What are NFTs?
Non-fungible tokens, aka NFTs, are unique tokens where one NFT can not be substituted for another NFT. The majority of NFTs are built upon the Ethereum blockchain using the ERC-721 or ERC-1155 token standard. The EOS, Tron, and Neo blockchains also have their NFT standards. Non-fungible tokens are different from the commonly traded ERC-20 tokens that represent governance DAOs, securities, and cash products.
The main attributes of NFTs are that they are:
Non-interoperable - NFTs from one game can not be used in a different game - i.e. a CryptoPunk can not be used on CryptoKitties.
Indivisible - NFTs can not be split into smaller units.
Indestructible - Each token can not be destroyed, replicated, or removed since all the NFT data is recorded on the blockchain.
Immutable - Ownership of the token belongs to the buyer of the token and not the creator. NFTs for gaming rewards belong to the holders of the NFT and not the gaming company.
Verifiable - Historical ownership data can be traced back to the creator allowing for authentication.
Market Growth
NFTs hit the mainstream in Q1 2021 with over $2 billion in NFTs traded. For perspective, slightly over $250 million NFTs were sold in 2020. The following data does not include off-chain sales - i.e. Christie’s sale of Beeple’s The First 5000 Days ($69 million), the volumes traded on Nifty Gateway, Rarible, and NBA Top Shot, and ERC-1155 assets.
Table 1. NonFungible.com - Quarterly Report Q1 2021
The availability of side-chains, like Matic and Immutable X, have made NFT creation and transactions relatively costless removing the cost barrier that has limited DeFi. Mainstream artists (Deadmau 5, Snoop Dog, Lil Yachty), luxury brands (LMVH, Breitling), and traditional marketplaces (Christie’s, Sotheby’s) have also validated the use case for NFTs which has led to greater market adoption.
Use cases
NFTs are currently divided into six main segments.
Figure 1. Market distribution (USD traded) between segments - Q1 2021. Nonfungible.com Q1 2021 Report.
Collectibles
Crypto Punks and Crytpo Kitties are the pioneers of NFTs, both launching in 2017. The creator of CryptoKitties, Dapper Labs, has followed up their success with the launch of NBA Top Shot. NFTs are purchased by collectors and then further enhanced with skin additions to increase the value of the NFT. Collectible NFTs can be resold via secondary markets like OpenSea.
Adorable and expensive CryptoKitties
Table 2. NonFungible.com - Quarterly Report Q1 2021
Art
NFTs are similar to licensed prints where proof of authenticity and ownership are documented on the blockchain preventing counterfeits. An artist retains their ownership of the original artwork unless the contract is written otherwise.
Figure 3. Consensys DeFi Report Q1 2021.
3. Sports
Sports projects can encompass games, collectibles, and utility tokens that are based around athletes, leagues, and sports teams. Sorare is the leader in this category with football (aka soccer) NFTs. NBA Top Shot, not included in this list, offers fans video clips and trading cards of their favorite NBA basketball star as a tradeable NFT.
Sorare football NFTs.
Table 3. NonFungible.com - Quarterly Report Q1 2021
Metaverse
Metaverses are digital Universes, similar to Second Life and the Sims, where users can build experiences and worlds virtually. The Sandbox is a virtual universe that allows individuals to build their games and buy land parcels for their virtual world. Decentraland is similar to The Sandbox with assets and land parcels available for its users. Both digital Universes have their digital currency and marketplace to facilitate transactions.
Table 4. NonFungible.com - Quarterly Report Q1 2021
Gaming
A player’s collateral can be represented in a game via a digital character, character wearables, in-game items, and any digital asset. These NFTs can then be monetized and traded inside or outside of the game also on external marketplaces. Magic the Gathering’s Black Lotus physical card and NFT were auctioned for $85,000 on Open Sea. The leading crypto gaming platforms are Gods Unchained, Axie Infinity, and Aavegotchi. Axie Infinity has become the leading platform in the Philippines as players can earn an income by creating Axies that can be sold on Open Sea.
Table 5. NonFungible.com - Quarterly Report Q1 2021
Utility
Utility tokens include tokens used for a variety of projects including social identities, music, and memberships. The Ethereum Name Service is the most dominant player in this group maps human-readable ‘name.eth’ addresses to ethereum wallet addresses. The Kings of Leon released their latest album on Yellowheart.io, an NFT ticketing platform. Utility tokens can also act like memberships enabling elite token-permissioned communities to form. KarmaDAO is the first Telegram group to require members to hold 200 $KARMA to join the group.
Real-world uses
Real-world companies are in the exploration stage of NFTs.
Fashion & Luxury
Nike has had an NFT patent since 2019 called “CryptoKicks”. Each NFT is tied to a real-world pair of sneakers and can be traded on a secondary market. Other luxury companies like LMVH and Breitling are also using the blockchain for the provenance of their goods.
Nike Crypto Kicks
Music
Musicians are bypassing their record labels and are releasing their music directly to their fans via NFTs. Besides the Kings of Leon, Lil Yachty, DJ DeadMau5, and Snoop Dog have released tracks as NFTs. Lil Yachty raised $16k for his Nifty Gateway listed collection. DJ DeadMau5 and the Worldwide Asset eXchange (WAX) created packs of tradeable NFTs. Snoop Dog partnered with Crypto.com for his collectible set and collaborated, Nyan Dog, with the meme creator of Nyan-cat that sold for $242,000 earlier in April.
Snoop Dog x Nyan Cat collaboration - Nyan Dogg NFTs
Digital Art Auctions
Both Sotheby’s and Christie’s have had amazing success with NFT auctions. Christie’s launched NFTs into the mainstream with the auction of Beeple’s The First 5000 Days for $69 million back in March 2021. Sotheby’s sold The Fungible collection on Nifty Gateway in April for over $16 million.
Beeple’s The First 5000 Days
Entertainment Franchises
Major entertainment franchises have created NFT collectible card games around their brands. Topps has recently launched an MLB collection on WAX in early April. Disney has also partnered with Topps to create trading games for their Disney collection, Star Wars, and Marvel brands. Warner Brothers production partnered with Terra Virtua to auction Godzilla vs Kong NFTs.
Terra Virtua movie NFTs
Conclusion
Buyers should note that they are purchasing a digital copy of the artist's work. Generally, NFT transactions do not include copyright or intellectual property interests which limits the buyer’s use of the NFT. For most NFTs, the user is buying a token that contains a link to the IPFS or file host address where the digital data for the work is stored.
Users that purchase NFTs, whether they are art, collectibles, or video game assets, are looking to join a community and build relationships with other people with the same interests and passion. NFTs are another tool that companies and brands can use to enhance and develop their communities and develop a core following of loyal enthusiasts.
NFT Resources
Consensys, DeFi Report Q1 2021.
Nonfungible.com, NFT Quarterly Report Q1 2021.
Nonfungible.com, NFT Yearly Report 2020.
J.Zittrain & W. Marks. The Atlantic, What Critics Don’t Understand About NFTs. April 7, 2021
D. Finzer. OpenSea, The Non-Fungible Token Bible: Everything you need to know about NFTs, January 10, 2020
L. Xie. A beginner’s guide to NFTs. January 4, 2021
J. Walden. NFTs make the internet ownable. February 15, 2021
A. Steinwold. Quick Overview of the NFT Ecosystem. October 1, 2020
A16z.com. NFTs Reading Resources. April 2, 2021
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