Franklin Feringa - 14 August 2021

Why NFTs are here to stay

The cryptocurrency industry has been obsessed with Non Fungible Tokens (NFTs) this year which has seemingly only been increasing lately. Opinions on whether this is sustainable or not are divided. In this article we will take a look at what has driven the hype thus far and what we might expect from the future. 

History

NFTs are designed to be unique, unlike fungible tokens which are interchangeable, like utility tokens for example. Back in 2017, the first NFTs ever were launched; CryptoKitties. Each CryptoKitties had its unique characteristics. This immediately became a hype which died down just as quickly. Since then, the talks and speculation about NFTs never really went away although the whole NFT market did not heat up again until the end of last year. 

Resurging popularity

The hype has for the most part of the year predominantly been in the collectible and art NFTs. Whereas CryptoKitties were the most popular before, this year CryptoPunks, uniquely created characters, and NBA Top Shot, where NFTs represent video highlights, became extremely popular. Their success re-lit the fire under the NFT market which then spread out to other projects and art NFTs. 

We can see the increased popularity of NFTs back in the volume of the largest NFT marketplace, OpenSea, as well as the overall weekly sales. 

Unsurprisingly, the success of few has drawn the interest of many. Now, it seems like we have new NFT projects launch their collectibles every day with the hopes of mimicking the success of projects like CryptoPunks. This is also what causes doubt about the NFT market for some people. But we must not forget that this is just a minor portion of what NFTs have to offer. 

There are many other industries that NFTs can revolutionize by giving users ownership of assets and creating new economic models/opportunities. 

  • Musicians can use NFTs to sell their songs or albums, giving the holder of the NFT the right to listen to it. It also allows them to program it in such a way that they will receive a portion of the sale every time people decide to re-sell their album. 
  • NFTs can be used to buy and sell real world assets and participate in different investment types in the future as well. 
  • Within crypto, NFTs can be combined with DeFi protocols to give them extra value such as backing them with interest bearing tokens. 

And these are just a couple of examples.

The next trend

Another use case for NFTs recently received a sudden increase in attention as well: Play2Earn. Axie Infinity has been the big driver behind this hype. In Axie Infinity, the AXS utility token, along with Smart Love Potions (SLP) tokens, are used to create unique upgradable beasts that are called Axies. Whereas the AXS token has a fixed supply, the SLP token has an uncapped reflexive supply. When used to create Axies, the SLP tokens are burned.

Players create teams of (upgradable) Axies to battle each other or AI and win AXS and SLP tokens if they are victorious. AXS tokens can be staked to earn further rewards that come in the form of revenue generated by the network through marketplace transactions. The goal is to create a metaverse of many different games. 

The trading of Axie NFTs has taken over a large portion of the NFT market in terms of trading volume. Because of this success, the NFT hype has spread from just collectibles, to the gaming market as well. The gaming market size was $157 bln in 2020 with a projected size of $293 bln in 2027. So there is plenty of room for cryptocurrency projects to capture value through revolutionizing the market by giving gamers ownership over in-game assets and allowing them to earn capital by playing games. Many are already live or under development. As this market matures, we will start to see more traction. Axie Infinity is likely the start of this with more to come in the future. 

Conclusion

So this aspect of the NFT market is currently overvalued and thus has a lot of risk, other parts of the market are still more in their early phase. The next strong hype will likely be in gaming. But after that, there will be a lot more opportunities that NFTs are waiting to revolutionize which will also create new investment opportunities. 

So, while the popularity of collectibles currently might be considered over the top, it is still a good development for the development of the entire NFT market as new attention is drawn to it and the hype can flow over to other more revolutionary use cases of NFTs. It feels like the ICO bubble of 2017/2018. People are getting too hyped up over simple NFTs, hoping that other people will buy it from them at a higher price. 

After the initial hype, many larger players will be attracted to the space, including investors. This will further drive innovation in the industry and ultimately lead to faster adoption.