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NFTs Are Changing Everything But Are They Built to Last? (Hint: Some Are)

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Are NFTs a bubble? That’s been the burning question ever since the first specimens of this breakthrough application on the Ethereum blockchain captured the imaginations of crypto heads and non-crypto fans alike. 

In this research piece for The Defiant, we will unpack this query as definitively as possible. And what better place to start than with definitions themselves. 

2021 – The year of the NFT

NFTs (short for Non-Fungible Tokens) are not something new. The idea of tokenizing an asset in a manner that each representation is unique, has been around for quite some time. NFTs have their origins in 2013 with Colored Coins, a colorful representation of bitcoin coins. However, these tokens presented technical flaws and were just an experiment. Yet the foundations for a future revolution were set. 

In June 2017, Matt Hall and John Watkinson created 10,000 unique characters generated on the Ethereum blockchain. The number of these characters could never change and no two items would be identical. The two creators let anyone with access to the Etherum network claim their creations for free and the CryptoPunks were officially born. 

A few months later, CryptoKitties, a game that consists in trading and breeding digital was brought to the light, paving the way for NFTs to be recognized beyond the blockchain sphere. 

Flash forward four years and you will find a market that attracts 108,000 Unique Active Wallets per day whilst generating $5.2 billion in a single month.

By 2021, the blockchain industry was showing clear signs of a sustained evolution. The movement called DeFi, short for Decentralized Finance, was in full flower. The environment surrounding the industry was no longer just about trading cryptocurrency and embedding blockchain technologies into real business models. The real sensation of getting rid of the middleman was truly ground-breaking and managed to capture the attention of thousands. 

The total volume of NFTs traded in 2020 was $250.85M, almost triple the level in 2019. The NFT market was nothing compared to the billions locked in DeFi dapps. However, in the first quarter of 2021, a series of events made NFTs a phenomenon. 

In February, NBA Top Shot collected over $224M in 28 days. In March, Jack Dorsey, Twitter’s CEO, auctioned the first tweet in history, racking up 1,630 E or $2.92 million. Days later, Christie’s, a famous British auction house, collected $69M for Beeple’s NFT art piece “First 5000 days”. The exclamation point was two CryptoPunk sales that accounted for 4,200 Ξ or $7.57 million each. 

NFT mania was on. Dozens of projects were being (and are still) launched by the day. The NFT audience grew so diverse to include blockchain devs, art collectors, Hollywood celebrities and 14 year-old kids. Everyone was jumping on the NFT bandwagon. 

In 2021, the NFT market has generated more than $10B in trading volume. In a span of five to six months, myriad NFT projects were launched, propelling the space to a record-breaking August. During that month, NFTs generated over $5.2B in trades and attracted more than 3.14M traders. The trading volumes increased 311% from July and 680% from March. 

And September started with the same rhythm. Collections like Mutant Ape Yacht Club or Sneaky Vampires Syndicate generated massive numbers in recent weeks, while hyped projects like MekaVerse or RTFKT’s Akira are waiting in the wings. Despite a slight cooldown, demand is still in place. 

Now, the demand for NFTs is increasingly balanced by  supply. Still, as with any elastic good or service, demand will become unsustainable. Most certainly, there will be a time when the NFT supply will outpace  demand and burst the bubble. 

However, not all NFT projects are inside the bubble. Some of them have certain characteristics that support their value, and others are closely linked to gigantic industries, while still others will become your gateway into the metaverse. 

True value beyond JPEGs

Currently, there are around 4,200 NFT projects on Ethereum alone. Unfortunately, not all of them comprise the set of attributes required to provide NFT collectibles with true value beyond the art itself. 

By now, without a doubt, everyone in the space has heard about collections such as CryptoPunks, Bored Ape Yacht Club (BAYC) or Art Blocks. These projects belong to Mount Olympus, the top-tier of the NFT space. But how exactly do they achieve this status?

Next, we will review six important elements or building blocks that give NFT collectibles a whole different meaning than being simple JPEGs.

Rewarding Owners with Added Utility

Utility in the NFT space is becoming more relevant each day. Individuals have started to realize that it may not be worthy enough to buy an animal picture for thousands or maybe even millions of dollars, just to be used as an avatar in social networks. Users are now expecting future benefits by owning a certain collection. 

One of the most interesting concepts around NFT utilities is the assets collateralization. NFTs, especially those that hold significant value, can be used as collateral, or a promise to pay, when borrowing an underlying asset. Once the loan plus interest is repaid, the user can recover the NFT. An example of this is NFTfi, a platform that allows users to borrow cryptocurrencies by locking their NFTs as collaterals. 

