Non-fungible tokens (NFTs) have come a long way and have captured the zeitgeist over the last few years. Mainstream focus has been primarily on profile picture (“PFP”) projects, catalyzed by growing attention (and value) of CryptoPunks and Bored Ape Yacht Club.
Skyrocketing Prices for CryptoPunks and BAYCs…
…Sparking a Wave of PFP Projects
These projects illustrate some of the emergent properties and behavior that NFTs enable. First, NFTs provide true digital ownership of unique assets. Because people are confident that they actually own these assets, they can (and often) use them as representations of their digital identity. Even Web2 platforms like Twitter have incorporated NFTs as profile pictures. And, like in the physical world, these avatars produce social properties such as status-signaling, gated communities, social hierarchies, and other related behaviors. Ownership also extends past the raw files themselves. For instance, Bored Ape Yacht Club members own the intellectual property of their apes, allowing them to use their apes to launch beer brands, comics, and even virtual bands.
Second, the programmable nature of these assets enables a wide swath of use cases generally not available in real-world objects. NFTs can be programmed to respond to actions taken by the owner, react to external triggers, or change over time. They can embed royalties, enabling creators to participate in future upside along with their community. And because all this happens on a blockchain, creators can identify and reward owners through airdrops or early access to future projects.
All of these features combined can spark a virtuous cycle, in which community members create value from grassroots initiatives, driving up demand for their assets, giving creators higher revenue through sales royalties, which they can use to further expand the scope of their project.
Indeed, PFPs have been at the forefront of NFT adoption and experimentation, and are the largest NFT vertical to date. But there has been a Cambrian explosion of NFT experiments outside of them, including generative art, non-fungible metaverse lands, interactive NFTs, different forms of media as NFTs, financialization of NFTs, and countless more.
NFT Market Capitalization by Category
At Amber, we believe that the metaverse — a loosely defined concept referring to real-time, interoperable, and immersive digital experiences — is inevitable and that NFTs are a key primitive for these virtual worlds. In this report, we touch on some interesting projects innovating on what NFTs can do, as well as tools and frameworks readers can use to navigate the growing NFT space. Due to the vast and rapidly growing NFT projects across multiple blockchains, we focus mostly on Ethereum-based projects.
A key question of the emerging metaverse is: where will the users be? Sales of virtual lands for many platforms have risen over the past year as people flock to own the space where people will gather. Perhaps the two largest benefactors of this virtual land rush are Decentraland and Sandbox, both free-to-play platforms with a finite quantity of tokenized land.
A Digital Land Grab
One of the rationales behind buying land is hosting metaverse events and experiences. However, Decentraland and Sandbox are both still relatively new platforms and have yet to build out infrastructure to accommodate high traffic loads. For instance, Samsung’s attempted to host a Galaxy smartphone launch event in Decentraland but faced technical difficulties as people tried to gain access. Decentraland’s co-founder suggests that the maximum concurrency of the platform is only ~2,500. Even existing open-world platforms with established server infrastructure still struggle to process environments with hundreds of players — Free Fire, a mobile-only battle royale game, caps each arena to 50 people, and Roblox can process up to 700 only in beta testing.
As a result, instead of rebuilding an entire tech stack, some projects have decided to iterate on the concept of an open metaverse on existing infrastructure. One example of one such project that has gained growing attention within the crypto community is NFT Worlds.
NFT Worlds is a community-driven, metaverse platform built on top of Minecraft’s open-source ecosystem. By bootstrapping an open world on top of Minecraft, NFT Worlds can leverage cross-platform support and existing world-building tools.
There are 10,000 unique worlds in total with metadata across 39 categories, including land area, water area, annual rainfall, resources like lumber and metals, etc. These traits determine each world’s rarity and can be used for different gameplay elements. Holders of these worlds can use an existing Minecraft launcher, or the upcoming NFT Worlds Launcher, to build and edit their owned world.
Worlds owners can customize their land and host ~600 users concurrently. Furthermore, NFT Worlds aims to launch multiplayer voice chat, user-generated play-to-earn games, and support for customized avatars by Q2 2022. Due to these features, the project has attracted growing interest from a wide range of NFT communities looking to host metaverse events. The total value of NFT Worlds’ land sales has grown significantly since October 2021, even surpassing Decentraland’s and Sandbox’s in recent months.
