Is NFT a bubble? Since the first sample of this breakthrough application on the Ethereum blockchain has attracted the imagination of cryptocurrency executives and non-cryptocurrency fans, this has been an urgent problem to be solved.
In this research article, we will solve this question as clearly as possible. What better starting point than the definition itself.
2021 The first year of NFT
NFT (Non-Fungible Tokens) is nothing new. The idea of labeling assets in a way that each representation is unique has been around for a long time. NFT originated from the colored coins in 2013, it is the colored representative of Bitcoin coins. However, these tokens have technical flaws and are just an experiment. However, the foundation for the future revolution has been laid.
In June 2017, Matt Hall and John Watkinson created 10,000 unique characters on the Ethereum blockchain. The number of these characters will never change, and no two items are the same. These two creators allowed anyone with access to the Etherum network to claim their creation for free, and CryptoPunks was officially born.
A few months later, CryptoKitties, a game involving transactions and nurturing numbers, was exposed, paving the way for NFT to be recognized outside the blockchain field.
Fast forward four years and you will find that a market attracts 108,000 unique active wallets every day, while generating $5.2 billion in a month.
By 2021, the blockchain industry will show clear signs of continued development. A movement called DeFi (short for decentralized finance) is blooming. The environment surrounding the industry is no longer just about trading cryptocurrencies and embedding blockchain technology into actual business models. The real feeling of getting rid of the middleman is indeed groundbreaking and has successfully attracted the attention of thousands of people.
The total amount of NFT transactions in 2020 is US$250.85 million, almost three times the 2019 level. Compared to the billions of dollars locked in DeFi dapps, the NFT market is insignificant. However, in the first quarter of 2021, a series of events made NFT a phenomenon.
In February, NBA Top Shot raised more than $224 million in 28 days. In March of this year, Twitter CEO Jack Dorsey auctioned the first tweet in history, auctioning 16.30 E or 2.92 million US dollars. A few days later, Christie’s, a well-known British auction house, raised $69 million for Beeple’s NFT artwork for the “first 5000 days”. The exclamation point is two CryptoPunk sales, each of which is 4,200 E or 7.57 million U.S. dollars.
The NFT mania began. Dozens of projects were (and are still) being launched that day. NFT’s audience is becoming more and more diverse, including blockchain developers, art collectors, Hollywood celebrities, and 14-year-old children. Everyone is joining the NFT trend.
In 2021, the transaction volume of the NFT market has exceeded 10B (10 billion) U.S. dollars. In five to six months, countless NFT projects were launched, pushing the field to a record-breaking August. In that month, NFT generated more than $5.2B of transactions, attracting more than 3.14 million traders. Transaction volume increased by 311% from July and 680% from March.
Now, the demand for NFT is increasingly being balanced by supply. Nevertheless, as with any elastic goods or services, demand will become unsustainable. Most certainly, one day the supply of NFT will exceed demand and the bubble will burst.
However, not all NFT projects are in a bubble. Some of them have certain characteristics that support their value, while others are closely related to huge industries, while others will be your gateway to the meta-universe.
Beyond the true value of JPEG
Currently, there are approximately 4,200 NFT projects on Ethereum alone. Unfortunately, not all of these include the set of attributes needed to provide NFT collections with true value beyond the art itself.
So far, there is no doubt that everyone in the field has heard of series such as CryptoPunks, Bored Ape Yacht Club (BAYC) or Art Blocks. These projects belong to Mount Olympus, the top floor of the NFT space. But how did they achieve this state?
Next, we will review six important elements or building blocks that give NFT collections a completely different meaning from simple JPEGs.
Reward holders with additional utility
The utility of the NFT field is becoming more and more important every day. Individuals have begun to realize that spending thousands or even millions of dollars to buy an animal picture may not be worth it just as an avatar in a social network. Users now expect to gain future benefits by owning a certain collection.
One of the most interesting concepts surrounding the NFT utility is asset mortgage. NFTs, especially those with important value, can be used as collateral or payment commitments when borrowing basic assets. Once the loan plus interest is repaid, the user can withdraw the NFT. An example of this is NFTfi, a platform that allows users to borrow cryptocurrency by locking their NFT as collateral.
