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This article is contributed by Felix Xu, co-founder of ARPA and Bella Protocol.
Non-fungible tokens (NFTs) made a great journey in 2021 and launched one of the most notable episodes in the history of emerging decentralized industries. NFT trading volume was $ 2.5 billion in June 2021. By December 2021, NFT’s total sales had reached a whopping $ 23 billion, a 10-fold surge over the next six months. In contrast, the total trading volume of NFTs in 2020 was only $ 100 million.
To understand the extraordinary success story of NFTs, we need to graph the trajectory of last year’s NFTs. This article takes a chronological approach to explain the NFT epidemic and what is in front of us.
Build the foundation
Cryptocurrency historians often argue whether a peculiar event led to an NFT explosion in the crypto domain. There’s no clear answer, but selling Beeple’s NFT art for $ 69 million has created ripples across the global market. People suddenly saw a surge in NFT projects with headlines that attracted attention in newspapers and web portals. In addition, most of these NFTs have revisited the nature of the artwork with a finite series of algorithmically generated collections.
CryptoPunks, one of Ethereum’s earliest NFT generative art projects, had total sales of over $ 1 billion in August 2021. One CryptoPunk collectible sold for $ 10 million in December, making it one of the most expensive NFT collectibles. Another popular NFT series that has recently exceeded $ 1 billion is the Bored Ape Yacht Club (BAYC). These projects were very popular due to the active support and promotion from NFT influencers.
For example, NBA player Stephen Curry bought a BAYC for $ 180,000, and hip-hop sensation Eminem bought another BAYC for $ 500,000. The diverse community of NFT influencers ranges from Reddit co-founder Alexis Ohanian and comedian Steve Harvey to Dallas Mavericks owner Mark Cuban. Social media also has anonymous NFT influencers such as: Artchick, Ellio Trades When Gmoney, Helps to raise interest in this project. However, individuals are not the only ones who express bullish feelings about NFTs.
Some mainstream companies are adopting NFTs to diversify their investment strategies. Global payment giant Visa purchased the CryptoPunk NFT for $ 150,000 in August 2021. Adidas, a well-known sports brand, purchased BAYC NFT for $ 156,000 in September 2021. In addition, some of the most popular NFTs were sold by Sotheby’s and Christie’s, which have a history of about 300 years, and recorded NFT sales of $ 100 million and $ 150 million, respectively.
However, NFT collectibles are not the only asset driving the adoption of mainstream cryptocurrencies among private and institutional investors. NFT-based Play-to-Earn games contributed significantly to the growth of the crypto sector in 2021. In the blockage and unemployment of COVID-19, Southeast Asians turned to NFT games like Axie Infinity. Revenues from NFT games have helped quite a few people bring food to the table.
The above example shows that NFTs have become a cultural phenomenon with a variety of use cases and utilities. On the one hand, people use NFTs to supplement their monthly income. But on the other hand, NFT collections have emerged as a status symbol for wealthy demographics. As a result, people are now posting NFTs as profile pictures (PFPs) on various social media handles to showcase their collections. Twitter, which had already considered NFT verification badges, came up with a solution on Twitter Blue.
NFTs will use blockchain technology to unleash an unexplored territory of digital ownership and asset history. These verifiable virtual assets are the core components of a new metaverse that spans multiple blockchain networks. However, NFT projects need to address some issues if they want to keep themselves in the long run.
Sailing in a choppy landscape
Currently, a few NFT projects are showing signs of instability. For example, the developers of the highly successful Pudgy Penguins NFT ran out of all their financial resources, but failed to achieve the promised roadmap. As a result, the penguins community voted for founding members through a decentralized governance structure.
Apart from that, NFTs have crazy minimum price fluctuations, and speculators bid on prices even in illiquid market conditions. For example, last year the minimum charge for a clip art lock NFT without a specific utility was $ 2.2 million. This tendency for some speculative investors to hype price indicators without reason or rationale can be detrimental.
This turmoil in the NFT market is not so surprising. Although NFT technology and concepts are innovative, the NFT sector is still in its infancy. Things can be quite volatile in these early stages of development. However, NFT projects can be successful if they focus on three key elements: innovation, community, and ecosystem.
The most important task of the NFT project is to focus on innovative designs and diverse utilities for users. In addition, the first NFT project to market will always have an advantage over other competing projects to create value. Unfortunately, making a copy of the original (fork) is easy, but the project is not always successful.
For example, Larva Labs’ legendary Ethereum-based CryptoPunks is the inspiration behind Polygon Punks on the Polygon blockchain. PolygonPunks are very successful, but many consider them to be “derivative collections” that can compromise the safety of the buyer. This is why the NFT marketplace OpenSea has delisted Polygon Punks at the request of the developers of Larva Labs.
The second characteristic of a good NFT project is the strength of the community. A truly decentralized project with a well-connected community will greatly help to make it successful. As shown above, the Pudgy Penguins and CryptoPunks communities are robust enough to protect the heritage of the project. In addition, interoperable NFTs help build and strengthen communities across blockchain networks.
Each network ecosystem is different, so another important factor to consider is the blockchain where NFTs reside. For example, Ethereum’s gas prices are very high, with NFT whales owning more than 80% of blockchain NFTs. On the other hand, blockchain gas charges such as Binance Smart Chain, Solana and Tezos are negligible. In addition, many of them are carbon-neutral networks that attract many environmentally friendly NFT artists.
If the NFT project focuses on the above qualities during the development phase, most of them will last in the long run. But what is the outlook for NFTs in the near future?
Expectations for the horizon of NFT-based projects
Undoubtedly, 2022 will be a year of tremendous innovation and growth in the NFT space. As a result, NFT use cases can grow steadily in ways never imagined before.
One such usage may be to use NFT-based financial products with tokenized insurance, real estate, bonds, debt, and commodities. NFTs can open up new methods of secured lending or leasing to help start-ups raise money. In addition, NFT derivatives can become very popular this year. As a result, gamers can trade in-game NFT assets such as cars and weapons in the derivatives market to bring more liquidity. In addition, the Bluechip NFT Indexes allow new investors to participate in the most successful NFT projects. Some charities and businesses also use NFTs in fundraising campaigns. Currently, few NFT projects offer the services mentioned above, but they are still immature and undeveloped. Significant innovations and further diversification in everyday use cases have yet to reach people.
As the years go by, the value and use of NFTs will diversify and disrupt different industries. However, the success of the NFT sector depends heavily on how fair, transparent and secure the NFT is. Game theory proves that random numbers are a fundamental component of a fair and secure system. Most blockchain networks, including most NFT protocols, rely on random numbers for routine system operations.
First, it is used in cryptographically generated public keys and digital signatures. Second, the randomness of the input and output programs guarantees a fair chance for all participants in NFT-based games. Third, random numbers are important in hash power and proof of work consensus protocols.
As the NFT industry grows, developers need a large set of random numbers in their projects. But, as the American mathematician Robert Coveyou said, “Random number generation is too important to be left to chance.” therefore, “Random numbers should not be generated in a randomly chosen way.” According to Turing Award-winning Donald Knuth. Rigorous research and solid science are essential to generate random numbers.
If all goes well, NFTs are heading for a bright future.
Felix Xu is a co-founder of ARPA and Bella Protocol.
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