NFT Enters the Valley

Published in

BLOCK6

6 min readApr 1, 2022

A couple of months ago NFTs (or Non-Fungible Tokens) were all the rage. Pretty much every graphic artist I know was silently jumping on the bandwagon. Axie Infinity, the first breakaway gaming success story was making it into the mainstream press. Many of the biggest gaming companies rushed to announce some sort of a project tied to this new tech buzzword.

If you, by any chance, had missed the news, NFTs are a special variety of Blockchain-based digital currency. What makes them special is the fact that by design, the system guarantees the uniqueness of these digital tokens. In this form, they can serve as digital proof of ownership of pretty much anything associated with them, where the ownership is recorded in a distributed database, the so-called ledger. If you are interested in details, you can take a look at one of the numerous introductory documents all over the web.

There are two particular applications of NFTs that have been the center of the recent hype:

As a means of trading digital art,
As a part of the in-game economy in free-to-play games.

This text is not intended as a discussion of the merits of NFTs as a concept or their usefulness in either application. There are plenty of other sources where you can read about these topics. For example, this, this, and this.

Rather, I will take a look at them simply as a novel technology and try to map their potential future trajectory.

As a concept, NFTs have existed for several years, however, the hype was slow in making. The start of this technology has been overshadowed by its older blockchained brethren.

Opensea.io, arguably the biggest market for NFT based digital art, was founded in 2017. Axie Infinity, the game that I already mentioned, was launched by the Vietnamese Sky Mavens studio in March of 2018.

By the summer of 2021, a critical mass has been reached. Twitter was suddenly on fire. The likes of the Financial Times, BBC, and The Guardian, started publishing articles on the topic. By September of the same year, the revenue of Opensea.io skyrocketed to $2.75 billion.

Major gaming companies started announcing their own projects. In November 2021, Andrew Wilson the CEO of EA called NFT the future of gaming and announced plans to integrate them into EA’s Gaming portfolio. Similar announcements were made by CEOs of Ubisoft and Epic Games. Many of those announced plans amounted to little more than a set of vague promises, without any concrete strategy or goals.

What is more, investors started pouring millions into various NFT startups. Two of them alone, Dapper Labs and Sorare, have risen over $900 million in September 2021. Startups have been able to obtain seed money by having as little as a whitepaper and a name vaguely connected to blockchain technology amongst its founders.

Fast forward six or so months, and where are we now?

In the meantime, a huge social media backlash against NFT come and gone. It is hard to estimate the actual impact of this backlash. Many of the biggest corporate names have slowly backtracked from their NFT plans.

It is much more interesting to take a look at the current quantitative data about NFT trading on various platforms. The nature of blockchain technology affords a great deal of transparency in these matters. According to data by Dune Analytics, almost all Key Performance Indicators of the OpenSea have seen a steep decline from the record values reached at the end of the last year. This includes the volume of trade, as well as the number of active traders on the platform.

The situation is similar in the world of NFT gaming. Take a look for example at the chart showing the value of Axie Infinity Shards to US dollar.

AXS to USD value, data by CoinMarkectCap.

I am deliberately focusing on different KPIs to show that the trend is actually universal across the sector.

Of course, real-world events such as inflation in the USA and the outbreak of a major new war in Ukraine, bundled with canceling of Russia might have had some effect on the NFT market. The value of all cryptocurrencies has tanked at the start of this year.

Other problems are inherent to NFT gaming, and Play-to-Earn as a concept. You can find more info about these issues here.

However, it helps if we map this data to another well-known chart, the so-called Emerging Technology Hype Curve.

It becomes clear that NFT as a technology is now standing on the threshold of the dreaded Valley of Disillusionment! It is a dark place that any promising new technology seems to need to go through on its path to world domination. From this particular point in time, no one can tell how deep this particular valley is. For the moment the way for NFTs looks to be only down.

But what does it mean in practice? It means that the vast majority of the new NFT projects started at the peak of the hype will be either abandoned or dead on arrival.

Sorry to break it to you, but that fancy new startup you decided to join,… yup it will probably fail. That collection of avatars you decided to invest in…, will probably lose 90% of its value. This sentiment is not mine. It has been voiced by others, such as for example, Coinbase co-founder Fred Ehrsam.

All things move towards their end. Once the bottom has been reached, there are two trajectories that emerging technology can follow. One is as bleak as the way down. Some technologies are simply not meant to ever fly. Do you still use those glasses that come with that 3DTV you bought back in 2010? Do you even remember you once bought one? VR seems to be going through this same hype cycle over and over again every 20 or so years. I am old enough to remember at least two. NFTs might well end up never emerging from this dark valley.

On the other hand, the wind might change. The trajectory might start pointing upwards. Out of all the thousands of failed NFT based projects, some might actually stumble on the magic formula of mainstream success. I don’t know what this might be. However, it is entirely possible that some will figure out how to make a sustainable business around this technology,

Time will tell.

Update

In the time between the writing and publishing of this text, a major heist took place. A group of hackers has managed to exploit the inherent features of blockchain technology to steal $620 000 000 worth of Ethereum tokens from the Axie Infinity ecosystem. The nature in which this particular crime was perpetrated underlines the difference between the theory of DAOs (Distributed Autonomous Organizations), and the realities of their implementation.

NFT Enters the Valley

Update

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Written by Stanislav Stankovic