As of now, more than 13.62 million US dollars of loans are secured by NFT. As shown in the figure below, valuable collectibles such as Art Blocks, BAYC, CyrptoPunks, and CryptoKitties are one of the main tools used as collateral in NFTfi. The opportunity to use NFT as collateral creates an additional layer of liquidity, which may increase the overall NFT space.
On another level, recognized NFT projects have a common behavior, rewarding their investors with additional parts in the related set. Maybe Larva Labs (LL) started this trend. In May 2021, Matt and John from LL announced their next NFT project, which includes 20,000 3D characters living on the Ethereum blockchain. Half of the Meebits are awarded to CryptoPunk owners at a ratio of 1:1.
In this way, CryptoPunk holders can claim for free (plus gas fees) the NFT whose reserve price (the cheapest NFT in the collection) at the time of writing this article is 4.36 Ξ or $13,300. It’s like receiving a Rolex at Christmas. The model was widely accepted and began to be regarded as a standard. After the Meebits model, several NFT sets follow the LL procedure. For example, BAYC holders received their ape pet companion in the form of a dog from the Boring Ape Kennel Club (BAKC). Ghxsts is a small but important collection that rewards its owners every month, representing each of the 12 constellations. The list can continue.
However, rewarding owners with additional NFTs is not the only way to provide additional utility. Currently, we are seeing projects like CyberKongz, which generate rewards through the collection of native tokens every day. In Kongz’s case, $BANANA. Original Kongz holders will be able to claim 10 BANANA tokens per day for the next 10 years. At the current BANANA price, the owner of Genesis Kong can get $390 per day or $140,400 per year. Other projects such as SupDucks ($VOLT) also embed this token reward system into their respective models.
All in all, the utility element of any NFT becomes essential. Although rewarding additional NFTs or generating tokens are the most commonly used models, there are projects like Punks Comic that combine the best of both worlds and provide practicality in a very tangible way.
From series to brand
The second element to consider in NFT is the brand awareness created by a series. NFT is becoming a brand that allows its owners to be part of an exclusive group. Each series is unique and some of them are becoming fashionable. A clear way to illustrate this is the name Larva Labs created for itself. Once Meebits was ready for casting, although the casting price could easily be higher than average, the series sold out within a few hours, and there was no further utility at that moment. It seems that NFTs associated with recognized names are less difficult to find suitors (just like Messi NFT).
Another example can be found in the Bored Ape Yacht Club series. Due to the success of the project, the base price of BAYC rose from 3 ETH at the end of June to 38 ETH or approximately $115,000 at the time of writing. At these levels, it is fair to assume that for most collectors, the collection is out of reach. Owning a boring ape has become a sign of social status. It produces the same emotions as wearing luxurious clothes or driving a high-end car.
In order to add another level, some series released clothing that only applies to series owners. This is the literal representation of the brand in any respect. In addition, when well-known celebrities express opinions on certain items, brand awareness will be magnified.
Build a deep-rooted community
NFT is building a strong and special community. In a nascent space like NFT, it’s refreshing to find someone who is really interested. NFT enthusiasts discuss in the Twitter space and Discord channels, share lessons and warnings about potential risks, and even better share ideas on how to improve their projects.
The avatar movement in Twitter has become famous, and like brand awareness elements, celebrities also have an active influx in the community. The fact that Mike Tyson used a blue cat as his Twitter profile picture undoubtedly had a positive impact on the Cool Cats project. The same happens in other projects, such as VeeFriends, where it is common to chat with Gary Vee. In addition, sharing the same beliefs with sports superstars such as Stephen Curry or DJ Steve Aoki was unthinkable a few years ago. This is what the NFT community is all about-remove these barriers and build a project community.
The community has undoubtedly become such an important element that projects like Loot aim to connect its members. Loot is a NFT collection that simulates Dungeons and Dragons RPG card games. Following its debut in September, the project generated $194 million in transactions within a week. Loot is a groundbreaking project because it was created for the community and will be developed by the community. All future improvements and developments will be the responsibility of their members. The upper limit of the project is determined entirely by this group. No team members participate or will never participate.
Community elements have become the basic value of common beliefs. The stronger the connections and foundations within the community, the greater the chance of project success.
