i What they are
ii The numbers
iii The anatomy
iv The landscape
v A look forward
In October 2020, Pablo Rodriguez-Fraile spent $67,000 on a ten-second motion graphic of Donald Trump that he could have watched or replicated for free online.
Within six months he sold the piece for $6.6m. He did so with the possibilities created from non-fungible tokens.
Non-fungible refers to things that can’t be exchanged on a like-for-like basis and are individually unique. Humans are non-fungible, gold, dollars, and Bitcoin, are fungible.
People find it hard to wrap their heads around exclusive digital ownership of something that can be easily and endlessly duplicated - like a meme, tweet, or video clip.
The NFT of the first-ever tweet was sold for $2.9m and Tim Bernard Lee auctioned off the original piece of code used in the creation of The Internet for $5.4m.
Non-fungible tokens are a way of attaching a unique digital signature that acts as a certificate of ownership to various tangible and intangible objects on a blockchain.
Cryptographic algorithms are used to tokenize the digital asset, or the digital twin of a physical asset, and validate its origins as unique.
By creating real-world scarcity for digital objects we create value.
As with crypto, a record of who owns what is stored on a shared ledger known as a blockchain. Once it’s in stone, those records can’t be forged because the ledger is validated by the consensus of thousands of distributed computers around the world.
People have been playing around with the concept since the mention of Coloured Coins on Bitcoin back in 2013, but the emergence of NFTs has spiralled beyond anything imaginable in the last year.
They dramatically shift the value and exchange of data, items, and IP across mass markets.
The NFT tsunami has been many years in the making and stretches much further back than symposiums on Coloured Coins.
It answers a Cartesian argument of original, exclusive, and unique ownership of assets in the digital universe. A universe we now spend more time in than our physical reality.
This is the new frontier of art and a way to materialize the cultural artifacts of the Internet Age. Their arrival and market function will play a monumental role in shaping a reimagined, decentralized, and increasingly real, Open Internet.
“It does feel a bit to me like the very early web, and I can say that because I was there, in the sense it takes an extra step of imagination to grasp how big the economics of it are.”
Anthony Citrano, CEO of NFT marketplace, Acquicent
A global pandemic and a succession of disjointed lockdowns have accelerated our steps into the digital stratosphere and started a land grab for NFTs.
“If you spend ten hours a day on the computer, or eight hours a day in the digital realm, then art in the digital realm makes tonnes of sense - because it is the world.”
Alex Atallah, Co-founder of OpenSea.
The rising tides of crypto have lifted all ships and the explosion of DeFi from $11bn in February to $140bn in June has cemented the function of NFTs alongside - and intimately within - DeFi.
Whilst individual cryptocurrencies have fluctuated in value, their collective advance has been unstoppable in 2021. Their combined market cap reached a peak of $2.43trn in the first week of May (220% YoY+) and has regained momentum after a downturn across June and July. Markets like these don’t disappear.
Most NFTs are built on Ethereum, whose market cap grew at three times the pace of Bitcoin this year to jump from $82.8bn in January to $411.1bn in September.
The rapid entrance and climb of alternative crypto chains like Solana and Cardano has been fuelled, in part, by the explosive demand for NFTs. Bitcoin accounted for 69% of the entire crypto market capital at the beginning of the year and now accounts for 42%.
Everybody is Nostrodamus when it comes to NFTs and there’s a lot of talk around the bubble bursting.
However, the rate of adoption with NFTs, the wider market growth, their role in DeFi, the metaverse, and their evolutionary function in the market make that highly unlikely. NFTs are dead, long live NFTs.
The space just recognized its best month ever, topping $5 billion in sales volume according to New Dapps Report on NFT collectibles.
That said, there is a real need to increase their everyday utility and move them from the hands of the profitable few to the advantage of the many.
"NFTs will serve as the ultimate gateway for billions to enter the greater crypto ecosystem. The future digital world and economy will be decentralized which we are not only preparing for but championing.”
Co-founder & Co-CEO of Recur, Zach Bruch,
Most NFTs are stored and transacted on Ethereum although other blockchains such as Solana, Flow, and Cardano can also create NFTs.
They can be any digital asset or digital twin of a physical asset and confirm ownership of items like cars, concert tickets, metadata of digital clips, gaming skins, or intellectual property.
Anthony Hopkins new film will be marketed as an NFT and Snoop Dog announced plans to hold a private concert in the metaverse using NFTs as the entrance ticket.
“All consumer products that can’t be eaten will have digital twins in ten years”
William Quigley, Tether
NFTs are unfolded into seven parent categories:
Each token stores a digital fingerprint in its metadata that can include size, name, scarcity, functions, and other identifying taxonomies. These are immutable and cannot be altered.
