Utility is a commodity. Adding staking or gated access to an NFT is trivial; the technical implementation via ERC-721 or ERC-1155 standards is solved. The market is saturated with identical 'utility' features, rendering them valueless.
nft-market-cycles-art-utility-and-culture
Blog
Why Utility NFTs Are Vessels for Shared Experience
An analysis of how the most durable NFT value is derived from collective participation and cultural formation, not replicable on-chain perks. We examine the market cycles from art to utility and argue that true utility is a shared state.
introduction
THE MISALLOCATION
Introduction: The Utility Trap
NFT utility is a misnomer; the value is in the shared, verifiable experience, not the embedded feature.
Value accrues to coordination. The scarce asset is the provable, on-chain record of shared participation. Projects like Proof of Attendance Protocol (POAP) and Galxe succeed by minting verifiable social graphs, not by offering exclusive perks.
The trap is feature-bloat. Teams build complex utility systems on Polygon or Solana to justify a price, distracting from the core product: a coordination primitive. The NFT is the ledger entry, not the application.
Evidence: Compare the floor price of a utility-heavy Bored Ape Yacht Club (access to airdrops) versus a Cryptopunk (pure status artifact). The market prices the stronger, simpler social signal.
thesis-statement
THE SHARED STATE
The Core Thesis: NFTs as Social Primitives
Utility NFTs are not assets; they are programmable vessels for coordinating group identity and action.
NFTs encode shared state. A utility NFT's metadata and on-chain logic define a persistent, verifiable record of group membership and entitlements. This creates a coordination primitive more powerful than a Discord role or database entry.
Utility drives network effects. Unlike speculative PFPs, utility NFTs like POAPs or guild badges derive value from active use. Each interaction—staking, voting, accessing—reinforces the social graph, creating sticky user retention.
The vessel is the protocol. Projects like Lens Protocol and Friend.tech demonstrate that the NFT is the social contract. It governs access, monetization, and data portability without centralized intermediaries.
Evidence: Lens profiles, as ERC-721 tokens, facilitated over 500 million social transactions, proving that social graphs on-chain scale user-owned networks.
key-trends
FROM SPECULATIVE ASSETS TO PROGRAMMABLE VESSELS
Market Context: The Evolution of NFT Value Propositions
The NFT market's value proposition is shifting from static PFPs to dynamic, utility-driven assets that encode shared experiences and programmable benefits.
01
The Problem: JPEGs with No Legs
The 2021-22 bull run was dominated by speculative profile pictures (PFPs) with thin utility. The result was a ~95% floor price collapse for major collections and a market searching for sustainable value beyond hype.
- Zero recurring revenue post-mint.
- No utility to sustain demand or community engagement.
- High correlation with ETH price, failing as independent assets.
-95%
Avg. Drawdown
>90%
Volume Decline
02
The Solution: Programmable Access & Shared States
Modern NFTs act as verifiable keys to experiences, from token-gated content to on-chain games. Projects like Parallel and Pudgy Penguins use NFTs as vessels for story progression and physical/digital perks.
- Dynamic metadata that evolves with holder actions.
- Royalty-generating mechanisms (e.g., Yuga Labs Otherside).
- Interoperable identity across applications (ERC-6551).
ERC-6551
Token Standard
$200M+
Gaming NFT Volume
03
The Problem: Isolated Communities & Silos
NFT communities historically existed in walled gardens (Discord, Twitter). Engagement was social, not economic, leading to fatigue and high churn rates. The asset was disconnected from the value it could accrue.
- No native economic layer for community contributions.
- Fragmented identity across platforms.
- Passive ownership without governance or yield.
~70%
Discord Churn
0%
Native Yield
04
The Solution: NFTs as Financial & Social Primitives
NFTs are becoming the base layer for decentralized social graphs and shared treasury ownership. Friend.tech keys and Farcaster frames demonstrate social capital as a tradable asset.
- NFTs as share certificates for community-owned brands (e.g., Krause House).
- Direct revenue splits and staking rewards to holders.
- On-chain reputation and credentialing.
$50M+
Friend.tech Fees
DAO-NFT
Convergence
05
The Problem: Illiquid, One-Time Sales
The primary sale was the main revenue event for creators. This created perverse incentives for rug pulls and left long-term alignment on the table. Secondary market royalties proved unenforceable on major marketplaces.
- Zero ongoing value capture for creators.
- Holder value tied solely to speculative resale.
- Broken royalty model (~<5% enforcement rate).
<5%
Royalty Compliance
1
Revenue Event
06
The Solution: NFTs as Recurring Revenue Vehicles
Smart contracts enable NFTs to function as perpetual revenue shares. Platforms like Manifold and Zora enable creator-owned markets and ERC-721M for enforceable royalties.