NFT Worlds Monthly Volume Over $20 Million In the Last Three Months
So far, over 100 NFT communities publicly announced the purchase of NFT Worlds, including RTFKT, Zipcy’s Supernormal, and WVRPS. Anyone can view a specific world in a web browser, such as World #9856, which is already customized.
Owners of NFT Worlds receive two rounds of airdrops of $WRLD tokens. They will also be able to stake and/or rent their land out to receive additional tokens. $WRLD has a maximum supply of 5 billion tokens, ~85% of which are distributed over a five-year timeline.
$WRLD Distribution Schedule
The team recently launched a payment layer centered around $WLRD, which will be used as the main medium of exchange within the ecosystem, including for upcoming play-to-earn and reward mechanisms. Transaction fees are also paid in $WLRD, freeing players from managing costs with another token.
Despite recent hype for NFT Worlds, the implied value of its land and the fully diluted valuation of $WLRD tokens are still orders of magnitude less than the top two crypto-native, open-world platforms.
NFT Worlds vs. Other Metaverse Platforms
Certainly, there are some downsides to NFT World’s approach. For example, Microsoft (owner of Minecraft) could shut down the project. Although the NFT Worlds team stated that they have been in close contact with Microsoft’s IP team and have not encountered any issues to date, open worlds often run the risk of inappropriate behavior that is outside the founding team’s control.
Nonetheless, we are watching the project closely as one indicator of our thesis that the future of web3 will have to be, in the near term, built and iterated on web2 rails. While we believe open metaverse platforms will eventually have more decentralized tech stacks (e.g., content distribution, servers, and storage), those pieces have yet to be fully built out. In the meantime, projects like NFT Worlds can better reflect what a real-time, interactive, and community-driven open metaverse could look like.
A Decentralized Autonomous Organization (DAO) is a group organized by shared missions and values. Typically, these DAOs are formed over fungible tokens, such as BitDAO ($BIT), ConstitutionDAO ($PEOPLE), and Friends with Benefits DAO ($FWB).
NounsDAO is a case study of forming DAOs in the context of NFTs. A Noun, randomly generated and auctioned off every day, is a 32x32 pixel character of people, places, and objects. Key defining features of Nouns are colored square spectacles and pixelated artwork.
A Gallery of Silly Nouns
NounsDAO is an open-source project — the code that creates Nouns and the artwork itself is put in the public domain. 100% of auction proceeds go directly to the NounDAO treasury and each Noun NFT owner has one vote over the use of treasury funds.
The first Noun NFT sold for 613.37 ETH on 9 August 2021, roughly US$1.9 million at the time. Since then, prices have fluctuated from 24.2 to 313.69 ETH, stabilizing around 80 ETH for each Noun since the beginning of this year. The treasury currently has over 20k ETH (~$60 million at the time of this writing), which the DAO uses to fund creative (and sometimes wild) proposals to further cement Nouns’ cultural relevance, including featuring Noun glasses in a Superbowl commercial and sending a Noun to the International Space Station.
Nouns Price Stabilizing After Initial Hype
Because the license is available in the public domain, a wide range of community-driven initiatives and derivative artwork have sprouted up in the ecosystem, including an application that “Nounifies” your existing profile picture and a website that attempts to generate what could be the next Noun.
NounsDAO is an exciting experiment for community-driven brand building and reflects the social utility that NFTs can bring forth. With a significant treasury and an engaged, close-knit community, the Nouns project is one to keep an eye on going forward.
NFTs as Utilities
Mainstream NFT discourse revolves around community (BAYC), art (Fidenza), or gaming (Axie Infinity) projects. However, we see countless teams looking to leverage the unique properties of NFTs to provide utility to users.
Chris Cassano showcased an interesting use of NFTs by hooking up his Tesla Model 3 to an NFT. Using Lit Protocol — which allows anyone to grant access to content, software, and data through blockchain objects — Chris allowed anyone owning a specific NFT to control his Tesla, including flashing the lights, locking and unlocking the car, and starting the engine.
Controlling a Tesla with an NFT
The pros and cons of using NFTs as car keys can be debated, but this experiment illustrates the real-world utility that NFTs can bring. For instance, platforms like Airbnb could grant guests access to hosts’ homes through the use of expiring NFTs — guests would be assured of access and hosts would be saved the hassle of changing passwords after each guests’ stay.
