The inventor of the non-fungible token says he has spent the last two years lurching “from excitement to dread.” Although artist Kevin McCoy says he is “gratified” to see people engaging with what started as his “own private thought experiment,” he claims to be terrified by the gold rush it inspired. In March 2021 during the early throes of NFT mania a single token, tied to an artwork called Everydays: The First 5000 Days, by digital artist Beeple, sold for almost $70 million.

When McCoy and his partner, entrepreneur Anil Dash, pitched the idea for a unique crypto-like token that demonstrated ownership of digital goods back in 2014, they had some sense it was an “important idea.” The intention was to create a mechanism for tracing the provenance of digital works and give small artists a new way to make money. But McCoy says he never imagined NFTs would become a conduit for financial speculation.

Over the course of 2021, beginning in earnest with the landmark Beeple sale, a frenzy of buying and selling drove the prices of NFTs sky high. By the end of the year, the average price of an NFT had risen beyond $3,000, despite a tsunami of new tokens diluting the market, while the cheapest NFTs from the most vaunted collections were selling for $200,000 a piece. 

But all economic bubbles must eventually burst, and the NFT bubble has done so in spectacular fashion. In January 2022, $17 billion worth of NFTs changed hands, but by November that figure had fallen to $400 million, a collapse of 97 percent. Precisely what triggered the crash is unclear, but the fall in demand—catalyzed by a slump in the cryptocurrency market—has wiped almost $9 billion from the combined value of all NFTs in circulation.

Tasked with picking through the wreckage, members of the NFT industry are treating the collapse as something of a cleansing event. “I’m a strong believer that you don’t need the hype,” says Shiva Rajarman, VP of product at OpenSea, the world’s largest NFT marketplace. Although the publicity was good for business, he says it brought people to NFTs for the wrong reasons—to make a quick buck—and distracted from the utility of the technology.

With regulators now circling, and skeptics basking in the schadenfreude, the NFT is at a crossroads. The consensus among industry insiders is that, for the technology to achieve widespread adoption and continued cultural relevance, it will need to be recast in a different light.

Rajarman says a new breed of use cases is surfacing that take advantage of the particular properties of NFTs: the ease with which they can be traded and the ability to move them freely between applications. Although some predate the NFT craze, they have been “cloaked” until now by the trading frenzy, he says.

Among the clutch of utility cases, NFT gaming is the most widely battle-tested, with some games attracting hundreds of thousands of players each day. Although the specifics vary from title to title, the general idea is to allow players to own their in-game assets (characters, cosmetic items and so forth) and trade them for cryptocurrency.

In a game called Splinterlands, launched in May 2018, NFTs are linked to digital cards that each confer a special ability that can be used in battle against another player—similar to titles like Hearthstone or Magic the Gathering. The tokens tied to the cards can be traded on the secondary market, which means people can recoup money they’ve put into Splinterlands if they decide they no longer want to play, says Jesse Reich, the creator. And far from fostering an unhealthy fixation with profiting from play, such a setup encourages “entrepreneurship” in players, Reich claims.

The price of a single card ranges from 1 cent for the most common to hundreds of thousands of dollars for the rarest; the median is around $5 to $6. To ensure nobody is priced out of the game, players are typically matched for battle only with others whose quality of cards and skill level are similar to their own. Although player numbers have dipped somewhat since the market downturn, Splinterlands still attracts 150,000 to 250,000 people per day, and roughly 90,000 cards change hands in the same period.

An Australian studio called ImmutableX deploys NFTs in a similar way in titles like Gods Unchained, released in 2019. Cofounder Alex Connolly argues that NFTs prevent scam-ridden “gray markets” from forming, whereby players resort to unofficial avenues to trade in-game assets for real money. Gods Unchained NFTs sold directly by ImmutableX range from $2 to $150, but like with Splinterlands, trade on the market for prices ranging from a few cents to many thousands of dollars depending on their scarcity and perceived in-game value.

Separately, NFTs are increasingly being used as a form of membership. Some New York restaurants are selling tokens that give owners the right to a table whenever they want one, while Starbucks has launched an extension to its loyalty program whereby customers can earn NFTs for sampling drinks and completing other activities. Celebrities like DJ Steve Aoki are doing something similar, using NFTs to give fans special access to events and merchandise.

