NFTs and the Crypto Universe

NFTs-and-crypto-in-defi

Over the past twelve months, the NFT landscape evolved from a small ecosystem with a few hundred million in sales volume to a multi-chain ecosystem where individual projects like Axie Infinity have surpassed over $1 billion in sales volume. OpenSea facilitated $24 million in sales volume in all of 2020 and by August of 2021 surpassed $1 billion in volume. Unlike the DeFi ecosystem, non-fungible tokens are highly consumer-facing and attention-grabbing. As DeFi continues to build out the financial rails of the future, NFTs will cyclically advance into the cultural zeitgeist.

OpenSea is telling a canary in the coalmine for NFT growth. In June, OpenSea facilitated over 211,000 NFT sales across nearly 40,000 active traders.

In the month of August, NFT exchange OpenSea hit $3B in monthly volume as over 1.5 million NFTs changed hands. Its August volume alone exceeds that of every other month in its history, combined. OpenSea’s August volume is on par with $3B in gross sales Etsy put up in all of Q2: another sign of just how big the NFT market has grown relative to other online marketplaces in a very short timespan.1

NFTs and Web 3.0

We spent the last 20 years building networks on the internet. Social media platforms like Instagram, Twitter, YouTube, and Discord are networks, which can be divided into billions of smaller networks, consisting of followers, friends, subscribers, backers, etc. These platforms gave many people an audience who didn’t previously have one. But due to fundamental structural misalignments between the networks and the companies that own them, we’ve seen increasing tension around these networks’ rules and economics. For example, social media companies that control large networks routinely kill off promising 3rd-party developers, fight cross-network interoperability, charge excessively high take rates, and adopt intrusive advertising models. This is not due to bad people or motives. It’s the logic of the model. If you don’t do these things, your competitors will, and you’ll be out of business.

We are now entering a new era of the internet — Web 3 — where we have the chance to upgrade these networks into economies, and in the process build systems where the incentives of the network owners, network participants, and third-party developers are fully aligned. Economies (as used here) are networks with various crypto assets freely flowing through them, from any node to any other node, directed by the decentralized participants and not by the centralized network owner.

At the end of the day, non-fungible tokens (NFTs) are simply a primitive of blockchains, like fungible, ERC-20 tokens. But the narrative of NFTs as a category has taken off to refer to a broader trend and thus, similar to DeFi, the term “NFTs” now encompasses its own ecosystem – Chris Dixon

The next evolution of content platforms is starting. Using crypto primitives – like NFTs, permissionless protocols, programmable royalties – content creators are set to control the next era of content – The Ownership Era

The Distribution Era: The key value in this era for consumers was aggregation while creators received wide distribution of their content(e.g. songs). However, as users realized that their content had value, beyond views and likes, individuals started to create their own brands.

The Subscription Era: Distribution is no longer worth the tradeoff. Personal websites are ubiquitous. Influencers host their own podcasts where advertising is the key form of revenue or have transitioned to Substack/Patreon where they directly monetize their connections to users.

The Ownership Era of Content: Platforms are partially owned by their content creators. The creators earn tokens for their work which provides ownership in the network. The platform-creator relationship becomes more synergistic as opposed to parasitic.

Content will remain king, but this time creators, not corporations, will control the reigns. As society shifts from valuing firms to individuals, creators who leverage these new web3 platforms will be poised for greater success – Mason Nystrom

NFTs

NFT stands for non-fungible tokens. It’s easiest to think of NFTs as a file format. People use file formats – like jpeg, png, or gif – to transfer information or value on the internet. NFTs are a file format that transfers data and value on blockchain networks like Ethereum. Since NFTs exist on blockchains, these tokens (or files) contain properties similar to bitcoin, primarily digital ownership (a token in a person’s wallet) and transparency (all activity is recorded on a blockchain). We’ll get into some of the other noteworthy benefits that come with NFTs further below.2

The term non-fungible refers to the concept of fungibility. A good is said to be fungible if it is identical and interchangeable. For example, one dollar is worth one dollar. You would happily swap dollars with me since we all agree they have the same value. Comparatively, an item is said to be non-fungible if it is unique. Lots of items are non-fungible including diamonds, houses, and baseball cards. No two of these items are the same, diamonds have different colors and cuts while houses even in cookie-cutter neighborhoods have different locations which affect how light comes into the house. An NFT is simply a token (or piece of information) that is unique. A common example of an NFT might be a digital trading card or piece of digital art.

An amalgamation of a few factors was the perfect dry powder to ignite NFTs’ explosion into the mainstream psyche:

1. Bitcoin’s insane bull run to 3x all-time highs from 2017

2. The emergence of NBA Top Shot

3. The convoluted monetization structure of digital content (inclusive of music & video)

4. The growing digital collectibles market — especially during the covid pandemic

NFT features

While NFTs are simply a way to transfer information (data), they provide various benefits because they are created on blockchain networks.