Superfluid enables programmable money streams, such as subscriptions, salaries, and recurring rewards. One of its newest applications is streaming tokens to NFTs instead of Ethereum addresses. So if the NFTs change hands, the new owner automatically receives the stream. This feature opens a wide design space for programmable cash flows. For instance, the Superfluid team suggested that one could charge rent (in a stream) for metaverse property. If that property is sold, the cash flows from rent automatically go to the new owner. One could also take out loans backed by these NFTs and have loans automatically repay themselves over time via the underlying cash flows.
Membership and Access
Several organizations are experimenting with gated access using NFTs as membership passes. LinksDAO, whose members include NBA players Steph Curry and JJ Redick, is attempting to create a golf and leisure club with membership authenticated through NFTs. Flyfish Club similarly aims to create a private dining club exclusive to NFT holders. Coachella’s 10 NFT keys that grant lifetime access to Coachella events are being auctioned off at $55k.
Authenticating and gating membership through NFTs provide a couple of advantages to traditional methods. First, in contrast to most private club models, members can easily find and identify other members (or wallet addresses if some members choose to remain anonymous). Second, current members can resell their NFT on secondary marketplaces, a feat unavailable to most traditional memberships. People are likely willing to pay higher prices for these passes due to resale value. These passes could even be rented out in the secondary market, turning what is usually a consumption into a cash-producing asset. Finally, because this all happens on a blockchain, membership verification and authentication are transparent.
Blue Ocean and OpenSea
Most users’ first foray into NFTs is through OpenSea, which boasts a >95% market share based on trading volume. However, a host of new platforms has hit the market, targeting specific subsectors (e.g., generative art), different use cases (e.g., NFT swaps), or simply a slice of OpenSea’s market share.
This January, LooksRare “vampire attacked” OpenSea by airdropping native tokens to OpenSea users as it launched its platform. LooksRare successfully gained widespread interest in the crypto community, capitalizing on disappointment that OpenSea may IPO instead of generating tokens for its users.
At first glance, the new marketplace seemed to take market share from OpenSea. But LooksRare introduced an aggressive staking and rewards program that incentivized wash trading on the platform. After filtering out most of the wash-trading activity, organic activity on the traction appears significantly more modest. Moreover, trading volume substantially contracted after LooksRare’s rewards halved on February 9.
LooksRare’s Trading Volume Dominated by Wash Trading with Limited Organic Activity
OpenSea Continues to Dominate
*LooksRare Filtered subtracts “back and forth” trading activity between two wallets and trades with abnormally high prices
Despite occasional outages, phishing hacks, and censorship, OpenSea continues to dominate NFT trading volumes due to its network effects — users will converge to where other users are. But NFT adoption is still nascent and new marketplaces will invariably come up to challenge OpenSea’s stronghold on the market. Just this month, another NFT platform, X2Y2, vampire-attacked OpenSea by airdropping tokens to users and offering a reward system that encouraged high-quality listings instead of pumping trading volume. Universe, a DAO-driven NFT marketplace, is also expected to launch sometime in the next few months. And Coinbase’s marketplace, which has around 3.8 million people waitlisted, is supposed to launch later this year as well. OpenSea’s dominance will continue to get tested over the next few years.
Aggregating the Aggregators
As new marketplace platforms launch, one space we are watching closely is marketplace aggregators. These aggregators serve several functions, including finding the best price and seamlessly listing NFTs for sale across several platforms. They also allow for batch buying, allowing users to easily “sweep the floor” (raising the floor price of a collection through buying up the cheapest ones listed) and shop across multiple collections.
There are currently two main NFT aggregators: Genie and Gem. Genie first launched last July and allows users to easily trade on OpenSea and Rarible, facilitating nearly 109k ETH in volumes since inception at the time of this writing. Gem launched early this year, and due to higher gas savings and faster product iteration (e.g., integrating with LooksRare, launching Sweep Mode), its volume surpassed Genie’s in only a couple of weeks.
Gem Overtakes Genie in Just a Couple of Weeks
Gem Offers Greater Fee Savings for Users
Both aggregators primarily target JPG flippers, but we expect their use cases to expand more broadly. For example, we see aggregators serving a valuable function in the context of NFT gaming assets, where assets could either be listed in the game’s proprietary marketplace or on an open platform. In this scenario, aggregators could help gamers easily find their desired items across several marketplaces or discover assets that are interoperable between multiple games.
As prices of certain NFT collections rise, an emerging pain point for certain owners is the monetization of their assets. Some platforms now offer loans backed by NFT collateral, mimicking collateral-backed loans for real-world non-fungible goods like houses, cars, and luxury goods.