As of now, there are more than $13.62 millions in loans whose collateral is a NFT. As shown in the visual below, valuable collections like Art Blocks, BAYC, CyrptoPunks and CryptoKitties are amongst the main vehicles used as collateral in NFTfi. The opportunity to use NFTs as collateral creates an additional liquidity layer that might boost the NFT space as a whole. 

Source: nftfi.com

On another level, recognized NFT projects share a common behavior, rewarding their investors with added pieces from a related collection. Perhaps Larva Labs (LL) started the trend. In May 2021, Matt and John from LL, announced their next NFT project, a collection of 20,000 3D characters living on the Ethereum blockchain. Half of the Meebits were rewarded to CryptoPunk owners on a 1:1 ratio. 

In this way, CryptoPunk holders were able to claim for free (plus gas fees) a NFT whose floor price (cheapest NFT in a collection) at the time of writing is 4.36 Ξ or $13,300. That’s like receiving a Rolex for Christmas. This model was well accepted and commenced to be viewed as the standard. After the Meebits model, several NFT collections followed LL steps. For instance, BAYC holders received the pet companions for their Apes in the form of dogs from the Bored Ape Kennel Club (BAKC). Ghxsts, a smaller but important collection, rewards its owners with monthly drops that represent each one of the 12 zodiac signs. And the list can go on.

However, rewarding owners with additional NFTs is not the only way to provide an added utility. Currently, we are seeing projects like CyberKongz that yield daily rewards on the collection’s native token. In the case of Kongz, $BANANA. Original Kongz holders will be able to claim 10 BANANA tokens per day for the next 10 years. At the current BANANA price, a Genesis Kong owner receives $390 per day or $140,400 each year. Other projects like the SupDucks ($VOLT) are also embedding this token reward system into their respective models. 

All in all, the utility element of any NFT has become essential. And whilst rewarding extra NFTs or yielding tokens are the most used models, there are projects like Punks Comic that combine the best of both worlds, providing utility in a very tangible manner.

From Collection to Brands

The second element to consider in NFTs is the brand awareness created by a collection. NFTs are becoming brands in the sense of allowing their owners to be part of an exclusive group. Each collection is distinctive from others, and some of them are becoming fashionable. A clear way to illustrate this is the name Larva Labs created for themselves. Once the Meebits were ready to be minted, the collection sold out within hours despite having a minting price that was easily above average, and at that moment, no further utility. It seems that NFTs that are tied to a recognized name will have less difficulties finding a suitor (like Messi NFTs too). 

Another example can be found in the Bored Ape Yacht Club collection. Due to the project’s success, the BAYC’s floor price rose from 3 Ξ at the end of June, to 38 Ξ or $115,000 approximately at the time of writing. At these levels, it is fair to assume that the collection is already out of reach for most of the collectors. Owning a Bored Ape has become a sign of social status. It generates the same sentiment as wearing a luxury outfit or driving an exclusive car. 

To add another layer, some collections have released apparel that is only available for collection owners. This is the literal representation of a brand in any aspect. Furthermore, the brand awareness is magnified when renowned celebrities become vocal about certain projects. 

Building Deep Rooted Communities

NFTs are building strong and special communities. In a space so nascent as the NFTs, finding someone that shares a real and genuine interest feels refreshing. NFT enthusiasts fill Twitter spaces and Discord channels with discussions, sharing lessons and warning about potential risks, or even better, sharing ideas on how to improve their own projects. 

The avatar movement in Twitter has become famous. As with the brand awareness element, celebrities have a positive influx in the community. The fact that Mike Tyson uses a blue cat as his Twitter profile picture certainly generates a positive impact in the Cool Cats project. Same happens in other projects, like VeeFriends, where chatting with Gary Vee is typical. Moreover, having the same common belief with sports superstars like Stephen Curry or DJ Steve Aoki was something unthinkable a few years back. And that’s exactly what NFT communities are all about — bringing down those barriers and building a project’s community.

Source: DappRadar

Communities have definitely become such an important element that projects like Loot were designed to let  their members bond. Loot is an NFT collection that emulates a Dungeon & Dragons RPG card game. Following its debut in September, the project generated $194 million in trade volume in one week. Loot is a ground-breaking project in the sense that it was created for the community and is going to be developed by the community. All the future improvements and developments will be in charge of their members. The project ceiling is fully dictated by this group. No team member is involved or ever will be. 

The community element has become a fundamental value of the common belief. The stronger ties and roots develop within the community, the better chances a project has to succeed.