Team element
Talking about the team, this is another relevant element when evaluating any NFT project. Loot’s situation is very rare. The specification is that the team creates a project, performs any required enhancements or developments, nurtures the project and effectively communicates the milestones in their roadmap.
This is a common element of successful projects, and some teams are widely disclosed. This is the case with Larva Labs, VeeFriends or World of Women. Other teams such as Yuga Labs or 0N1 Force will remain anonymous under their avatar role.
Finally, the most important aspect is the level of involvement with team members. The team that achieves the goal will become trustworthy. It is easy to find teams that are eager to bring value to the community. But perhaps most importantly, how do they deal with the challenges they face?
Rarity and scarcity issues
Each set has a set of attributes and characteristics, allowing the algorithm to randomly generate each fragment so that it can be different from other fragments in the same set. The rarity assigned to each feature makes the NFT collection unique. This unique or rare element has also promoted the growth of demand. It is true that some works may be more attractive than others, even if they are not so unique; however, rare items are more popular than ordinary items, thereby increasing the price of the former.
Another factor to consider is supply. A collection of 10,000 avatars seems to be the current standard in the NFT market. These collections usually have a certain upper limit, which means that the supply will always remain the same. Limiting the size of the collection’s version adds a scarce element, appreciate the value in the process. However, this is not the rule of every series.
For example, a breeding program like Avastars, which contains 25,200 first-generation fragments without a single clone, will allow their holders to combine these characteristics into two or more fragments to create a brand new NFT. Although the supply will increase, the newly minted NFT will be marked as Replicant or Gen-2 to clearly distinguish the two types. This is a very important aspect to consider. Although certain series will expand their supply, the original NFT works should be distinguished from other works in some way.
Expand to other industries
So far, we have solved most of the elements or factors that can be achieved in NFT avatar projects.
They create real communities with common interests and in some cases provide tangible rewards to their owners.
Although these avatar projects are indeed the main driving force behind the latest NFT mania, there are other categories that are helping NFTs create a sensation in different industries.
Game upgrade
Take blockchain-driven games as an example. According to Statista, they may revolutionize the traditional gaming industry, which has an annual revenue of 114 billion U.S. dollars.
The first is the narrative of game earning, and the second is the ownership of NFT enabled in blockchain games. For the first time, players will truly own and fully control their game assets.
As detailed in DappRadar’s August Industry Report, blockchain-based games are driving usage in the industry. The number of Unique Active Wallets interacting with gaming dapps (decentralized applications) was 747,000, a 64% increase from July. Comparing this specific game usage metric with other peer categories such as DeFi or NFT collectibles itself can clearly show how the game supports the latest surge in the number of unique wallets associated with blockchain dapps.
In fact, looking closely at the record NFT transaction volume in August, 18% came from in-game collectibles, that is, NFTs that can be used in blockchain games.
All in all, the gaming space is expected to become a bigger market. Axie Infinity is a game earning game developed by Vietnamese studio Sky Mavis, which has attracted more than 1.5 million independent players worldwide every day. Illuvium is preparing to launch Immutable X, the Ethereum layer 2 solution, at the end of this year, and the game Star Atlas that will run on Solana is also being hyped.
Of course, there is also Metaverse, a place that aims to be a place for individuals to create, trade, and socialize in virtual reality. Important game projects in Metaverse include Decentraland, The Sandbox, Blankos Block Party, Ember Sword, Somnium Space, etc.
Digital art
Art is one of the most suitable applications for NFT. The game is ideal. On the one hand, NFT aims to prove authenticity, which is one of the most important aspects of a work of art. On the other hand, the market for trading NFTs is a perfect scene for artists to gain recognition. Use this digital space while having a reliable way to manage royalties.
Art in NFT exists in different ways. There are 1/1 works of art, or unique works. Think of the artwork of the Mona Lisa or Beeple. They only exist in a single and non-repetitive way.
In addition, there is generative art, a new way of artistic creation. In generative art, the artist (or programmer) instructs the program to run a code that assigns unique characteristics to a predefined pattern. This type of art NFT has become so coveted that these works sell for as much as 5.68 million U.S. dollars. Some examples of generative art projects are Art Blocks and Larva Labs’ Autoglyphs.