NFTfi is the largest peer-to-peer platform for decentralized borrowing/lending for NFTs. Borrowers can list and mortgage select NFTs on the platform to solicit loan terms from lenders. These loans, dominated in WETH or DAI, can last up to 90 days, with an average interest rate of ~70% APR. If the borrower defaults on repaying the loan, the lender can seize the underlying NFT collateral.
NFTfi launched in May 2020 and has seen growing adoption, facilitating ~$72 million in loans to date. Bored Ape Yacht Club, Art Blocks, and CryptoPunks make up nearly 50% of total loans by value. Currently, large lenders like Metastreet have a 45% maximum loan-to-value ratio on blue-chip assets.
NFTfi expects to launch “NFTfi V2” this quarter that includes several new features, including unlimited duration loans, loan extensions, and loan renegotiations. The team also plans to reward previous users with an airdrop of eventual NFTfi tokens.
NFTfi successfully capitalized on the growing demand for NFT-collateralized loans. However, there are some disadvantages to its peer-to-peer model. Borrowers cannot instantly access liquidity; they have to wait until lenders provide acceptable terms. On the other side, lenders have to manually provide loan terms to each asset listed on the platform. Lenders also have to stash sufficient WETH/DAI in their wallets until loans are accepted, facing the risk of idle, unproductive capital.
We see parallels between NFT finance and the early innings of DeFi. EtherDelta provided peer-to-peer exchange trading, but it was Uniswap that gained market adoption through its peer-to-pool model. Similarly, within the NFT vertical, we are closely watching platforms that seek to provide instant liquidity for NFT-backed collateral using liquidity pools. One platform that stands out to us is Pine.
Pine is an early-stage project seeking to solve two problems: instant liquidity for owned NFTs and “buy now, pay later” financing for aspiring buyers of high-priced NFTs. They are slated to launch instant liquidity for a handful of whitelisted NFTs this month.
The mechanics are relatively simple. Lenders stake their tokens (e.g., ETH, USDC) into select vaults, called “Pine Pools.” Each vault supports a collection (e.g., BAYC, Doodles) with maximum borrow amount (based on a specific collateral factor), interest rate, and available tenor. Borrowers can access these vaults and instantly take out loans against their NFTs. To improve capital efficiency, liquidity providers’ assets deposited in pools can go to protocols that generate yield.
The Pine Protocol Design
Pine’s borrowing feature is currently in alpha stage as the team tests the platform and expands their suite of supported collections. Pine aims to release its Buy Now Pay Later (BNPL) solution in Q2 2022.
Admittedly, Pine’s solutions are novel and untested. And perhaps the permissionless peer-to-pool model does not translate well from fungible to non-fungible tokens. Nonetheless, both instant liquidity and BNPL solutions are vital to enhancing accessibility and functionality of NFTs. After speaking with the Pine team over its design and potential challenges, we came away impressed and confident in their ability to work to this vision. [Disclosure: Amber is an investor in Pine.]
Admittedly, current use cases for borrowing ETH at >40% interest rates for a couple of weeks seem limited. We speculate that most demand comes from leveraged NFT trading — collateralizing one NFT to purchase another with the aim of quick profits.
However, it is still early days. In the physical world, financialization of non-fungible goods demonstrably improved accessibility and created new asset classes (e.g., mortgage and automobile loans expanding home and car ownership).
We expect similar parallels for NFTs. And NFTs are not merely images — they can reflect ownership of liquidity (Uniswap v3 liquidity provider positions), intellectual property (such as music and patents), and even real-world assets. For instance, just a few weeks ago, a Florida home was auctioned off as an NFT. In the future, perhaps the owner could take out loans backed by this collateral, in a permissionless manner without having to negotiate with multiple banks, verify credit scores, and deal with paperwork.
Do NFTs Belong in an Investor’s Portfolio?
There are some merits to including NFTs in an investment portfolio. NFTs and related technologies are key building blocks for the metaverse and will see exponential growth over the next decade. And performance of the asset class has started to diverge from the overall cryptocurrency market. Although historical data is limited, analyses from multiple sources suggest that correlations between NFTs and cryptocurrencies are low, a highly desirable property in the context of portfolio management. Correlations between different types of NFTs, such as collectibles vs. 1-of-1 artwork, are also low. Finally, there is arguably high room for alpha (i.e., outperformance by astute traders) given the nascency of the asset class.