- On-chain affiliate fees programmed into the NFT.
- Fractionalization (via ERC-404 like Pandora) for enhanced liquidity.
- Usage-based minting and upgrade paths that generate continuous fees.
ERC-404
Liquidity Proto
100%
Creator Fee Control
NFT VALUE PROPOSITION
Transactional vs. Cultural Utility: A Comparative Analysis
This table deconstructs the core utility models for NFTs, contrasting fungible-like transactional assets with non-fungible cultural artifacts.
| Feature / Metric | Transactional Utility (e.g., ERC-20, SFTs) | Cultural Utility (e.g., PFP, Art) | Hybrid Model (e.g., Gaming, Membership) |
|---|---|---|---|
Primary Value Driver | Underlying asset or cash flow | Community narrative & social signaling | Access rights + community status |
Fungibility Proxy | High (e.g., fractionalized NFTs) | Effectively zero | Low (tiered access creates subsets) |
Liquidity Profile | CEX & AMM listable (Uniswap, Curve) | OTC & curated marketplaces (OpenSea, Blur) | Specialized DEXs & internal markets |
Valuation Model | Discounted Cash Flow (DCF) | Brand Equity / Hype Cycles | Sum-of-the-parts (utility + prestige) |
Holder Churn Rate |
| < 10% APR (hodl culture) | 30-70% APR (utility expiration) |
Protocol Integration | DeFi legos (Aave, MakerDAO) | Social graphs (Farcaster, Lens) | Dual-purpose (staking for yield & perks) |
Dependency on Creator | Low (autonomous smart contracts) | Critically High (roadmap execution) | Medium (requires ongoing utility updates) |
Example Artifacts | RealT (tokenized real estate) | Bored Ape Yacht Club | Parallel Trading Cards |
deep-dive
THE PROTOCOL
Deep Dive: The Mechanics of Shared Experience
Utility NFTs encode shared state and rules, transforming digital ownership from a static record into a dynamic, programmable social contract.
Utility NFTs are stateful objects. Unlike static JPEGs, a utility NFT's metadata is a mutable ledger of collective interaction. Projects like Lens Protocol and Farcaster use this to encode social graphs and engagement directly on-chain, making the NFT a live record of community provenance.
The smart contract is the experience engine. The NFT's utility is not the token itself but the permissionless logic in its governing contract. This logic defines the rules for interaction, upgrades, and rewards, creating a verifiable framework for shared participation that platforms like Galxe exploit for credentialing.
Shared experience requires verifiable scarcity. The finite, transparent supply of an NFT collection creates a bounded context for status and membership. This cryptographic scarcity is the substrate for communal identity, a mechanism leveraged by Art Blocks for generative art collections and by Proof of Attendance Protocol (POAP) for event proof.
Evidence: The Lens Protocol social graph, stored as interconnected NFTs, has facilitated over 50 million transactions, demonstrating that programmable social objects sustain persistent, on-chain engagement far beyond initial minting.
case-study
FROM SPECULATIVE ASSET TO UTILITY ENGINE
Case Studies: Protocols That Nailed the Vessel Model
These protocols transformed NFTs from static JPEGs into dynamic vessels that coordinate shared state, access, and value.
01
Blur: The NFT as a Liquidity Position
Blur redefined the NFT as a vessel for market-making intent and loyalty. Its airdrop wasn't a gift; it was a staking mechanism for its native order book.
- Key Benefit: Incentivized deep liquidity, achieving ~80% market share in pro trading volume.
- Key Benefit: Turned holders into active protocol participants, not passive speculators.
80%
Market Share
10x
Volume vs Opensea
02
Friend.tech: The NFT as a Social Bond
Each 'key' is a vessel for exclusive access and shared financial alignment. Price becomes a direct function of community engagement.
- Key Benefit: Created a $50M+ TVL social DEX where relationships are the underlying asset.
- Key Benefit: Demonstrated that NFTs can be high-velocity utility contracts, not just collectibles.
$50M+
Peak TVL
2M+
Keys Sold
03
Uniswap V3: The NFT as a Concentrated Liquidity Vault
LP positions are minted as NFTs, making each one a unique vessel for a specific price-range strategy and fee generation.
- Key Benefit: Enabled up to 4000x capital efficiency vs. V2, attracting institutional liquidity.
- Key Benefit: Transformed LPs into active portfolio managers with composable, tradable positions.
4000x
Capital Efficiency
$3B+
TVL
04
The Problem: NFTs as Dead Capital
Pre-2021, most NFTs were inert, offering no utility beyond proof-of-ownership and speculative hope.
