NFT Tokens

What are NFT Tokens?

When an NFT collection is created, sometimes the creators decide to compliment the NFTs with fungible ERC-20 tokens. These tokens may serve a variety of use cases and are always connected somehow to their parent NFT collection. They may be used as a value transfer medium for purchasing and selling the NFTs or they can be utilized within the community to create hype and incentivize certain actions.

In other cases the NFT tokens may not be connected to a specific NFT collection, but rather to a service that participates in the NFT ecosystem. An example of this is the NFT marketplace, which issues its own token LOOKS. Such tokens may enable their holders to participate in governance, collect rewards, and so on.

NFTs vs NFT Tokens

It is important to make a clear distinction in this regard to avoid confusion. NFTs are their own non-fungible assets offered in the collection (ERC-721). They usually come with attached artwork or other specific pieces of information.

On the other hand, NFT Tokens (ERC-20) are complementary fungible tokens of NFT collections, apps, and services, which serve various functions inside their ecosystems.

Utility and Adoption

The popularity of complementary NFT tokens is connected heavily to the success of the underlying NFT collection or application. The issuance of such NFT tokens may foster its community and align the incentives to help the project grow faster. Some users may see a speculative opportunity in these tokens, which also tends to be a big part of their popularity. They are similar to memecoins in a certain way and are often treated as such.

Community

Many NFT projects issue fungible tokens to help them engage interest and grow online communities. Often solely community tokens lack further utility and are objected to speculation and high volatility.

Many tokens also provide some benefits to their holders. For example, exclusive access to certain events, pre-sale of new NFTs, newest information from inside the project, and so on. Certain online communities, like discord channels, may be guarded and allow entrance only if users own a certain amount of the token.

Incentivization

Some NFT service platforms or dApps may use fungible ERC-20 tokens to incentivize certain behaviors in their ecosystem to sustain growth and increase adoption. These tokens then essentially act as a monetary reward.

• Staking - some platforms offer users to “stake” their tokens in order to receive a yield (APR/APY). This form of staking has nothing to do with verifying transactions on a given blockchain network. It serves as an incentive mechanism to prevent token holders from selling too soon.
• Activity Rewards - users may earn a portion of rewards on some NFT platforms by participating in predefined activities, such as completing a specific trading volume or displaying an NFT for a certain time.
• Revenue Sharing - fees collected from users of an NFT platform are redistributed to the holders of its token. This is often conditioned by staking the tokens.

Value Transfer

Although the common practice is to denominate NFTs in ETH, some platforms offer the purchase exclusively in their own token. This practice often in combination with staking prevents the token from getting dumped.

Security and Challenges

While some NFT tokens offer interesting usability and benefits, it is important to know that the majority of them are still memecoins that lack inherent value. These memecoins are tied to the hype and community of a certain NFT collection and use it to propel its popularity. Speculation on the price increase is possible, but it takes a very keen understanding of trends and is also extremely risky. Such speculation should be considered a gamble.

On the other hand, there exist tokens with real utility tied to NFT platforms and projects. Such as revenue sharing and incentivization of certain actions on the platform. These are use cases that benefit both the platform and the users.