The Potential of NFTs

The internet was transformative because it democratized access to information and enabled instant, complex communication. I think that cryptocurrency has the potential to have as big an impact on the world by powering digitally native trade and commerce. Cryptocurrency allows people to transact seamlessly and agree on the terms for the transfer of value instantly and trustlessly. As more utility is available on-chain more of our daily activity will be powered by crypto rails. NFTs are an early example of this utility.

I’ve been playing around with Non-Fungible Tokens (NFTs) for a little over eight months now and they are super fascinating from both a technology, cultural, and utility standpoint. NFTs are on-chain assets where each one is unique as opposed to “fungible” assets like Bitcoin or USD where each one is worth the same. They can be used to verify ownership of digital assets such as images (the most common use case right now).

Yes, we are living in some weird metaverse microcosm where pixelated Twitter profile pictures (PFPs such as CryptoPunks) can cost more than most people’s houses but this is the start of people placing value on their digital identity. PFPs allow people to express themselves while being a member of a bigger tribe. It’s not much different to being a sneakerhead and buying some rare Air Force 1s to collect and share with your other sneakerhead friends.

Beyond digital identity, NFTs have immediately made lives better for both creators and collectors which I’ll summarize in more detail below.

NFTs are better for Creators

I’m particularly excited about what NFTs mean for creators. Creators have historically given very large portions of their income to promoters, curators, and auction houses. NFTs can help creators find, interact and transact more easily with their customers. 

  • Trading behavior: NFTs allow creators of products (digital or physical) or understand the behavior of their buyers. Are people “flipping” when they purchase? Are people long-term holders? What are the transaction and trading behaviors of their holders?
  • Direct Interaction: Ownership is all verified and on-chain so creators know who owns their products, how long they have held it for, how many they own etc. This allows creators to have direct interaction with their fans and supporters in a way that was almost impossible in the past.
  • Annuity: Many NFTs allow creators to participate (via revenue share) in all future transactions of their products. This leads to an ongoing “annuity” from people trading their products and a much lower percentage of fees to marketplaces and platforms which I think is healthy.
  • Digital distribution: NFTs and distribution tools allow creators to run more complex launches without a lot of technical experience. Creators can run raffles, auctions, or even sell NFTs that can be redeemed for physical goods like the Damien Hirst NFT

NFTs are better for Collectors

NFTs also make the experience better for buyers and collectors. Here are a few ways that NFTs are superior to “offline” tradiitonal models. 

  • Ownership: NFTs allow collectors to actually prove that they own the asset in a way that is verified by the collective community as it’s “on chain” and cannot be forged.
  • Authenticity: NFTs are “digital papers” that certify that the asset is authentic. For high-craftsmanship products (e.g. fine art, mechanical watches) authenticity is important. Verifying authenticity is a big part of the reason people transact through trusted dealers and they often charge high fees for this service.
  • Liquidity: NFTs unlock more liquidity for owners. They can find other collectors to transact with faster and more easily which has always been an issue for more niche products.
  • Legacy: NFTs allow us to track the history of ownership of assets which is often lost for other products. A Rolex that was owned by Jack Nicklaus sold for $1.2M because it was his watch. Steph Curry’s Bored Ape is likely worth more than the average one because he owned it. 
  • Community: Collectors like to engage with other collectors. NFTs make it much easier to find other real collectors and engage and transact with them and feel part of a club gated by ownership. It’s possible that NFTs are the start of early social networks powered entirely by cryptocurrency.

Many folks are being onboarded into crypto through NFTs and can be tricked more easily than purchasing a physical piece of art from an artist or gallery. They can be victims of organized “pump and dump” schemes, “rug pulls”, fake minting links in Discord all completely anonymously and without recourse.  We still need clearer user experience , better requirements/standards, better tools, and trusted information so that the communities and projects are safer for everyone. 

