NFTs: The Good, the Bad, and the Ugly…

NEU Blockchain Organization
Coinmonks
Published in
25 min readApr 20, 2022

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Written by Youssef Haidar, Co-director of Research — Twitter @YoussefHaidar_

WTF is an NFT?

The revolution will be tokenized. NFTs, also known as Non-Fungible Tokens, are a tokenized claim of ownership to a digital asset — nothing more or less. To explain what this means and its profound significance, let us walk through the current state of affairs with JPEGs and other forms of digital media. For starters, you cannot verify that the media is authentic, reliably tracing its ownership history is impossible, and lastly, it is siloed to the platform you uploaded it to.

You can have a huge following as an artist on Instagram, but the moment you lose access to the account, your following and reputation diminish with it. On top of this, a creator’s work is subject to mass replication and minimal value accrual. NFTs offer unique solutions to the common problems we face online today.

Is that an authentic NFT? Simply check the collection it was minted from on a Block explorer or a marketplace

If Instagram deleted an influencer’s account, they lose their entire following and platform. If OpenSea delisted your collection you could move to a different marketplace like LooksRare or Rarible.

NFTs have completely upended digital culture and will continue to grow into more facets of our digital, physical, and phygital lives. The value of each NFT is subject to a handful of variables such as: Cultural Significance, Supply, Demand, Community, Roadmap, Rarity, Utility.

Fidenza by Tyler Hobbes, Source: Art Blocks

Most mainstream media coverage has focused on the top 1% of projects garnering the most attention and this tends to fuel the misconception that NFTs are just random JPEGs trading for millions of dollars. This is not true for most NFTs, they aren’t random when you take time to learn more about these collections nor do they all trade for 7 figures. To make matters worse, people who do not own NFTs see a cesspool of sponsored posts and engagement farming that make the space feel like a giant Ponzi scheme, to say the least. After reading this article, you will never see NFTs the same way.

NFTs have use cases that go well beyond flexing expensive animal renditions. They are being issued by creators, brands, and platforms to increase community engagement, distribute rewards, and even crowdfund expenditures like smart contract audits and events. Traditionally, receiving funds to pursue a high-growth venture involves sacrificing a portion of debt or equity to finance growth but with NFTs, you lose neither.

Blockchains are permissionless, immutable, and decentralized databases that keep all these ownership claims filed accurately for everyone to see. There is no question of who owns an NFT, anyone can simply open up the ownership history and it’s all there. No one can pretend they own it and no one can benefit from its utility aside from the NFT holder. Giving data decentralized veracity and provenance is a huge value-add for the internet as a whole, furthering Web3’s value proposition: a community-owned web where participants help govern or partake in the development of brands, goods, and services.

Prior to Blockchain, users needed to trust a 3rd party (i.e. Facebook) to run all the servers on their platform and accurately store the data, compromising custody and accepting significant point-of-failure risk. When it comes to the Blockchain no one centralized entity does this. Instead, thousands of decentralized validators agree on the network’s state and that is what keeps the ledger immutable. No one appreciates the power of decentralization until they need it most, as shown by the Cambridge Analytica scandal and the LME halting Nickel trading and canceling trades. In this case, do we really need to witness censorship and cyberattacks en masse to realize the power of resilient networks? Web3 is early but it is certainly a force to be reckoned with…

Like all innovations, there are some caveats and critiques to follow. This article will run you through an overview of the NFT space after which I will dissect the Good, the Bad, and the Ugly behind NFTs.

The building blocks of Web3

Assuming you hold your NFTs in a self-custodial wallet, no one has control over your NFT — therefore, no one can seize it. For the first time, digital assets are self-sovereign assets controlled by the user and not a service provider. That is an accomplishment underappreciated by most, giving users full control over their digital assets and shifting the status quo to put the holder first. The ecosystem surrounding user-owned platforms and brands is known as Web3. NFTs are the building blocks to Web3 and, without them, realizing a user-centric community is near impossible at scale.

I’m not going to go too deep into explaining what an NFT is because there are great articles that already get the job done. Check out these great articles below if you want to learn more:

It’s Bigger than JPEGs

NFTs represent disruptive innovation. They have permeated across music, art, gaming, philanthropy, collectibles, and fashion. In 2021 the NFT market was valued at $40 billion, which is nearly as large as the $50 billion global art market. The NFT market is primed to outgrow the art market over the next few years.

RTFKT Studios, a Nike Company
Nas released two songs as Music NFTs on Royal: “Ultra Black” from the Grammy Award winning-album King’s Disease and the single “Rare” from King’s Disease II. Ownership of an NFT grants you a percentage of the royalties generated by the song, allowing fans to earn alongside the artists they support

Here are two great examples of NFT collections that have different forms of utility to their users. These collections both largely rely on fostering a brand or community.