It’s fair to ask how this sort of thing is different from any other membership or rewards scheme. According to Ryan Wyatt, CEO of the business arm of Polygon, the Ethereum extension on which many NFTs now sit, it’s all about tradability.

In all of these examples, membership tokens can be traded on the open market, because they sit on top of public blockchain infrastructure owned by no single company. So in a scenario in which loyalty to a brand earns someone a particular benefit (say, a lifetime discount), that person can choose to convert their efforts into cash by trading away their NFT. With a traditional non-NFT membership, which cannot be passed freely from one person to another, that value cannot be redeemed.

The same premise could extend into virtual worlds too, says Alexei Falin, founder of NFT marketplace Rarible, who predicts NFTs will act as a “foundation for commerce” in the metaverse. Not only could an NFT grant exclusive access to a particular digital experience, but it could act as a deed of ownership for a virtual property or clothes for an avatar. To some ears this might sound deranged, but the billions in annual revenue generated by Fortnite demonstrates that people are willing to pay to improve their social standing in virtual spaces.

The thread connecting most of these applications is the use of NFTs and economic incentive as the foundation for community-building. Even creators originally drawn to NFTs for the monetization opportunity are cottoning on.

“It’s bigger than the money,” says King Saladeen, a prominent Philadelphia-born artist who turned to NFTs when lockdown stopped him working on physical projects. Around his NFT projects, King Saladeen fostered a community on messaging platform Discord, where fans can chat with him directly. “It’s about the connection you get with somebody you’ve been following for a long time.”

There is a shadow of uncertainty hanging over all of these endeavors as a result of a lack of regulatory clarity. There are no NFT-specific regulations anywhere in the world, which creates a level of risk for any business that might consider investing in the technology. Equally, this means there is no recourse for people who have lost considerable sums of money on failed or abandoned NFT projects no longer supported by their creators.

Some countries are beginning to pay closer attention: In November the UK government launched an inquiry designed to assess whether NFTs pose a threat to “vulnerable speculators.”

Julian Knight, the member of parliament who chairs the committee overseeing the inquiry, says “NFTs swept through the digital world so fast that we had no time to stop and consider.” Although the committee intends to keep an open mind about the potential of NFTs to “democratize how assets are bought and sold,” the inquiry will focus on consumer protection as a priority.

Meanwhile the EU is preparing to vote on a new set of laws, Markets in Crypto Assets, that will determine how crypto-centric organizations can operate. MiCA is described by Caroline Malcolm, head of public policy at blockchain analytics firm Chainalysis, as a “benchmark” on which other countries will base their own regulations.

Although NFTs will not be covered by the initial MiCA rule set, an investigation in the next 18 months will determine whether additional NFT-specific provisions are needed to mitigate financial risk to users.

There is also the question of whether NFTs will really work the way people think. The rules of supply and demand, says economist Peter Schiff, dictate that NFTs will not and cannot hold their value over time.

He says the “code of honor” is the only thing stopping NFT issuers from diluting the value of tokens by flooding the market with new items, which means scarcity cannot be relied upon as an anchor for value. “Everybody can have beachfront property in the metaverse,” he says, “because I can create an infinite number of beaches.”

Although Schiff admits there are potential use cases for NFTs, like transferable memberships, he sees these as only marginal improvements on systems that already exist, not as the “game-changers” they are dressed up to be. 

He also claims that the majority of people using NFTs are uninterested in use cases that are divorced from speculation—they’re only in it for financial gain. And there is plenty of evidence to support this theory.

Even since the crash, high-profile companies have continued to flood the market with NFTs, in an effort to cash in on brand equity. Crypto exchange Binance, for example, recently released a set of NFTs in collaboration with Cristiano Ronaldo (on which $445,000 has been spent), while Warner Bros. Discovery published an NFT version of The Lord of the Rings: The Fellowship of the Ring.

“The important thing is that the typical person that has bought an NFT is going to lose their money,” says Schiff. “If you bought an NFT because you think it’s going to be worth more in the future, you’re wrong. It probably won’t be worth anything.”

McCoy, who started all this in the first place, is more philosophical about the future of his creation. He also predicts the renewed focus on utility will create a measure of price stability, breaking NFTs free from the exhausting boom-and-bust cycle that has characterized the cryptocurrency market to date and led to the loss of funds by so many.

“Unique digital property is too important a concept to disappear now,” says McCoy, “[it’s just that] the final form and function of these tokens remains to be seen.”