Fantasy showdown between sports and NFT
The sports industry is huge, especially in the United States. According to Verified Market Research, the global sports trading card industry is worth $13.82B in 2019. One of the most important sports associations in the world is aware of the huge opportunities waiting to be seized.
In July 2019, the NBA established a joint venture with Dapper Labbs, the blockchain company behind CryptoKitties. This marked the beginning of NBA Top Shot, an NFT project running on the FLOW blockchain. It wasn’t until February this year that the project really became apparent. From February to March 2021, Top Shot generated more than $432.36 million in revenue in 2.56 million transactions.
If basketball has its official NFT platform, football (soccer) will not fall behind. Enter Sorare, a fantasy football platform that allows players to trade and manage fantasy teams based on player cards represented by NFT. In this game, unlike traditional fantasy platforms, fantasy managers can fully control their players. Sorare’s limited supply of cards adds another layer of strategy to the game. Although Sorare has not yet reached the level of Top Shot, some Sorare exclusive player cards, such as Ronaldo or Mbappé, are worth tens of thousands of dollars.
In addition, sports collection projects have also attracted a lot of investment interest. Dapper Labs announced a $250 million round of financing, while the French-based NFT project Sorare raised $680 million, led by SoftBank.
In general, the sports industry has been well represented in the NFT field. Ethernity Chain is a blockchain that specializes in NFTs and provides an extensive collection of sports legends, including Bailey, Muhammad Ali, Lionel Messi and Dan Marino.
Fashion brands join the NFT boom
The incarnation is the real inhabitant of the meta universe. Skins and cosmetics in the game are very important among players. An obvious example is a free game like Fornite, which allows gamers to customize their game avatar. DMarket, a platform for trading in-game wearable devices, is estimated to be worth US$40B per year in the skin market.
Although Burberry is the first fashion brand to work directly with the metaverse project, some of its peers are already in progress. In June, fashion giant Gucci auctioned its first official NFT for $20,000, a short film inspired by the 2021 autumn and winter series. Recently, Dolce & Gabbana followed closely with UNDX, a curated market specializing in luxury goods and cultural products, and launched a nine-piece NFT series.
Go mainstream
The impact of blockchain technology, especially NFTs, has reached new heights. The impact is so great that big brands in all industries have expressed interest in becoming part of this field. In August, Coca-Cola auctioned off a branded NFT skin that can be worn in Decentraland. Slowly, huge organizations are leaving their footprints in this field.
This is not just about brand launching series or auctioning rare works. NFT has successfully attracted the attention of important investment companies and even financial institutions. For example, the Singapore-based hedge fund Three Arrows Capital announced the creation of Starry Night at the end of August. The mission of Starry Night is “Assemble the best NFT collection in the world”.
On August 23, payment processing giant VISA announced via Twitter to purchase CryptoPunk #7610 at a price of $150,000. The announcement attracted the attention of important media. Finally, last week, Sotheby’s auctioned 101 works from the BAYC collection for $24 million.
All in all, mainstream audiences will help the NFT space consolidate its value. Although NFT still feels like a nascent space, it is not far-fetched to think that it will reach the numbers in other blockchain categories such as DeFi.
The future of NFT
Currently, the blockchain industry is still in a very early stage. The current strong demand is sufficient to balance the growing supply, and many NFT projects may not be able to maintain value in the long term. However, the best performing group of NFT dapps will become a key part of the industry in the future.
Some NFT projects are rewarding their owners with previously unimaginable utilities, while others have demonstrated the power of building a strong community. All in all, these series are becoming well-known brands outside of chain stores.
The impact has become so great that important vertical industries such as the sports or fashion industries want to be part of this evolving landscape. Perhaps more importantly, major institutions have seen the true investment value of this concept.
The true ownership granted by the NFT will unlock many applications, and the ticket will become the NFT, causing a potentially fatal blow to piracy. Music files protecting artists will be distributed as NFTs. NFTs that generate revenue may become as important as many existing financial products. It seems that we are heading towards an unstoppable virtual reality, similar to what Ernest Cline described in his famous novel Ready Player One-a world where real-life assets will be tokenized or NFTized. Which bubble burst first is still the biggest question.