The Team Element

Talking about teams, another element that is relevant when assessing any NFT project. The case of Loot is very rare. The norm is that teams create a project, work on any required enhancements or developments, nurture the project and communicate effectively the milestones in their roadmaps. 

That is a common element in successful projects. Some teams are widely disclosed. That is the case with Larva Labs, VeeFriends or World of Women. Other teams like Yuga Labs or 0N1 Force will remain anonymous under their avatar personas. 

Source: boredapeyachtclub.com

In the end, the most important aspect is the level of engagement with team members. Teams that meet their goals become trusted. It is easy to spot teams that are eager to bring value to their communities. But perhaps most importantly, how do they respond to the challenges presented? 

Rarity and Scarcity Matter

Each collection possesses a set of attributes and traits that allow an algorithm to randomly generate each piece so that it can be different from other ones in the same collection. The rarity assigned to each trait is what makes NFT collectibles special. This unique or rarity element also drives the demand up. It is true that certain pieces may be more attractive than others even though they  are not so unique; nevertheless, rare items are more wanted than common ones, thus raising the price of the formers.

The other element to consider is the supply, with 10,000 avatar collections appearing to be the standard of the current NFT market. These collections are normally capped at a certain level, meaning the supply will remain the same forever. Limiting the edition size of a collection adds a scarce element, appreciating the value in the process. Yet, this is not the rule for every collection out there. 

Source: rarity.tools

For example, breeding projects like Avastars, a collection of 25,200 Generation 1 pieces without a single clone, will allow their holders to combine the traits in two or more pieces to mint a completely new NFT. Even though the supply will increase, the newly minted NFTs will be labeled as Replicants or Gen-2, making a clear distinction between both types. This is an utterly important aspect to consider. While certain collections will expand their supply, the original NFT pieces should be somehow differentiated from the rest. 

Expansion into other industries

So far, we have tackled elements or factors that are attainable mostly to NFT avatar projects. 

They have created true communities that share common interests, and in some cases grant their owners with tangible rewards. 

While it is true that these avatar projects were the main driver behind the latest NFT mania, there are other categories that are helping NFTs make a splash in different industries. 

Games Level-up 

Take blockchain powered games. They  may revolutionize traditional gaming, an industry that generates $114 billion in yearly revenues, according to Statista. 

First is the play-to-earn narrative, and secondly, is the ownership enabled by NFTs within blockchain games. For the first time, players will have true ownership and full control over their in-game assets. 

As detailed in DappRadar’s August Industry Report, blockchain-based games are driving the usage within the industry. The Unique Active Wallets that interacted with game dapps (decentralized applications) were measured at 747,000, up 64% from July numbers. Comparing this particular game usage metric with other peer categories like DeFi or NFTs collectibles itself, clearly shows how games are behind the latest surge in the amount of unique wallets connected to blockchain dapps.

As a matter of fact, looking in detail at the record NFT trading volume in August, 18% came from in-game collectibles, NFTs that can be used within blockchain games. 

All in all, the gaming space is expected to become an even bigger market. Axie Infinity, a play-to-earn game developed by Vietnamese studio Sky Mavis, already attracts more than 1.5 million unique players worldwide each day. Illuvium is preparing to launch at the end of the year in Immutable X, an Ethereum Layer 2 solution, and Star Atlas, a game that will run on Solana, is being hyped too.

And of course, there is the metaverse, a space aiming to become the place where individuals create, trade, and socialize in a virtual reality. Important game projects in the metaverse include Decentraland, The Sandbox, Blankos Block Party, Ember Sword, Somnium Space among several others.

Art Getting Digital

Art is one of the most well-suited applications for NFTs. The matchup is ideal. On one hand, NFTs are built to prove authenticity, one of the most important aspects in art pieces. On the other hand, the marketplaces where NFTs are traded, are the perfect scenario for an artist to become recognized. Taking advantage of this digital space, and at the same time, having a reliable way  to manage royalties. 

Art in NFTs exists in different flavours. There are 1/1 art pieces, or pieces that are unique. Think about the Mona Lisa, or Beeple’s art pieces. They only exist in a single and unrepeated manner. 

Also, there is Generative Art, a new way of producing art. In generative art, the artist (or programmer) instructs a program to run a code that assigns unique traits to predefined patterns. This type of art or NFTs have become so coveted, that these pieces have been sold for as much as $5.68M. Some examples of generative art projects are Art Blocks and Larva Labs’ Autoglyphs.

A Fantasy Matchup Between Sports and NFTs

The sports industry is big, especially in the US. According to Verified Market Research, the global sports trading card industry was worth $13.82B in 2019. One of the most important sports associations in the world realized the tremendous opportunity waiting to be taken. 

