Digital asset trends explained: NFTs
Non-fungible tokens, referred to as NFTs, made a splash in the crypto industry on the heels of DeFi Summer. These cryptographic tokens that represent digital uniqueness proved to be a powerful mechanism for DeFi projects to capture significant added value from memes and community engagement. The NFT trend may look like “the next big thing” on the surface, but there’s long term potential that’s easy to overlook.
At BitMax, we believe one goal of a digital asset platform should be to allow users to interact with the most exciting features of the crypto ecosystem, directly from the platform. That means taking calculated risks on some of the most bleeding-edge products and technologies in an already highly technical marketplace. Here’s why we’re looking closely at NFTs.
Non-fungible digital assets
NFTs may be difficult to differentiate from other crypto tokens at first glance; however, these unique assets offer value in a variety of ways. A prime example of digital scarcity, each NFT is entirely unique, unlike cryptocurrencies like Bitcoin or Ether or stablecoins like Tether or Dai where each coin within the relevant blockchain network is indistinguishable from another.
Though the earliest example would be Colored Coins, a set of instructions for representing real-world values using metadata on the Bitcoin blockchain introduced in 2012, NFTs as they are known today largely trace their origins to CryptoKitties. One of the first attempts at a blockchain-powered game, CryptoKitties popularized a framework for building NFTs on Ethereum and demonstrated the value of digital uniqueness.
By December of 2017, two months after the project’s debut, CryptoKitties had accounted for 10% of all traffic on the Ethereum network, and one CryptoKitty, or “cat,” had sold for 246 ETH, over $100,000 at the time and nearly $150,000 at the time of writing. The latest surge of interest in NFTs extends beyond the gaming roots as projects seek out new ways to leverage this innovative technology. Many recent NFT debuts seek to tokenize real-world assets like intellectual properties, collectible card games, toys, and more.
The DeFi / NFT connection
The influx of capital into DeFi in August of 2020 brought with it thousands of new, eager investors, token holders, and developers — all community members riding the wave of innovation. Platforms like “Rarible” and projects like “Don’t Buy Meme” have been able to successfully leverage NFTs to capture the memes of the moment, generating massive returns by capitalizing on the popularity of the memes memorialized on the NFTs.
As more capital entered the space, the prevailing crypto market narrative shifted from DeFi to NFTs as projects revisited the concept in search of implementation opportunities beyond gaming. DeFi protocols, for example, began looking for new ways to incorporate NFTs and came up with innovative solutions like Aavegotchi, digital collectibles backed by interest-bearing tokens on the Aave protocol.
This influx in experimentation created a rapidly expanding market which resulted in sporadic and volatile NFT trends, making it challenging to pick winning projects. Therefore, if you believe in the long-term potential of NFTs but don’t want to build a strategy on a project-by-project basis, it might be beneficial to have exposure to the “plumbing” that supports the trade and transfer of the tokens themselves.
Interest in NFTs is still growing
Despite being past the peak hype of DeFi Summer, interest in NFTs continues to grow.
Monthly users for the community-owned NFT marketplace Rarible are several orders of magnitude higher than where they were during Summer 2020:
Monthly protocol users, Rarible
The digital art market SuperRare has now seen over $5.4 million worth of art sold, a significant portion of which occurred between September and October 2020.
Cumulative monthly volume in USD, SuperRare
Looking at the aggregate monthly sales volume across some of the largest NFT markets, SuperRare, AsyncArt, Rarible, and KnownOrigin, we’ve noted that the average continues to steadily increase.
Monthly sales volume, NFT markets
Unlike other synthetic on-chain assets, NFTs are not related to stocks, commodities, or other traditional securities which can be uniquely challenging to represent as tokens. Assets like art, collectible card games, or virtual reality wearables are easier to tokenize, paving way for more innovation to enter the space. We see long-term potential of NFTs, and their value as an asset is growing with each new use case.
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