While the value of an NFT can vary depending on how it’s used, generally speaking, NFTs provide the following characteristics:

Distinctive – The hallmark trait of non-fungible tokens is that they are unique and this can be verified on a blockchain.

Permanent – NFTs have permanent information and data that is stored within the token. This information can include a message, image, music, signature, or any other piece of data.

Programmable – An NFT is just a piece of code on a blockchain. This means it can be programmed to have various qualities. One of the most useful qualities of NFTs to date is that royalties can be programmed (or built-in) to the tokens. This means an artist obtains a royalty on all secondary sales of their artwork.

Permissionless – NFTs can be used in multiple ways if they exist on a permissionless blockchain like Ethereum (not all NFTs are on Ethereum). For example, Sorare – a sports trading card game – has third-party games (not built by the Sorare team) that use Sorare trading cards.

Digital Ownership – whoever possesses an NFT in their wallet, owns and controls the NFT. Digital assets like domain names (Google.com) aren’t actually owned by Google, but instead by middlemen like GoDaddy or Verisign even though they control the rights to the asset.

These qualities empower various new use cases for NFTs.

Benefits

The main benefits of NFTs are closely related to everything that distributed ledger technologies (DLT) have offered in recent years. Blockchain technically secures the authenticity of the NFTs, and it guarantees direct payments to content creators.

NFT Categories

Art

Digital art has taken the world by storm over the course of the past several months. Digital art combined with the digital property rights of NFTs (verifiable ownership) and perpetual royalties for artists makes NFTs a 10x improvement upon the current system. Most recently, the global auction house, Christie’s auctioned an NFT-based work of art created by Beeple, the top NFT artist by sales volume.

Gaming

Gaming assets are already digital in nature, so creating them as digital assets that individuals can own presents various benefits. There are multiple game studios building games that run on blockchain rails including Blockade and Horizon. Axie Infinity, a pokemon-style game has issued creatures called “axes” as NFTs that are used in Axie Infinity’s battling feature. Lastly, there are several platforms like Enjin which are building their own platforms that facilitate game development including the issuance, or minting of gaming assets.

Content Creation

Music, blogs, tweets, memes, and other digital content can all be issued as NFTs. While that doesn’t make the content valuable it does present unique opportunities for digital ownership and on-chain royalties. Although the distribution of content may remain free for blogs or music, NFTs present unique monetization opportunities for crowdfunding content or selling a blog/song similar to how one might buy vinyl records or old edition books. Decentralized publishing platform, Mirror is enabling writers to crowdfund blogs and sell them as NFTs. Other experiments include the Kings of Leon selling albums as NFTs that provide additional value including lifetime concert tickets or exclusive experiential artwork for an album.

Digital Trading Cards

Sorare and NBA Top Shots are two of the most popular sports trading card collectibles. Sorare cards can be used in Sorare’s fantasy football (soccer) leagues while NBA Top Shots by Dapper Labs is developing a game that uses their NBA NFTs. Other digital trading card games include GodsUnchained which resemble strategy games like Magic the Gathering or Yu-gi-oh.

Authenticity

Various items, especially collectibles and high-value items come with digital certificates. These certificates are often either stored as paper records or digital pdf copies. The benefits of digitizing these certificates and issuing them as NFTs means that any can verify the authenticity of the digital certificates and nobody can alter the information or misplace the document.

ConsenSys backed company, Treum has already piloted a program with the NBA that would authenticate memorabilia such as in-game worn jerseys that are sold during an NBA game via live auctions. While there’s always the possibility of a physical object being tampered with, digital NFTs can act as a better and more automated certification than existing practices.

Domain Names

Blockchains inherently make for great asset registries and one of the largest digitally native assets are domain names. Domain names are digital assets that map IP addresses to more human-readable names(e.g. 13.57.64.34 to Messari.io). Ethereum Name Service, Unstoppable Domains, and Handshake are three projects taking different approaches to enable domain names on blockchains.

Financial Products

Many types of financial products aren’t interchangeable. For example, your mortgage is unique to your house, length, interest rate, and more. Any simple financial contract can be issued as an NFT and stored on a blockchain. The real estate sector, in particular, suffers from serious barriers to entry, especially for younger people. The application of blockchain technology has the potential to radically change this industry for the better by broadening access, increasing transparency, and streamlining complex transaction processes. Nori has tokenized carbon removal credits as NFT where each Nori NFT acts as a certificate representing carbon removal.

Tweets and Social Media Posts

NFTs presents an opportunity to turn media into tokenized content. For instance, selling social media posts such as Tweets are the latest use case for NFTs. You have probably seen by now, but Twitter CEO Jack Dorsey is auctioning his first-ever published tweet as an NFT. Dorsey shared a tweet with a link to a digital platform called “Valuables,” which facilitates buying and selling of tweets autographed by their creators. This new use case for NFTs opens up the possibilities for selling speech or iconic cultural moments on the web.

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