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Cardano enables new business models for NFTs

Published 2.5.2023

The NFT sector is one of the most discussed topics around blockchain. NFTs have gone through a hype that has waned in the bear market. Were NFTs just an experiment that failed, or will they come back even stronger? From our perspective, NTFs technology is sound and will form a substantial part of Web3. What is crucial for the success of NTFs is not so much the individual projects but the possibility to create new business models. Cardano is, in our view, one of the best platforms for minting NFTs as there is no need to use a smart contract for minting and they are native tokens much like ADA coins. What needs to emerge now at Cardano are new platforms that will allow authors and publishers to create new and better business models that will be more profitable for authors and users than the existing ones. And that is an achievable goal.

TLDR

The combination of NFTs and new business models will drive adoption. Through the NFT, you can buy and own a digital work with resale rights, not just a license with usage rights. In addition, the authors of the work can receive royalties from each sale on the secondary market.

NFT Hype

A lot of people got the idea to use NFT technology to create digital art. Some NFT collections are successful, others less so. Let's face reality and admit that most images are not worth what they sell for. We can agree that the NFT sector needs to attract serious authors who will find it profitable to use Cardano or another platform to publish their work. To do this, it is not enough to be able to mint NFTs that represent some content. What is much more important is to provide authors and users with concrete benefits that will be more advantageous than existing options.

NFTs can represent not only static images but also audio and video content, books and magazines, educational material and courses, tickets, game items, identity, physical objects, etc. Famous authors publish successfully on existing platforms and are likely to be happy. Existing platforms have a huge network effect. Authors may not have heard of the possibility of publishing on the blockchain and do not see any benefits in doing so. This needs to change.

The hype around NFTs was important because it drew attention to the possibilities of representing digital content through NFTs. The low quality of NFTs was disappointing, but this was due to the quality of the authors. The low quality of NFTs cannot be associated with Cardano technology, which is neutral and only offers options that anyone can use.

It is important to see the positives. Cardano allowed a huge number of people to mint their own NFTs and tokens that they could send to each other. There were no hacks or network failures. Cardano has passed an important quality test. That's an achievement to build on. The second wave needs to offer more than just minting.

Old business models do not work well

Current business models are not ideal, as third parties abuse their powerful position. Let's give some examples.

If you buy a digital book (e-book) on Amazon, you own the rights to access and use the digital file, but you do not own the content of the book itself. In the case of an e-book, the resale right is owned by the distributor of the digital book (by Amazon), not the author of the book. The author of the book can sell his or her copyright in the digital book but usually has no control over how the digital copy of the book is distributed or whether the digital copy of the book can be resold. A digital book distributor may set its own rules for digital content, including rules for resale.

In the case of digital music, the right of resale is also generally not allowed. When you purchase a digital music file from a platform like iTunes or Amazon Music, you are granted the right to use the file, but you do not own the file itself or have the right to resell it. This is because digital music files are considered "licensed," meaning that you are granted a limited right to use the file for personal, non-commercial use only. The license terms typically specify that the file is for your personal use and cannot be resold or redistributed to others.

In contrast, if you purchase a physical music CD, you have the right to resell it because you own the physical copy of the music. This is known as the "first-sale doctrine," which allows the purchaser of a copyrighted work to resell the original copy without the permission of the copyright owner. However, this doctrine generally does not apply to licensed digital music files. It's very similar to books, but also with video content or video games.

In general, big publishers typically sell digital content as a license to use the content, rather than selling the content itself. This allows them to retain control over the distribution of the content and prevent unauthorized copying or sharing of the content. It also allows them to easily make updates or changes to the content if needed.

Note that with the same authors' work in physical form, they are not able to achieve the same effect. The licensing model restricts the rights of consumers to use and transfer the content they have purchased. In our view, consumers should have the same right to resell or lend digital content as they do with physical content.

Is it possible to disrupt the current business models of large publishers and create new ones that are attractive to both authors and users? Is it possible for a decentralized solution to find a large enough number of users to compete with the current big players on the market? Let's take a first look at what a new business model could look like.

New business models

From the authors' perspective, the current business model is not fair and efficient, as big publishers take tens of percentages for publishing. For example, in the case of Kindle Direct Publishing, Amazon keeps 30% and the author receives 70% as royalties. As we have already mentioned, users only buy a license to read the e-book, but they cannot do anything else with the e-book itself.

It is possible to create a decentralized platform that would have lower operating costs. Authors could have significantly higher royalties. Readers buying NFT would get the right to sell the book in such a way that the author would always get a royalty for reselling NFT on the secondary market.