Profile Pictures and Generative Art

Profile pictures, collectibles, and generative art are driving most of the trading volume for NFTs right now. I think they are culturally important and the start of digital expression in the Metaverse, but I don’t think many new projects will have long term staying power. OpenSea is currently the largest NFT marketplace. Should the company hold on to its 97% market share, that suggests a total annual GMV of $28BN. (Source: The Generalist Article, from public data). 

https://dune.xyz/queries/3469/6913

The most common type of project is modeled after CryptoPunks which was the first project of this kind. The formula is a few thousand (usually 10k) randomized images created with some unified theme (lions, monkeys, aliens etc) and traits (body, hat, sunglasses etc) each with non uniform rarity attached to each trait. This results in a distribution of outcomes which are a combination of the traits (and some are much rarer than others). Rarer NFTs typically command much higher prices in popular collections.

Collectors can mint (create them) these NFTS and for the most popular projects this can be a battle for how much “gas” buyers are willing to pay to secure one of the NFTs. It’s not uncommon to see people spend thousands of dollars on gas just to get to the front of the line and have a chance to mint a rare NFT. Once buyers have minted they can keep the NFT, or trade them on a marketplace like OpenSea which is the most popular place to trade (280k+ monthly users in September 2021). The project creators often receive a portion of the value of all future trades acting as an annuity if their project has trading activity over a sustained period of time.

Buyers pick NFTs on the market based on aesthetics and rarity then often showcase their NFTs as their profile pictures in social media and private communities. The most popular projects are CryptoPunks and Bored Ape and the “floor price” for each is 110 ETH ($400k) and 40 ETH ($150k) respectively.

Every credibly project typically has a published roadmap after minting is complete such as access to special events, future NFTs for holders, or even full-blown games. In reality, very few projects will actually have to stay power to build a robust and active community and continue to develop and innovate. Developers often take the minting the profits which can be substantial (e.g. 10,000 mints x 0.05ETH x $4000 per ETH = $2M) and move on to the nest project. This “drop formula” is becoming stale and many new projects don’t have the same demand unless they have some sort of unique innovation so I expect this wave to pass in the next few months.

On-chain generative art is also a popular category (CryptoArte, and Art Blocks were early innovators). They both have programmable on-demand generative content that is stored immutably on the Ethereum Blockchain – a true intersection of art + code. CryptoArte is an NFT art collection that tells the history of Ethereum with each block representing a moment of time. Art Blocks has done a great job of curating new projects and giving creators a launchpad for their work. Chromie Squiggles were the first project on Art Blocks and the cheapest one is 9 ETH ($37k). 

CryptoArte
Example Art Blocks

The Potential of NFTs

I’m most excited about the next phase of innovation for NFTs. I think there is a lot of space for growth in terms of quality and utility for NFTs and will be following the developments closely. Here are a few of the areas that I’ll be tracking closely.

Collector Tools

As I noted above, NFTs are a great medium for collectors. Collectors can have a good understanding of the total supply of collectibles and also the metadata for these collectibles (for rarity) of the entire universe. As metadata standards and analytics tools (e.g. Dune Analytics) improve this will help collectors build and trade with a more data informed perspective.

Collectors can also more easily get benefits from holding NFTs like access to communities or get special roles or rewards for holding the NFTs (although this has some legal/regulatory ramifications). This could be further segmented based on “sets” with different properties or “time based” to incentivize long term holding of NFTs.

As the technology becomes more mainstream and battle tested, more established creators will embrace NFTs increasing the quality of art available to collectors (see Damien Hirst “The Currency” below).

https://currency.nft.heni.com/

NFT Native Communities

I’m very interested in NFT communities where holding the NFT is an “access token” for the community. I’m a member of the 888 Inner Circle (promise of NFT drops and early access to quality artists), and Metaverse HQ (early information and access to future NFT drops and a community of serious collectors). These NFTs are all identical and purely act as a gate to access the community.

The same is true for communities like Bored Ape Yacht Club or Solana Monkey Business community MonkeDAO on Solana which have similar NFT ownership requirements to join but the different NFTs add more personality and freedom of expression for the participants. However, many of these communities don’t have a clear purpose and it’s hard to figure out at what level to engage in the discourse.