NFTs are usually bought through gaming platforms or traded on dedicated NFT marketplaces like OpenSea, Mintable, and Rarible. They are often attached to exclusive drops announced on Discord, Telegram, and Twitter channels.
The largest sale of NFTs such as Beeple’s Everydays: The First 5000 days, or Cryptorpunk #7523, which sold for $63.9m and $11.8 respectively - are usually conducted off-chain at auction houses and manually added to the blockchain.
Unlike centralized platforms and companies that dictate scarcity, NFTs offer the opportunity to shift control from the middle highwaymen to the hands of the creators and communities.
The ability to encode royalties into the resale and usage of purchased NFTs means the author is permanently attached and compensated for their work. Original owners of EulerBeats earn an 8% royalty every time their NFT is paid forward. Other platforms, like Foundation and Zora, also hardwire royalties into their tokens.
Vignesh Sundaresan, who acquired the Beeple piece for $69m said its purchase marked:
“A significant piece of art history and a very important shift in how art has been perceived for centuries.”
It’s a testament to the potential of blockchain to unshackle constructed hegemonies and restore value wider, and to creators with decentralization.
“The point was to show Indians and people of color that they, too, could be patrons, that crypto was an equalizing power between the West and the Rest, and that the global south was rising.”
A vanguard of creators, gamers, collectors, and crypto botanists may have thrown a pebble into the lake, but a tide of investment and developers have followed to architect a market around them.
Perhaps the best timeline I’ve found to date on the evolution of NFTs
A handful of dedicated NFT exchanges started in 2018 to meet demand, with lead runners including OpenSea, SuperRare, Rarible, and NiftySquare. A comprehensive breakdown of the current ecosystem is provided by The Block here, or alternatively, by DappRadar here.
OpenSea has since outpaced all other platforms, grown its monthly sales north of $4bn in September, received $100m funding in July, and become the first NFT marketplace to surpass a billion-dollar valuation.
AssetDash provides a good market cap tracker of the top NFTs for those interested in going further down the rabbit warren.
The game Axie Infinity universe surpassed $1.7 billion in historical sales volume and continues to engage more than one million players. Along with OpenSea they generated $433 million in revenues collectively in August ($355 million and $78 million respectively), and represent 87% of Ethereum’s total revenue
In addition to NFT marketplaces, there are dedicated game studios like Axie Infinity, Dapper Labs, Horizon Blockchain Games, Lucid Sight, and Platinum Egg.
Back in 2017, when NFTs were in their infancy, demand to adopt virtual kittens brought Ethereum to a virtual standstill.
Dapper Labs' creation of the game unearthed the limitations with current-gen blockchains and their ability to process the sheer volume of transactions involved in gaming and high-frequency NFT trading.
Every transaction needed to be authenticated by the nodes in its ledger and Ethereum could only accommodate 15 - 45 transactions a second. Comparatively, Visa on average processes 1,700 transactions per second.
Ethereum 2.0 intends to be able to handle 100,000 transactions per second but instead of waiting or looking for a new home, they constructed an entirely purpose-built blockchain for NFT collectibles and large scale crypto games called Flow. Dapper Labs was last valued in April at over $7.5 billion.
They took an alternative route to sharding and created a unique multi-node infrastructure which allows them to overcome the hurdle of processing transactions whilst scaling. They cover it in much clearer detail in this interview.
"When we look out several years, we envision consumers with screens in their homes displaying NFT based digital art. We expect that a substantial majority of these consumers will choose not to spend tens or hundreds of thousands of dollars on NFT collections, but rather will utilize our NFT based subscription service to cast pieces from our collection onto their wall.”
Ilya Nikolayev, CEO of Tapinator
Half of the ten most expensive NFTs to have ever been sold are Cryptopunks and they still dominate the top tiers of monthly trading. At first glance, you might question how a pixelated piece of digital art that takes you back to gaming on the SNES is selling for $11.2m.
Cryptopunks are an artistic nod to the British Punks of the 70s and the Cyberpunk movement of the 90s that introduced the concept of cryptocurrencies. They are the reality of William Gibson and Bruce Berling’s worlds’ in art form.
John Watkinson and Matt Hall realized they could create unique characters generated on the Ethereum blockchain. They limited them to 10,000 characters and ensured no two would be the same. Anyone that owned an Ethereum wallet at the time had a free grab and they were swiftly claimed. They’ve since started a thriving secondary marketplace that’s generated hundreds of millions.
Cryptopunks symbolise the first major step into how art was redefined in a digital age. Imagine them as the exclusive moulds of the first footprints on the digital Moon.
