How do NFT Companies Make Money?

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Contributor, Benzinga
May 4, 2022

The non-fungible token (NFT) space has skyrocketed in popularity over the last 12 months, with support from star athletes, investors and celebrities such as Jimmy Fallon, Mark Cuban and Stephen Curry. According to Footprint Analytics, the cumulative trading volume of NFTs was $21.5 billion by the end of 2021, compared to $120 million before 2021 — a 200x jump in cumulative trading volume. 

Many businesses, institutions and brands have identified the NFT marketplace as a lucrative opportunity to bolster their revenue. The following discussion will examine how NFT companies and projects make money.

What are NFTs?

NFTs are a type of cryptographic token that represents a unique asset. They function as verifiable proofs of authenticity and ownership within a blockchain. This means that they can’t be tampered with, altered or modified.

NFTs were first launched on the Ethereum blockchain, but other blockchains including the Binance Smart Chain and Solana now also support them. As implied by the term non-fungible, NFTs cannot be traded or exchanged at equivalency with each other. Every NFT is irreplaceable and unique, adding scarcity to the digital world. 

These tokens can represent real-world items such as artwork, real estate, property rights and individual's identities. Because they are based on the blockchain, NFTs can remove intermediaries, create new markets and simplify transactions.

How do NFT Companies Make Money?

NFT companies represent the legal entities behind a particular NFT project, such as Yuga Labs, the Web3 company behind the renowned Bored Ape Yacht Club (BAYC) NFT collection. While each project may differ in terms of objectives and aims, they share many of the same revenue streams. The core revenue streams for NFT companies are as follows:

Issuance of new NFTs: Artwork is a common underlying asset within the NFT space. Consumers spend large sums of money to acquire new digital art work depending on the prestige of the team, quality of the work and scarcity of the collection.

Yuga Labs has generated considerable amounts of revenue from the issuance of new digital art. The sale of its iconic BAYC netted the company around $2 million, followed by its Mutant Ape Yacht Club which brought in an additional $96 million. 

Moreover, NFT companies can generate significant revenue from the issuance of other types of NFTs such as virtual land parcels. Yuga Labs’ new metaverse project called the Otherside is a prime example of this. Know Your Customer (KYC)-verified consumers were able to purchase virtual land in this metaverse for 305 APE – ApeCoin (APE) is the official cryptocurrency of the Yuga Lab’s ecosystem. The firm sold tokens tied to 55,000 distinct parcels of land at around $6500 each, generating roughly $300 million in revenue.

Royalties from secondary sales: Royalties from NFT collections give the original owner or company a percentage of the sale price each time a specific NFT is sold on a marketplace.

This condition is effectively written into the smart contract of the underlying NFT. In the case of BAYC, Yuga Labs receives 2.5% to 5% of the secondary sale value. On the other hand, the Proof Platform enforces a 5% royalty for each secondary sale within its Moonbird NFT collection.

With well over $3 billion in lifetime trading volume, Yuga Labs has already managed to collect more than $60 million in secondary sales income.

Secondary transactions: Additionally, NFT companies often receive a portion of their revenue through other secondary transactions. Examples include royalty fees from music sales and other content associated with the original NFT collection. Sometimes, the team may be allocated NFTs from the collection which they may later sell for a profit.

What do NFT Companies Spend Money on?

In a broad sense, NFT companies primarily spend money on marketing, acquiring competing NFT communities, developing the smart contracts for new NFT projects or utility tokens and optimizing their social media communities. 

Larger companies also allocate a significant portion of their funds to developing the ecosystem or metaverse associated with their NFT collections. More specifically, they spend money on funding the development of NFT-focused games, online exclusive events and other virtual and in real life experiences. 

How are NFT Companies Funded?

Several crypto venture capital (VC) firms and staking providers support NFT and metaverse companies in their seed stage. Most of these supporters offer capital, networks, legal advice, early liquidity, content, tutorials and tooling. 

Yuga Labs closed $450 million in a recent seed funding round, providing Yuga Labs with a post-money valuation of $4 billion. The funding round was led by VC firm Andreessen Horowitz’s (a16z) crypto fund. Other investors joining in the round included game studio Animoca Brands and its subsidiary The Sandbox; tech giants Samsung and Google; and crypto players FTX and MoonPay.

Future Growth of NFT Companies

As the convergence of the digital and physical worlds continues to unfold, more brands are looking to use NFTs to expand their reach. Investment bank Jefferies Financial Group Inc. (NYSE: JEF) raised its NFT market-cap forecast to more than $35 billion for 2022 to over $80 billion for 2025.

Moreover, as secondary sales volume in NFT marketplaces continue to increase, the revenue of existing NFT companies will likely rise in conjunction, incentivizing new players to enter the market and improving the overall competition with the NFT space.

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