What’s clear to me is that we’re in the early stages of NFTs powering decentralized social networks and we need better tools to filter important and relevant information from these communities that stretches beyond tracking hundreds of Discord channels.

It’s also clear to me that we’ll see meaningful collaboration within these communities — members will collaborate in a digitally native way and be rewarded by their fellow community members or from the “treasury” (or DAO) where many of the high quality NFT communities are very well capitalized.

Merging of Digital and Physical

I also think that many physical craft products, tickets and collectibles will have companion NFTs and we are already seeing these patterns emerge. These NFTs will represent legal ownership and act as “digital papers” for the products.

Satoshi Studios produces sneakers with a companion NFT and QR code powered by the Lukso Network. Breitling is using Arianee to create digital papers for its mechanical watches. This will rapidly extend to other high value, scarce products from wines & spirits to fashion and art.

NFTs are also very likely to power tickets for events (authenticity, tradability) so that event organizers can capture a larger part of trading revenue over the marketplaces. The same thing will likely happen for gift cards, or coupons as the technology provides a more robust infrastructure for this type of product.

Trading and Composability in Gaming

Many games (especially MMOs, RPGs and MOBAs) have used in game items to increase the power of your in game character or as a medium of self expression. These items typically only have value in the games themselves and it’s not uncommon to see people trading high level accounts on eBay(with lots of loot). The issue with these items or in game currency is they only have economic value in the game and not outside the game.

Games powered NFTs can power composable Avatars where each individual object is an NFT that can be tradeable outside the game which makes the in-game items more valuable because they are liquid and have real world value. The same is true for earned in game currency.

There are also interesting projects like Loot which start off with the NFT or set of NFTs and encourage developers to build games or experiences with those items/NFTs. It’s a mental model that starts with the NFT v.s. starting with the experience which has never been done before.

Gaming is very likely to be significantly disrupted by crypto and will drive a lot of creativity especially on fast, cheap blockchains like Solana. Aurory is a RPG project that I hold and and am tracking closely. The hardest thing in gaming is making something super fun, so I hope many of these projects are not taking too much “game mechanic” risk to increase their chance of success.

Intersection of DeFi and NFTs

The intersection between DeFi and NFTs is also particularly compelling. There are a number of projects that allow for fractionalized NFTs which allows multiple people to bid and own an NFT. PartyBid and Fractional.Art and I’ve used both products (see CryptoPunk Zombie below). This also improves liquidity for NFTs because collectors can trade much smaller units of an NFT which increases the size of the addressable market.

High value NFTs will also be used as collateral for borrowing. Wealthy people who own physical art have been doing this for a long time, but this can now all happen in a decentralized environment in the future pending some regulatory hurdles.

It’s also going to be possible to rent NFTs (like folks do with Axies right now in Axie Inifity) when they have utility. This could be extended to club memberships, season tickets, home rentals etc so that owners can get more utility from these products.

I could even see a world where Gaming, DeFi and NFTs all collide and where resource production in game is functionally equivalent to yeild farming (gives users tradeable tokens) and in game assets are tradeable as NFTs but this is likely a while away. The 13 year old in me is thinking about a crypto native Command and Conquer Red Alert and getting pretty excited to play it 🙂

Further Reading


We are still in the early innings of both DeFi and NFTs powered by crypto. It’s easy to dismiss NFTs and the current expression of projects as “fads” but after digging a few layers deeper, it became more obvious to me that it is one of the most important innovations in crypto to drive more utility on chain.

One thought on “The Potential of NFTs

  1. Thanks for the comprehensive overview! Any thoughts on NFTs as a new asset class for investors? How has the secondary market actually performed so far? Is all of the enduring value at the top end? Are NFTs mostly a way to consume art and support creators or are they also an appropriate asset class that’s accessible to every day folks (whereas physical art largely is not)?

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