaction fees, with the other 50% allocated to the game developers.

This incentivizes both parties to actively increase economic activity within the game. Suddenly, all users become evangelists for the game, encouraging others to join and create goods and services. Since this token model is clearly a security, regulatory considerations must be taken into account. However, I still hope to see this token model implemented soon.

Subscriptions: Finally, there is a DeFi subscription model where users invest crypto assets into DeFi protocols or liquidity pools, and the resulting yields are provided to game developers. For example, a user could deposit 100 DAI into the money market protocol Compound, and the yield (currently around an annual percentage rate of 3%) could be given to the game developers.

Another business model with higher developer involvement is for game developers to launch staking services that users must use to play the game. I can imagine game developers requiring users to stake the native token XTZ of the Tezos protocol or requiring staking of ETH when Ethereum 2.0 launches.

Similarly, all yields will flow directly to the game developers as compensation for users playing the game. After users finish playing, they can unlock XTZ or ETH, meaning they effectively spent nothing! For a game with only 100 users, this type of business model generates minimal revenue, but as the user base grows, revenue will increase accordingly.

Native Tokens: Of course, NFT projects can also directly launch their own tokens as part of their business model. They may require that all assets in the game/virtual world can only be purchased using this token, giving it a use case. The game development team could also mandate staking in some form.

As DeFi demonstrates the effectiveness of these native tokens to users and developers, this type of native token model may become more popular in the NFT ecosystem.

5. More Intriguing Approaches

Let's explore some more unexpected ways development teams can generate revenue.

Splitting: The NFT splitting platform NIFTEX allows users to invest high-value NFTs and split them into 10,000 ERC20 tokens. These ERC20 tokens can then be traded on the NIFTEX market. Theoretically, a team could create a high-value NFT, split it, and then trade the split ERC20 tokens on NIFTEX, hoping for asset appreciation.

This method may only be applicable to established NFT projects with a large, vibrant community. If a new project splits NFTs and puts them on the market, there may be very few participants. To maximize the effectiveness of this method, it is essential to build something truly outstanding.

Loans: Nowadays, with NFT collateral loan platforms like NFTfi, game developers can use the assets they create as collateral to obtain loans. They no longer need to rely on outdated banking systems to secure short-term loans that may take weeks to obtain; they can simply use their assets as collateral and receive loan offers immediately.

Clearly, this is not entirely a "business model," but for teams facing unexpected expenses and in urgent situations, it is a viable way to obtain short-term cash flow.

I am sure we will see more interesting and exciting business models in the NFT ecosystem, but for now, we have already seen some viable business models.

I am very excited about any business model that gives users a sense of ownership in the game or platform. Of course, what we need to focus on now is conducting more experiments and building.