In July 2019, the NBA started a joint-venture along 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 was until February of this year that the project became really visible. Between February and March of 2021, Top Shot generated over $432.36M in 2.56M transactions. 

If basketball had its official NFT platform, football (soccer) would not lag behind. Enter Sorare, a fantasy football platform that allows players to trade and manage a fantasy team based on player cards represented by NFTs. In this game, fantasy managers have total control over their players, in contrast to traditional fantasy platforms. Sorare’s card supply is limited, adding another strategy layer to the game. Whilst Sorare has not reached Top Shot’s levels, some exclusive Sorare player cards like Ronaldo’s or Mbappé’s are worth tens of thousands of dollars.

Furthermore, sport collectible projects have garnered a good amount of investment interest. Dapper Labs announced a $250M funding round, whereas the french based NFT project Sorare raised a $680M funding led by Softbank. 

Overall, the sports industry is well represented within the NFT sphere. Ethernity Chain, a blockchain specialized in NFTs, offers a wide list of sport legends collections that includes Pele, Muhammad Ali, Lionel Messi and Dan Marino. 

Source: ‘Messiverse’ by Lionel Messi

Fashion brands join NFT craze

Avatars are the real habitants of the metaverse. Skins and in-game cosmetics have a strong importance within players. A clear example are free-to-play games like Fornite, that allow gamers to customize their playing avatars. DMarket, a platform to trade in-game wearables, estimates the skin market to be worth $40B per year.   

Source: Burberry – Blankos exclusive shark figurine

With a market so big, and players and NFT enthusiasts avids to get to the next level of exclusiveness, the metaverse can become a true value generator for the fashion industry. And the presence of these fashion giants has already been felt. In August, Burberry and Blankos Block Party, partnered to design a collaborative NFT suite that includes characters and accessories. The collection of 2,250 NFTs sold out in less than a minute. 

While Burberry was the first fashion brand to collaborate directly with a metaverse project, a couple of its peers were already under way.  In June, fashion giant Gucci auctioned its first official NFT for $20,000,  a short film inspired by the Fall/Winter 2021 collection. Most recently, Dolce & Gabbana followed by creating a nine- piece NFT collection in collaboration with UNDX, a curated marketplace specialized in luxury and cultural items. 

Going Mainstream

The impact caused by blockchain technology, specifically NFTs, has reached new heights. The impact has felt so soundly, that big brands across all industries have shown their interest to be part of the space. In August, Coca-Cola auctioned a branded NFT skin that can be worn in Decentraland. Slowly, mammoth organizations are leaving their footprint within the space.

And it’s not just brands launching a collection, or auctioning a rare piece. NFTs have managed to get the attention of important investment companies and even financial institutions. For instance, Three Arrows Capital, a hedge fund based in Singapore, announced at the end of August the creation of Starry Night. Starry Night’s mission will be to “assemble the world’s finest collection of NFTs”. 

On August 23, VISA, the payment processing giant, announced via Twitter the purchase of CryptoPunk #7610 for $150,000. The announcement drew headlines across important media outlets. Finally, last week, Sotheby’s auctioned 101 pieces from the BAYC collection for $24 million. 

All in all, the mainstream audience will help the NFT space cement its value. While NFTs still feel like a nascent space, it is not far-fetched to think it will reach numbers seen in other blockchain categories like DeFi. 

The Road Ahead

At-present, the blockchain industry is still at a very early stage. Right now the strong demand is enough to balance the ever growing supply. Plenty of NFT projects might not keep the value in the long term. Yet the best performing group of NFT dapps will become a critical part of the industry going forward. 

Certain NFT projects are rewarding their owners with utilities that were previously unthinkable, and others have demonstrated the power of building strong communities. All in all, these collections are becoming recognized brands beyond the chain.

The impact has grown so big that important verticals like the sports or fashion industries want to be part of this growing landscape. And perhaps more importantly, major institutions have seen a real investment value in this concept. 

The true ownership that NFTs grant will unlock numerous applications. Tickets will become NFTs dealing a potential death blow to piracy. Music files that protect the artist will be distributed as NFTs. Yield-bearing NFTs may become as relevant as many existing financial products. It looks like we’re headed to an unstoppable virtual reality similar to what Ernest Cline depicted in his famous novel Ready Player One — a world where real life assets will be tokenized or NFTized. Which bubble will pop first remains the biggest question. 

DappRadar tracks, analyzes, and ranks decentralized applications and is a primary gateway into DeFi. This report was written Pedro Herrera, a senior blockchain analyst at the venture.

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