NFTS comes for loyalty benefits at brands like Budweiser

NFTs, or non-fungible tokens, have arrived for just about every corner of the Internet and any business willing to throw money at what has been dubbed “Web3” — a hypothetical, future version of the web based on blockchain technology .

As they do, Hang, a new B2B startup in the new space, wants to help some of the world’s biggest brands replace their existing membership and loyalty programs with NFTs that use the technology.

The rise of the internet made it possible for anyone to view pictures, videos and songs online for free. People buy NFTs in the belief that they will be able to prove ownership of a virtual item through blockchain technology, which acts as a digital ledger of transaction history.

Last week, the company announced that it raised a $16 million Series A funding round led by crypto venture firm Paradigm, which has a stake in some of the biggest crypto players, including FTX, BlockFi and Coinbase. Other Hang investors include Tiger Global, eyewear company Warby Parker, shoe retailer Allbirds and Kevin Durant’s Thirty Five Ventures, among others. Early clients include Budweiser, Bleacher Report, Pinkberry as well as music festival groups Bonnaroo and Superfly.

“For most brands at a certain scale, it’s pretty hard to offset rising customer acquisition costs,” Hang co-founder and CEO Matt Smolin told CNBC. “The best way to do that is to increase the lifetime value of their user base and leverage loyalty,” which he adds is often done through a tiered reward system: the more often a customer buys something or interacts with a given brand, the more benefits they get, and in some cases they can “level up” to a certain type of customer status.

“Due to blockchain technology, NFTs create a way for brands to encourage their users to not only level up in the program, but actually appreciate the value of the asset they own and can later resell [NFT] marketplaces,” Smolin said.[Brands] can also take a royalty or percentage from each resale transaction as users continue to fast-track their loyalty status, which will inevitably only make them more aligned with that brand.”

But it is not without risk.

NFTs are unique digital assets, often collectibles such as artwork and sports trading cards, that are also verified and stored using blockchain technology, but critics see them as overhyped and potentially harmful to the environment given the energy-intensive nature of cryptocurrencies. Many NFTs are built on the network behind ethereum, the second largest token.

CNBC’s Eamon Javers recently reported that since May, criminals have stolen as much as $22 million in NFTs using Discord – a social platform that has become a hotbed for crypto traders to communicate in recent years. Analytics firm TRM Labs found that there were at least 10 accounts compromised within NFT channels on the Discord platform last month. These hackers used what the firm calls “social engineering” techniques to create a false sense of urgency around a given digital asset, sending deceptive messages that would instill “FOMO,” or fear of missing out, among users who were looking for to either buy or sell their NFTs.

“A lot of what we do isn’t really for your typical crypto audience,” Smolin said. “We try to work with some of the world’s biggest brands and help them solve real problems for their business. Yes: if [the brand] want, they can have their customers pay with ethereum or any crypto token, but for the most part, many of these brands actually choose to have their customers and users sign up with an email and credit card.”

Of course, that would involve the brand converting a customer’s payment into cryptocurrency to complete the NFT transaction underpinning a given reward redemption. But Smolin argues that Hang’s long-term success, and broader use of NFTs beyond just artists and collectors, will depend on integrating some of the transaction technology consumers were already familiar with, “like email and credit cards.”

Investors have been quick to argue that long-term value in digital assets will come from their utility. It’s a message that has been difficult for institutional investors to digest as collectibles such as the prominent Bored Ape Yacht Club and equally hyped Crypto Punks continue to experience dramatic price volatility in tandem with the recent “crypto winter” downturn.

“Bored Ape Yacht Club’s model is about exclusive, limited supply, and it works very well for them. But for most brands, it’s far more impactful to capture millions of people who spend 10% more per year than it is for them to get 10,000 people are going to spend $400 once or twice,” he said. “A lot of the future we’re building is towards these NFTs being free and users actually getting them in a store, on a website or in an app. And it’s no longer the lack of how many NFTs are sold, but just the leveling system.”

It’s a new perspective within the struggling crypto industry. In the midst of the “crypto winter,” big names like Three Arrows Capital and lenders like Celsius and Voyager Digital have all filed for bankruptcy, shaking confidence in the sector.

Still, ethereum and other coins rallied this week, with ethereum hitting its highest level in nearly a year, following a long slide that took it down nearly 70% from its peak last November.