It often happens that you read a book and you know you won't want to read it again. Or you get tired of the music or the movie. But you don't have the right to resell the digital work, and those who are interested in these works have to pay full price to the publishers, which they may not want to do. The secondary market makes sense because you can resell the work cheaper to someone who may not be willing to pay the full price. The author of the work gets at least a partial royalty.

Note that with the physical form of the works, this is neither possible nor enforceable. In the case of digital works, it is prevented by publishers.

By buying NFTs, people become owners of the work and can resell or even rent it. The owner of the in-demand digital work can thus profit by lending the work for a small fee for a specific period of time. This model can be used mainly for movies, series, or music.

The effect could be multiplied by releasing only a limited edition of the digital work. One could create a digital scarcity of the work where the owners, and the author, will forever profit from the work being resold.

Thanks to blockchain, it is possible to make everything 100% transparent and easy to audit. For ordinary users, it can be difficult to distinguish the original version of a digital work from a fake. Two files can look exactly the same. In the case of the NFT, it is relatively easy to distinguish the original from the fake. Authors of work can easily track how much their work sells and resells.

Another benefit may be that the author has through NFTs a kind of contact with the actual owners of the digital work. It may be just a blockchain address, but with the advent of decentralized identity (DID), it will be possible to share other information. For example, the author of a work can mint NFTs as a gift for the current holders of the work, or give them a discount on a new work. This may give rise to other new business models.

For example, authors can simply find out that someone owns all the published works and reward the owners with a special edition. This can motivate people to buy those works that are missing from the owners' complete collection. Authors will benefit from secondary sales. Authors can use NFTs as a ticket to a video stream or a physical event. This is another reason why people would want to own the original work and not a fake. NFTs make it easy for authors of works to interact with fans. The important thing is that authors can be creative and do not need the cooperation of a third party. Imagine if a small author wanted to do something similar and needed the cooperation of Amazon which holds all the buyer information.

Authors of works should be able to define their own terms of sale, including royalties for secondary sales. This is definitely not the norm today and smaller artists don't have the chance to dictate their terms when negotiating with big publishers.

Authors can arrange that there will be no reprint or reissue of their works after their death. The owners of the NFTs will own the work and the market value can grow as a result.

The success of the NFT sector is further dependent on multichain wallets with excellent user interfaces such as Lace. In addition to NFTs and the business model, users must have easy access to obtain and consume digital content. Imagine having ADA, stablecoins, and NFTs in one wallet. It would be easy to buy an e-book through stablecoins and read it right in your wallet.

The more we think about business models, the more ideas we have. We believe that NFTs definitely have huge potential if used smartly.

It won't be easy to succeed

The goal of decentralization is to enable peer-to-peer communication between users and remove an expensive and inefficient middleman from the process. Platforms can emerge on Cardano that provide digital authors with similar services to existing big publishers and offer better conditions and new possibilities.

Don't expect disruption to happen from one year to the next or in the next bull run. Existing services have a huge network effect, and authors usually have no desire to change things that work relatively well. Still, we believe that at least some of them will understand the benefits that a decentralized solution can offer them. In the beginning, the new solutions will be used by lesser-known authors. If it works, the stars may gradually join in.

From our perspective, the NFT itself had no chance of success. What is important to address are the regulations around copyright related to NFTs. This is the first necessary step to allow new business models to emerge.

NFTs, together with new business models built on smart contracts, have a much better chance of success. In addition to a token representing a value, decentralized applications will add further value. This combination makes it possible to economically and socially connect authors and consumers of digital works directly, without intermediaries.

This is a huge opportunity for everyone, both for teams building new marketplaces and platforms and for authors who want to do more than just sell their work through established third parties.

Web3 will be about the ability to own value. Anyone holding ADA or BTC will understand the difference between centralization and decentralization and between custodial and self-custody ownership. If decentralization succeeds, people will have a greater desire to own original works just as they will own stablecoins and volatile cryptocurrencies. The shift in perception of value will affect many industries, not just money. We believe this will facilitate the adoption of NFTs.

Conclusion

Actually, we always found it very silly to claim that NFTs are just links to a picture. NFTs can represent pretty much anything digital. Most content today is consumed by people on the internet, and inefficient and expensive middlemen are struggling to maintain their advantageous position. This is usually the case as long as technological advances don't disrupt it. Blockchain and NFTs have the potential to change that, but it's only potential. Both users and authors need to want it to happen. That will be a long way off. Many people believe that cryptocurrencies can disrupt central banks and that DeFi can disrupt commercial banks. We believe that Cardano will be one of the chains that will participate in that as well. In addition, it will be part of the disruption of the digital content trading sector. In the context of existing business models, this is a relevant goal.

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