Documenting the NFT journey: a journey into the future

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This article is contributed by Felix Xu, co-founder of ARPA and Bella Protocol.

Non-fungible tokens (NFTs) had a fantastic journey in 2021, ushering in one of the most remarkable episodes in the history of emerging decentralized industries. The NFT trading volume was $2.5 billion in June 2021. It rose tenfold over the next six months, with total NFT sales reaching a whopping $23 billion in December 2021. In contrast, the total NFT trading volume for 2020 was only $100 million.

To understand the extraordinary success story of NFTs, we need to map their trajectory over the past year. This article will take a chronological approach to explain the NFT craze and what lies ahead.

Lay the foundation

Cryptocurrency historians often debate whether a single event led to the explosion of NFTs in the crypto domain. While there is no definitive answer, the sale of Beeple’s $69 million NFT art caused ripples across the global market. People suddenly saw a spurt in NFT projects with striking headlines on newspapers and web portals. Moreover, most of these NFTs have reinvented the nature of artworks with their finite array of algorithmically generated collectibles.

CryptoPunks, one of the earliest NFT generative art projects on Ethereum, surpassed $1 billion in total sales in August 2021. A single CryptoPunk collectible sold for $10 million in December and became one of the most expensive NFT collectibles. Another popular NFT series that has recently crossed the $1 billion mark is the Bored Ape Yacht Club (BAYC). These projects became immensely popular with the active support and promotion of NFT influencers.

For example, NBA player Stephen Curry bought a BAYC for $180K, while hip-hop sensation Eminem bought another BAYC for $500K. The diverse community of NFT influencers ranges from Reddit co-founder Alexis Ohanian and comedian Steve Harvey to Dallas Mavericks owner Mark Cuban. There are also several anonymous NFT influencers on social media like Artchick† Ellio Trades and money, which help generate some interest in these projects. But it’s not just individuals who express optimistic feelings about NFTs.

Several mainstream companies adopt NFTs to diversify their investment strategies. Global payments giant Visa bought a CryptoPunk NFT in August 2021 for $150K. Adidas, the famous sports brand, bought a BAYC NFT in September 2021 for $156K. In addition, some of the most popular NFTs were sold from the nearly 300-year-old auction houses Sotheby’s and Christie’s, which posted $100 million and $150 million in NFT sales, respectively.

However, NFT collectibles are not the only assets driving mainstream crypto adoption among retail and institutional investors. NFT-based play-to-earn games have greatly contributed to the crypto sector’s growth in 2021. Amid the COVID-19-induced lockdowns and job losses, Southeast Asians turned to NFT games like Axie Infinity. Income from NFT gaming has helped a significant population put food on the table.

The examples cited above show that NFTs have become a cultural phenomenon with diverse use cases and tools. On the one hand, people use NFTs to supplement their monthly income. But then again, NFT collectibles are emerging as a status symbol for the rich demographic. As a result, people are now posting their NFTs as Profile Pictures (PFP) on various social media handles to showcase their collections. So much so that Twitter, already thinking about NFT verification badges, has now come up with a solution on Twitter Blue.

NFTs are unlocking a hitherto untapped area of digital ownership and asset provenance using blockchain technology. These verifiable virtual assets are the core components of the emerging metaverse across multiple blockchain networks. However, NFT projects need to address a number of issues if they are to sustain themselves in the long run.

Sailing through a turbulent landscape

Currently, a handful of NFT projects are showing signs of instability. For example, the developers of the highly successful Pudgy Penguins NFT spent all of their Treasury funds, but failed to deliver on the promised roadmap. As a result, the Penguins community voted out the founding members through its decentralized governance structure.

Aside from that, NFTs have insane floor price swings, with speculators pushing the price up even in illiquid market conditions. Last year, for example, a clip art rock NFT with no specific utility had an outrageous bottom price of $2.2 million. This tendency of some speculative investors to inflate a price statistic for no reason or reason can be harmful.

This turbulence in the NFT market is not very surprising. While the technology and concept of NFTs are revolutionary, the NFT sector is still in its embryonic stage. At such an early stage of development, it can be quite unstable. But NFT projects can succeed if they focus on three essential factors: innovation, community and ecosystem.

The most crucial task for any NFT project is to focus on innovative design and diversified utilities for its users. In addition, the first-to-market NFT project will always be ahead of other competing projects to generate value. Unfortunately, making copies of the original (forks) is easy, but it doesn’t always translate into a successful project.

For example, Larva Labs’ legendary Ethereum-based CryptoPunks is the inspiration behind PolygonPunks on the Polygon blockchain. Although PolygonPunks is very successful, many consider it a “derivative collection” that can compromise the safety of buyers. This is why the NFT marketplace has removed OpenSea PolygonPunks following a request from developers at Larva Labs.

The second hallmark of a good NFT project is how strong the community is. A truly decentralized project with a close-knit community makes it a great success. As demonstrated above, the Pudgy Penguins and CryptoPunks communities are robust enough to protect the legacy of the projects. In addition, interoperable NFTs help forge communities across blockchain networks, making them stronger.

Another critical factor to consider is the blockchain on which the NFT resides, as every network ecosystem is different. Ethereum, for example, has very high gas rates, with NFT whales holding more than 80% of the blockchain’s NFTs. On the other hand, blockchains like Binance Smart Chain, Solana and Tezos have negligible gas costs. In addition, many of them are carbon neutral networks, which attract many environmentally conscious NFT artists.

If NFT projects focus on the above qualities during the development phases, most of them will last in the long run. But what will the NFT landscape look like in the near future?

Hope on the horizon for NFT-based projects

2022 will undoubtedly be a year of mind-boggling innovations and growth in the NFT space. As a result, we can see a steady increase in NFT use cases in previously unimaginable ways.

Such use could be through NFT-based financial instruments with tokenized insurance, real estate, bonds, debt and commodities. NFTs can open up new ways of borrowing or renting with collateral and help raise capital for startups. In addition, NFT derivatives could become very popular this year. So gamers can trade their in-game NFT assets such as cars and weapons in the derivatives market, providing more liquidity. In addition, Bluechip NFT indices allow new investors to participate in the most successful NFT projects. Several charities and companies also use NFTs for fundraising campaigns. While there are currently few NFT projects offering the aforementioned services, they are still immature and underdeveloped. Significant innovations and further diversification in everyday use cases have yet to reach the people.

As the year progresses, the value and applications of NFTs will diversify, disrupting a variety of industries. However, the success of the NFT industry will largely depend on how fair, transparent and safe NFTs are. Game theory has proven that random numbers are the fundamental building blocks of any fair and safe system. Most blockchain networks, including most NFT protocols, rely on random numbers for their routine system operations.

First, they are used in cryptographically generated public-private keys and digital signatures. Second, arbitrariness in input and output programs ensures a fair chance for all participants in NFT-based games. Third, random numbers are crucial for hash power and in Proof-of-Work consensus protocols.

With the expansion of the NFT industry, developers will need huge sets of random numbers for their projects. But as American mathematician Robert Coveyou said, “Generating random numbers is too important to leave to chance.” So, “Random numbers should not be generated using a randomly chosen method,” said Turing Award winner Donald Knuth. Rigorous research and sound science are crucial to generating random numbers.

If all goes well, NFTs have a bright future ahead of them.

Felix Xu is the co-founder of ARPA and Bella Protocol.

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