Earning a passive income from NFTs
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An editor at Coincrop
01 Jan 2022 | 11 min read
t’s assumed by many that there is limited means of earning a returning from NFT assets. This is not the case and in the article below we look at a number of ways where your NFTs could bring you a passive income.
In this guide:
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What is an NFT?
A good place to start is by assuming that you have no knowledge of NFTs. A “non-fungible token” or NFT is a cryptographic asset that cannot be modified or copied. NFTs typically represent digital assets – although it is conceivable that an NFT could represent a physical asset such as land.
In some ways, domain names share similarities with NFTs – they are unique, cannot be copied, can be bought and sold and are semi-decentralised.
Examples of NFTs
The applications for NFTs are limited only by your imagination. Below are some existing uses and future possibilities:
• Digital art such as music, videos, GIFs and collectibles
• In-game assets such as skins, weapons, characters etc.
• Real world items such as tickets, tokenized invoices, signatures, deeds to property, legal documents etc.
How does an NFT have value?
The value of an NFT is very much based on the perception of individuals that trade in the space. You could think of an NFT valuation with that of a piece of artwork – it is the demand for the NFT that creates its value.
We could broad determine the value of an NFT with a formula as follows:
NFT Value = Ownership history + utility + future value + liquidity premium
• NFTs that as classified as having a high ownership history are often associated with well
known artists or strong brand names.
• The utility of an NFT refers to how the asset can be used. Gaming is a good example of an NFT with high utility – i.e. it is an item that has practical usage (e.g. a highly capable weapon in a game). In contrast, an NFT artwork would likely have low utility as it has little in the way of practical application.
• In considering the future value of an NFT, it is both an examination of the valuation changes and future cash flow. Valuation is derived from supply scarcity and speculation
• An NFT with high liquidity typically results in a higher value for the NFT.
Despite the NFT market still being very new, the total spent on buying NFTs in 2021 was over $13 billion.
Where can NFTs be viewed?
Contrary to most peoples understanding, the NFT doesn’t store the digital item – rather the NFT contains an address to the location of the NFT (on the internet). The web site Lazy (https://lazy.com) can be used to showcase NFTs.
How do I buy and sell NFTs?
There are a number of marketplaces where NFTs can be traded:
• Async Art
Staking NFTs may seem a contradiction – after all, the nature of NFTs is such that they are one-of-a-kind non-fungible assets. When we think of staking, we assume the grouping of similar assets (e.g. Ethereum) in order to earn a return. However, it is possible to stake NFTs and several platforms exists for this purpose:
• Kira Network
In submitting your NFT for staking, the platform is approximate the value of the asset and determine the annual percentage rate (APR) that will be earned. The value is dependent on factors such as the rarity and possibility of other incomes (such as royalties).
A particular characteristic of some NFTs is the concept of perpetual royalties – that is previous owners of an NFT are automatically sent a payment each time a secondary sale happens. The smart contract associated with the NFT ensures that the conditions of the NFT are fulfilled.
In the example of an in-game digital content item, a weapon that was originally created by an artist could have a perpetual royalty characteristic. Each time the weapon was sold to another owner, the previous owners (and original artist owner) could receive a percentage of the new sale amount.
There are a number of advantages of these perpetual royalties. In traditional digital asset sales, the artist would have no way of tracking subsequent transactions of their work – in NFTs it would be possible to see the NFT ownership trail. The NFTs would potentially attract higher valuations as it would be known that future royalties would continue to be paid to previous owners. Additionally, as NFTs operate on decentralised blockchains, there would be no intermediaries required to ensure that royalties were paid – the process would be automatic.
What about providing liquidity and yield farming?
Bunicorn (https://bunicorn.finance) is an interesting example of a DeFi gaming platform that combines blockchain and DeFi gaming. This liquidity model involves wrapping NFT tokens and distributing the farming reward to users. These wrapped tokens are time-locked (like a bond) which prevents users from disposing of their tokens immediately after acquiring them.
Renting out your NFTs
There is the possibility of earning a passive income by renting out the NFTs that you own.
Spliterlands is a collectible card game that runs on the Hive blockchain. Players battle in one-on-one matches from a selection of 7 cards. The cards are represented as NFTs that can be traded in the game and through third party websites. The game operates an economy in which players can rent cards generating revenue for the ultimate owner.
In the game of “DeFi Kingdoms”, characters in the game (referred to as Heroes), can be rented out and used to undertake quests. Users that own these NFT Hereos can earn a passive income from renting out them out.
Web site “reNFT” (https://www.renft.io) enables users to lend and rent NFTs on a temporary basis.
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