I first sat down to write this piece in June and by the end of August a new NFT collection had created an entire universe around Bored Apes. Writing about NFTs is like painting the Golden Gate Bridge - by the time you’re finished it needs a new coat.
Bored Apes accrued a market cap of over a billion dollars, sold a collection of 101 for $24 million at Sotheby’s, and by the end of August launched a splinter world of mutants.
The Mutant Ape collection generated over $228.3 million in just 10 days and became the sixth most valuable NFT collection. These NFTs are more than art, they’re creating cultural communities.
The NFT allowed any of the 10,000 original Bored Ape NFTs a single mutation from three types of serum into a Mutant Ape. That left 10,000 new NFTs to be minted and they sold out in minutes. Individual pieces are selling for as much as $1.13 million currently.
The future of the Metaverse is beyond comprehension. We’re talking about the first real moves into a multi-trillion dollar market. Elon Musk and Richard Branson might be making forays into space, but the bionics of NFTs and virtual experiences in a shared multiverse are creating a digital Big Bang.
Bored Ape Yacht Club collection which holds the fourth and fifth spot (Mutants) in trading volume this month are buying virtual real estate to build a Metaverse gallery. Somewhere people can come to see the Apes, buy them, and earn rewards in a game-like environment.
The Walking Dead creators are among a whole heap of major names making steps into these new worlds. Including Facebook, who announced earlier this week their intention to become a metaverse company and commit $50m to recognizing that.
Several virtual land platforms are rushing to dominate the space, including Decentraland, CryptoVoxels, Somnium Space and Sand Box, which sell islands in which people can interact through avatars.
Any market with the potential to make trillions in a rapid space of time cannot be ignored for long by institutions, regulators, and governments.
Visa’s purchase of a Cryptopunk which they cited as an important financial cultural artefact stamped recognition from the financial institutions and saw the market receive a $20m uplift that week.
They join Tesla, PayPal, Facebook, CNN, The New York Times, Christie’s and a host of other major institutions that have dipped their feet into NFTs. If the mainstream media, financial payment firms, and art houses of the world have recognised NFTs, then the institutions are already here...
Their potential in employment, healthcare, and the proliferation of global data are immense. Any industry that wishes to send confidential information such as medical records, employment history, and security details are doing so with privacy-preserving details coded into NFTs. They can be readily available, distributable, whilst maintaining control with the owner.
NFTs are assets and Decentralized Autonomous Organizations (DAOs) are ways to govern communities. DAOs have no hierarchies, they are flat by nature and are governed by voting rights and rules attached to asset allocation across the DAOs.
The NFTs provide the ownership and entrance to a community and the DAO provides the governance and rule of law within it. If NFTs are the art, music, skins, or IP, then DAOs are the collective movement attached to them.
We won’t delve too deep into this warren as this will be the subject of an entirely dedicated chapter in the coming weeks, but Interaxis sums the marriage up quite well here.
The most important thing to remember about NFTs and this growing ecosystem is that they will only be successful if supported by the right infrastructure. The market has outdone our expectations but is also feeling the growing pains of unstructured borders, inflated bubbles around rare items, and a reality check on mainstream utility and accessibility.
“Maybe 90% of collections minted today are totally useless and meaningless.”
Gauthier Zuppinger, COO of Nonfungible
The seismic interest in NFTs has created new and creative opportunities for phishing, scam artists, and imposters to leverage the space. It also offered huge gains for those to build on privileged market positions and profits as the recent front running scandal by the Head of Product at Open Sea demonstrated.
Regulation will help secure the space, but that doesn’t mean putting a stranglehold on decentralized trading. Any stringent red taping from the US would likely lose their advantage in a market that will inevitably be worth several trillion in the immediate future, whether it’s within their digital borders or not.
Exclusive ownership in the digital frontier opens a universe of investment opportunity and offers a real potential to democratise the journey from creator to buyer/collector.
It’s a vital foothold in the creation of an Open Internet away from the middlemen and it could also be the vehicle that legitimises the more peripheral corners of Blockchain and DeFi.
It seems to me like NFTs and their associated market are heavily influenced by consumer values and idealism, a kind of liberation for the internet. NFTs are not only a technological innovation, but a form of cultural innovation too. It could become an egalitarian utopia or another land grab and playground for the uber-rich, or perhaps, it has the possibility for both.
What the future may hold:
Earlier this year a Banksy print entitled Moron White was purchased for $95,000, only to be burnt in front of a livestream.
The NFT of the footage went on to be sold for $450,000.
You might question how an original Banksy is less valuable than the recording of its destruction, but assets are as valuable as the price someone is willing to pay for them.
Creating scarcity in an infinite world changes the entire concepts that we attach to our understanding and engagement between the physical and digital metaverse.
Welcome to the new frontier…