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Navigating the new normal
Future of money
Security
Sustainability
Economic insights
Visa views
Innovation experiences

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Visa Crypto Team

October 2021

 

6 Minutes

How NFTs can revolutionise social commerce

Non-fungible tokens (NFTs) are suddenly at the centre of payments conversations, with more than $1B in payment volume in August alone 1, through collections of digital-first memorabilia. New and fascinating use cases for NFTs are still emerging as the groundwork is being laid for how they work in the long term.

What is an NFT?

NFTs are unique tokenized representations of digital files that are exchanged on public blockchains. Like cryptocurrencies, NFTs are used to designate ownership of a certain asset. Each NFT is tied to some unique data, typically a digital content file of some kind and governed by a “smart contract.”* The process of converting a media file into a non-fungible token is referred to as “minting” an NFT, and, like cryptocurrency, the NFT and its ownership are written to the applicable blockchain database.

Unlike cryptocurrency, NFTs are not fungible, meaning each NFT is unique and not interchangeable with another NFT.

*Smart contracts are not the same as legal contracts. Smart contracts are computer code that execute simple if/then functions.

For the first time, content on the internet in the form of an NFT can be definitively owned by a specific person independent of a centralized intermediary, and this is unlocking exciting opportunities for digital commerce and engagement. Because NFTs are new, there is limited information on how existing laws and regulations apply to them.

Unlocking New Commerce and Engagement Opportunities

NFTs appeal to merchants, collectors, customers, and talent, particularly in industries like music, gaming, art and sports. They have become a great way for individuals and businesses to capitalize on unique assets, engage customers and potentially generate revenue.

“NFTs have the potential to become a powerful accelerator for the creator economy and lower the barrier to entry for individual creatives to earn a living through digital commerce. NFTs are ushering in a new form of social commerce that empowers both creators and collectors,” says Cuy Sheffield, Head of Crypto, Visa.

Because the opportunities for growth with NFTs are still evolving, businesses should define what their end goals are around NFTs. Some of the common ways brands are using NFTs to grow their business include:

  • Customer engagement – NFTs can be much more than a collectible or piece of art, and savvy brands are recognizing that the most successful and long-term-relevant NFTs will have ongoing value and utility. For example, NFTs can better connect fans to their favorite teams or brands by offering voting rights to team decisions or the ability to earn rewards.
  • Customer relationship management – Unlike physical goods, NFTs are trackable so it can be possible to see what wallet address they reside in. NFTs can open unique customer engagement strategies based on trackable factors related to the NFTs owned/purchased.
  • New potential revenue streams — Unlike physical goods, NFTs can include a smart contract that codes in a royalty percentage designated by the content creator. As such, subsequent sales of the NFT can generate revenue for the original NFT creator, providing an ongoing potential revenue stream as it is sold or auctioned.

How to Integrate NFTs

There are seven steps to consider for integrating NFTs successfully into a business.

1. Identify the NFT use case
First and foremost, work out how you will use NFTs as this will affect how you design it. It could be collectibles, art, gaming, experiences or another use case totally new to your business.

2. Determine the appropriate blockchain
Selecting the appropriate blockchain means you need to analyse across multiple dimensions such as throughput or transaction cost. While a business may start creating NFTs on one blockchain, they may want to create NFTs on multiple blockchains in future and should keep this in mind.

The ideal infrastructure partner would support multiple blockchains and enable interoperability of assets between blockchains.

3. Mint the NFTs
After determining what content to use, the NFT needs to be created, or minted. To mint an NFT, a cryptographic key is used to create a token on the blockchain that includes characteristics, like the name, description, and the edition size. Once an NFT is minted, it is immortalized on the blockchain.

There are several platforms that can help with minting NFTs. In creating NFTs, companies should find providers who will mint NFTs according to custom smart contracts so that companies have as much control as possible over the parameters of the NFT.

4. Store digital assets sustainably
NFTs are minted either to contain the digital content file itself or to contain a reference to the digital content. Accordingly, it is important to understand how this digital content is being stored, whether on decentralized or centralized storage methods.

5. Store and access NFTs securely and easily
Similar to cryptocurrencies, NFTs are stored in a crypto wallet – the digital equivalent to an address. There are many crypto wallets available, and it is important for NFTs to be able to integrate with many of these wallets, so that they can be delivered to a maximum number of digital addresses.

There are two primary models for wallets – ‘custodial’ or ‘non-custodial’. Consumers that interact with crypto often prefer the ‘non-custodial’ model, as it gives them full control over their assets. By contrast, including a custodial solution, from a trusted brand with strong security, can help provide a broader audience easy access to a business’ platform.

6. Distribution
Another important consideration is which marketplace to distribute NFTs. Factors for evaluating NFT marketplaces include: whether the marketplace allows users to purchase NFTs with fiat currency (dollars) or requires users to use cryptocurrency for purchases (for mainstream appeal, it is important to accept card payments); and the general audience of the NFT marketplace.

 

7. Identify additional opportunities
Today, selling art and collectibles is the primary use case for NFTs. While these use cases can generate revenue, there are untapped strategic opportunities that may be realized. For example, one exciting aspect of NFTs is their composability. As the ecosystem develops, NFTs can be designed in a way that spans multiple use cases, which could ultimately create more valuable NFTs that generate additional revenue on secondary sales or auctions. This area is rich for potential and can span multiple phases of the customer experience:

  • Loyalty and Gamification: NFTs can be used as a reward to incentivize certain behavior.
  • Utility Across Metaverses: NFTs could be used across different applications within multiple metaverses.
  • Ticketing: In addition to being collectibles, NFTs can be combined with event tickets to provide access to an event.
  • Customer Governance and Decision-Making: NFTs can be used to enable customers to impact decisions and outcomes of a team or brand.
  • Customer Data with Pseudo-Anonymity: A customer’s crypto wallet and the assets they own could inform marketing strategies and how to engage with the consumer.

Achieving Thoughtful Change

Innovation, particularly in cutting-edge areas, is not something that can be achieved on autopilot. NFTs are no exception, with a range of strategic considerations:

  • Risk Management
  • Environmental Impact
  • Fees (i.e., blockchain transaction fees, marketplace fees, infrastructure costs)
  • Licensing and T&Cs
  • Legal and Regulatory

Commerce is evolving, and innovations such as crypto and NFTs are likely to shape sports, entertainment, and other communities going forward. NFTs represent a deeper and more innovative way for customers to engage and potential new revenue streams for organizations. However, there are many considerations to take into account when integrating NFTs because it is a new space.

 
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1 https://twitter.com/dfinzer/status/1427429707365163009?s=20

All brand names, logos and/or trademarks are the property of their respective owners, are used for identification purposes only, and do not necessarily imply product endorsement or affiliation with Visa.

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