- The Flaw: Zero yield, zero utility, zero composability. Pure ponzinomics.
- The Cost: Projects failed post-mint; communities dissolved; the asset class was a meme.
0%
Utility
90%+
Abandonment Rate
05
The Solution: Vesselization
Embedding programmable rights and revenue streams into the NFT itself turns it into an active protocol participant.
- The Shift: From owning a picture to operating a micro-franchise with embedded business logic.
- The Result: Sustainable flywheels where NFT utility drives demand, which funds development, which increases utility.
10x+
Holder Retention
Continuous
Value Accrual
06
LOOKS Rare: The NFT as a Revenue Share Bond
LOOKS Rare NFTs are vessels that accrue a direct share of all platform trading fees, paid in WETH.
- Key Benefit: Created a perpetual yield mechanism directly tied to protocol performance.
- Key Benefit: Aligned holder incentives with platform growth, not just floor price speculation.
100%
Fees to Holders
Ongoing
WETH Distributions
counter-argument
THE EXPERIENCE LAYER
Counter-Argument: But What About Real Utility?
The utility of an NFT is not its underlying asset, but its programmable capacity to coordinate shared experiences.
Utility is coordination, not ownership. The value of a 'utility NFT' stems from its ability to programmatically manage access, rights, and state for a group. This transforms static assets into dynamic coordination tools.
Protocols encode social contracts. Projects like POAP and Galxe use NFTs as verifiable records of participation, creating a shared history layer that applications like Collab.Land use for gated access.
The asset is the vessel. An NFT for a concert ticket is not the seat; it is the immutable proof of membership in that event's audience, enabling secondary experiences like exclusive merch drops or future presales.
Evidence: The ERC-6551 token-bound account standard demonstrates this shift, turning every NFT into a smart contract wallet that can own assets and interact with dApps, making the NFT an active agent, not a passive collectible.
takeaways
UTILITY NFTS AS SOCIAL PRIMITIVES
Key Takeaways for Builders and Investors
Forget JPEGs. The next wave of NFTs are programmable vessels for shared state, unlocking new economic and social models.
01
The Problem: Soulbound Tokens Are Static
ERC-721S tokens are one-way reputation ledgers. They lack the dynamic, interactive state needed for evolving communities and games.
- Static Data: Cannot reflect ongoing participation or skill.
- Limited Utility: Acts as a badge, not an engine for engagement.
- Missed Opportunity: Fails to capture the value of collective experience.
0%
State Change
02
The Solution: Dynamic, Composable NFTs
Utility NFTs with mutable on-chain state become the backbone for shared experiences, from games to DAOs.
- Shared State: A single NFT's attributes update based on collective group actions.
- Composability: Can be used as input across DeFi, gaming, and social protocols like Uniswap, Aave Gotchis, or Farcaster frames.
- New Metrics: Value shifts from rarity to usage volume and network effects.
100x
More Utility
~$1B+
Market Potential
03
The Model: From Ownership to Access & Governance
The financial model pivots from speculative floor price to recurring access fees and governance rights.
- Access-as-a-Service: NFTs grant entry to experiences, generating sustainable protocol revenue.
- Governance Weight: Holding time and activity level can influence DAO votes, aligning long-term holders.
- Investor Insight: Look for protocols with high holder engagement and low wash trading.
30-70%
Recurring Revenue
04
The Infrastructure: Layer 2s & Appchains
High-frequency state updates require cheap, fast transactions. This is a native L2 or appchain play.
- Cost Efficiency: ~$0.01 transactions on Arbitrum, Optimism, or zkSync enable micro-interactions.
- Custom Logic: Appchains via Polygon Supernets or Arbitrum Orbit allow tailored execution for specific NFT logic.
- Builder Mandate: Choose infra with sub-second finality and native account abstraction for seamless UX.
~500ms
Latency
-99%
vs. L1 Cost
05
The Risk: Liquidity Fragmentation
Unique, stateful NFTs are inherently non-fungible, creating deep liquidity challenges for holders and protocols.
- Illiquid Collateral: Difficult to use in DeFi pools without wrapper tokens or fractionalization.
- Protocol Dependency: NFT value is tied to the health of the underlying application (platform risk).
- Mitigation: Look for projects integrating with NFTfi, BendDAO, or building native liquidity pools.
<5%
Liquidity Depth
06
The Signal: Engagement Over Speculation
The success metric shifts from trading volume to sustained user engagement and developer activity.
- Key Metric: Daily Active Holders (DAH) performing on-chain actions, not just transfers.
- Ecosystem Growth: A thriving third-party developer scene building on top of the NFT standard.
- Investor Filter: Prioritize teams with strong game theory and community design over art pedigree.
10k+
Target DAH
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