A look behind the buzzword at the NFT phenomenon.
NFTs have undoubtedly been the most talked-about asset in crypto this year. Non-fungible tokens representing everything from digital trading cards and virtual real estate to gig tickets and high-end art pieces have taken the world by storm, drawing huge amounts of liquidity into the market and providing yet another intriguing use-case for blockchain technology.
As with bitcoin, NFTs have succeeded in charming crypto natives, mainstream users and even Fortune 500 companies. Whether it’s McDonald’s releasing an NFT to commemorate its McRib anniversary, or Dolce & Gabbana raising $5.7 million from a ‘luxury’ wearable art collection, crypto is crashing into the mainstream in a big way. So why should you care?
If you’re still baffled as to what on earth an NFT is, the concept is rather simple: it’s a unique cryptographic token that represents something else.
That something else can be, well, just about anything: a domain name; a digital or physical artwork; a distinctive collectible featured in a video game. The value comes from the fact that NFTs aren’t interchangeable, and so the only way to prove ownership of the corresponding physical or virtual item is to own the redeemable token.
The market for NFTs of all hues continues to boom, propelled by celebrity endorsements, the pursuit of profit and the actions of influential companies like Visa – which recently bought an NFT-based CryptoPunk avatar for nearly $150,000. Leading NFT marketplace OpenSea, meanwhile, recently surpassed $10 billion in lifetime sales, with statistics revealing an average NFT sale price of $872. This is a serious market, with some serious adoption.
Having already helped drive contemporary art sales to an all-time high, it’s natural to wonder where the NFT market goes from here. Is it a matter of time before all major brands launch their own non-fungible tokens? Is this a core technology of the popular metaverse narrative? Is public appetite at large really strong enough to save the sector from a spectacular burnout? Here are three long-term trends we think have a pivotal role to play in the future of NFTs.
If the art world represented a proving ground for NFTs, the metaverse could be their long-term home. The decentralised metaverse describes an immersive, crypto-powered virtual environment, whether it’s a 3D ‘store’ that shoppers can browse via a VR headset, or a fantasyland in which your digital lookalike completes quests, interacts with friends and enemies, and earns rewards for their endeavors.
Countless metaverse projects have emerged over the past year, and all of them eagerly emphasise the ways in which NFTs can be – or have been – integrated. Open-world project Decentraland, for example, allows users to purchase virtual land plots in its sprawling universe. Back in June, Republic Realm purchased a tract of digital land for a whopping $913,000.
Rival venture The Sandbox, for its part, just closed a $93 million funding round having onboarded 500,000 users and generated $144 million in NFT merchandise revenue. Like Decentraland, it’s a virtual Eden where participants can play, build, own, and monetise their experiences.
In addition to representing the title deeds for virtual properties, NFTs can represent playable ‘characters’ and provide access to augmented experiences such as virtual events (such as concerts or conventions.) Indeed, Snoop Dogg has already trialled such an experience via an NFT released in partnership with The Sandbox. Dubbed Snoop Dogg Private Party Pass, the token allows holders to “access Snoop Dogg’s lifestyle: attend Snoop’s private metaverse parties, get access to exclusive NFTs, and enjoy priceless experiences.”
With Facebook pledging $10 billion to its nascent metaverse division, there’s plenty of runway ahead and we can only really hypothesise about the role NFTs might play over the long term. However, the social media giant has already confirmed that its metaverse will support NFTs in some capacity, saying it wants to “make it easier for people to sell limited-edition digital objects like NFTs, display them in their digital spaces and even resell them to the next person securely.”
One area where NFTs are increasingly being deployed is in blockchain-based gaming. Releases such as Illuvium, Gods Unchained, and the Pokemon-inspired Axie Infinity have helped spike NFT trading volume as players battle to acquire the niftiest collectibles and skins. Gradually, free-to-play gaming is giving way to a play-to-earn (P2E) model wherein successful gamers can actually make a living from their in-play activities and derive real-world value from the in-game items they assemble along the way.
The gamified finance (gamefi) movement is even attracting the interest of traditional developers such as EA, whose CEO Andrew Wilson believes play-to-earn releases “will be an important part of the future of our industry.”
NFTs in gaming don’t just represent virtual assets, incidentally; they can also allow players to influence the future direction of a project itself. This is the idea behind the governance NFTs released by BlockPegnio in its Ethereum-based RPG Six Dragons. Essentially, the governance NFTs let players vote for proposed gameplay changes and development priorities, as well as enabling them to earn fees from on-chain game mechanics. The perks will be available for the game’s PC version 1.0 as well as the upcoming PS5 version slated for late 2021.
Perhaps the NFT implementation that’s most interesting is the one advanced by Centrifuge, a protocol that tokenizes real-world assets by converting them into NFTs. But why would you want to tokenize, say, an expensive timepiece, a vehicle or even a house? Well, to participate in decentralized finance of course.
By offering a means by which users can unlock liquidity from real-world assets, Centrifuge allows users to leverage NFTs as collateral to access financing on blockchains like Ethereum. Third parties such as traditional lenders can, in turn, verify the value of the NFT against its on-chain anchors and identities. Who needs banks anyway?
The clever thing about Centrifuge’s NFTs is that they are privacy-enabled: while the eponymous chain tracks asset ownership, the underlying asset attributes are not revealed to the third party.
Experimentation has long been a watchword of the cryptosphere, and when it comes to NFTs, the inventors and imagineers are out in force. With strong demand continuing to drive innovation, and investors pouring more money than ever into the technology, it’s hard to be anything but optimistic for the future.