On the other hand, while we are confident that NFTs as a broad asset class will significantly expand going forward, we suspect most NFT projects will end up with little to no value. Moreover, the market is still dominated by large players. According to NFTGo, only ~1,100 whales hold nearly $4 billion worth of NFTs, reflecting ~23% of the total market cap for NFTs. Not to mention issues with wash trading, insider trading, hacks, scams, undisclosed advertising, get-rich-quick NFT projects, etc.
Therefore, buyers beware. We suggest that, for most people, NFTs should primarily be purchased for the utility, artwork, community, and other intangible benefits rather than for potential price appreciation. Nonetheless, for those willing to venture farther on the risk spectrum, selectively investing in NFTs could provide diversification benefits and help boost returns.
Thus, below we provide some metrics and frameworks to help readers navigate and evaluate between NFT projects. It focuses mostly on PFPs and collectibles, the dominant NFT categories right now. Like non-fungible goods in the physical world, valuation of NFTs remains imprecise and largely dependent on narratives. For artwork and collectibles, community, culture, and artwork all play a role in perceived value. Nonetheless, numbers and metrics can help gauge the merits of a project and reveal red flags.
Who are the Owners?
Using open-sourced tools such as Etherscan or community-created Dune dashboards (like @rantum’s), people can verify who the top holders of the project are. With manual digging or more professional tools like Nansen, they can also check the balance of “diamond hands” — owners who never sold after buying/minting their assets.
Apes and Penguins
These exercises provide several benefits. First, if the top wallets (often founders and insiders) control a disproportionate amount of assets, NFT owners have the risk of these wallets “dumping” assets on the market. Second, a growing number of “diamond hands” reflect the strength and conviction of the community. Moreover, these metrics indicate the distribution of the project’s assets. An even distribution of the project across a wide range of participants reduces sell pressure and encourages greater community participation.
The most common pricing measure for NFT projects is the “floor” price — the price for the cheapest asset currently listed on the marketplace. Assets in an NFT project typically have different rarity traits, and floor items are generally the least rare but the most liquid. In contrast, assets with higher rarity often have less liquidity.
Floor prices are often used as a barometer to a collection’s overall value, but high rarity assets matter too. A high-priced sale for rare assets can bring market attention to the collection, particularly if paired with a recognizable name, and spark higher demand. [Note that sometimes, high prints can be a result of wash trading.]
Celebrity Purchases and Brand Endorsements Can Spark Price Rally
Prospective buyers can also gauge price walls among listed assets, similar to an order book for cryptocurrencies. Below, the floor price for Azuki is 11.5 ETH but it only takes twelve purchases to reach 13.0 ETH. In contrast, mfer’s floor price does not rise significantly from its floor price of 4.8 ETH after twelve purchases, given the concentration of 5.0 ETH listings.
Azuki Floor Prices
mfers Floor Prices
The number of listings as a percentage of total is another indicator readers can use to gauge sentiment. The lower the number, the fewer current sellers there are, and the greater the potential for upward price movement. Flips is a useful tool that aggregates these metrics across a wide range of collections.
Flips Dashboard for Range of NFT Collections
Note that sales of NFTs can and often do occur on over-the-counter platforms to avoid marketplace take-rates like OpenSea’s 2.5% platform fee. These sales are often negotiated in a project’s Discord “buy/sell” channel, which can also provide prospective buyers and sellers a rough gauge of sentiment.
NFTs: Still In the First Inning
With NFT buzzwords entering mainstream discourse and seemingly-nonsensical prices for certain collections, some critics have dismissed the entire sector as a bubble or fad. Certainly, there are pockets of hype and overexcitement, and the space is already riddled with lofty promises and unfulfilled roadmaps.
However, taking a step back from million-dollar punks and derivative apes, NFTs simply encapsulate digital ownership rights for non-fungible and unique assets. In the real world, most of the objects we purchase and consume are non-fungible, from high-valued goods like houses and cars to lower-priced items like music and clothes. Enabling these dynamics digitally drastically expands what we can do online. Thus, we reiterate our belief that NFTs are critical building blocks in a native, digital economy, and the metaverse more broadly.
Viewed in this lens, NFTs have a long runway for growth. The collective global market capitalization for NFTs is estimated at ~$16 billion, a far cry from current TAM (total addressable market) estimates of over $1 trillion. TAM estimates also likely underestimate the eventual market size as NFTs enable a whole range of categories previously not possible online by conferring ownership to a range of digital assets.
This report only scratches the surface of the rapidly evolving space. We look forward to covering new projects and ideas that push NFTs into new frontiers in future reports.
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