Crypto Packaged Goods (Club CPG)

Source: Club CPG

This is one of my favorite collections because Club CPG offers significant utility to holders. According to their Medium, the collection aims to foster a community at the intersection of consumer and Web3, where each NFT grants its holders access to the following:

  • Private Club CPG Telegram Chat
  • Direct access to our community of crypto and consumer mentors, mentees, and influencers
  • Early Access: Club CPG Investment Vehicle
  • Investing in crypto + consumer startups
  • Club CPG Events
  • Networking, education, and community
  • Early access to upcoming NFT mints and pre-sales

This collection offers you a chance to learn from mentors, and access exclusive deal flow to get in early on some great consumer Web3 startups. Aside from the benefits above, all profits from the public sale were donated to Project Potluck, a non-profit tailored to helping grow businesses operated by People of Color.

Club CPG was launched by the founders of Color Capital Jaime Schmidt and Chris Cantino. At a mint price of 0.2 ETH, the collection is up 6,900% over the last 7 months!

Doodles

Source: Doodles

A project founded by “Poopie”, Evan Keast, and an artist named Burnt Toast, the Doodles are a set of creative profile-picture (PFP) NFTs that come in various sets of traits that ultimately determine rarity. What makes the Doodles so special? For starters, the team behind it is already heavily seasoned in the NFT space, with past experience at Dapper Labs and Cryptokitties, which gives this project more credibility.

The Doodles are loved and cherished as a blue-chip collection due to their aesthetic design and color schemes. I like to think the Doodles are at the beginning of a very long journey, especially after teasing their plans for the year. The Doodles are seeking to solidify their spot as one of the biggest Web3 brands in the space with a plan that will be discussed in the next section, the market seems to agree with this potential as they are currently trading at a floor price of 15ETH (~$46,500).

This sounds reckless and it must leave many of you questioning how humans perceive value but this behavior is not new in the slightest. Humans always add premiums to scarce luxury items, also known as Veblen goods, and supply and demand economics dictate these premiums over time.

Veblen goods increase in both demand and price, driven by exclusivity and perceived luxury. Source: The Geeky Griffin

Profile Picture art = Veblen identities

Many of the people looking at the NFT space from the outside see profile pictures selling for unjustifiable amounts of money by generating unjustifiable demand. It’s hard to appreciate something when you barely understand it which is why some light reading on an emerging asset class can do wonders. The creative collections with strong communities can jumpstart entire brands, as shown by Yuga Labs initially debuting with the Bored Apes only to plan to build a Metaverse platform and marketplace for a suite of collections.

Scarcity is another factor to consider. There will never be more than 10,000 Doodles or Azuki’s so as long as demand continues to grow so will the price, this is basic economics. Are we really drawing the line over digital art only to look the other direction when KAWS and other scarce collectibles have similar market mechanics?

This set had a retail value of $56,000 ($8,000 per print) and is selling at a 66% premium, Source: StockX

The first base to cover here is the very reason we have profile pics in the first place. You see, profile pictures are our first impressions in cyberspace. They hint at who we are online and generally speak to a user’s looks or interests. It makes perfect sense that virtual communities fostered by NFTs use them for this reason. It’s no longer about the actual NFT, it’s what you represent. Think of PFP art as a window to the artistic purview of a person. You decide what digital representations you want and you go one layer down that rabbit hole by being met with a community of thousands of like-minded people that align their interests the same way.

It starts with the NFT and can end with membership or a friendly network. Attend meetups, receive exclusive rewards, and gain early access to new products and services. The journey is limitless but the opportunities aren’t, making them Veblen identities. Some holders are more attached than others but this is a good mental model for understanding the FOMO. In fact, the value of these profile pictures may increase substantially in the future should they become rare and interoperable avatars in well-functioning Metaverse platforms.

Instead of limiting the experience to the physical bounded by time and space communities are shifting to a virtual medium that can transcend into the physical when required and scale exponentially faster. To further my point, imagine planning and promoting an event for thousands of people exclusively offline. Sending out holder-exclusive gifts, invites, and products, at scale, is only possible after verifying ownership of an NFT, and to do this, well, you need an NFT…

You can choose to interact online, offline, or both. You can even choose not to interact at all! It’s all about the users now because without the user the projects would cease to thrive and operate. People are going to start using NFTs to identify with communities more often and we are already seeing this happen with many normie influential figures around the world. Look at this picture: you might recognize most of these faces but did you know that they all own Bored Ape Yacht Club NFTs?

A passport to the land of the Doodles

Back to the Doodles, what does owning one of these vibrant NFTs grant the holder? Think of it as a passport to all things Doodles.

Merchandise

The Doodles had their first merch drop in February releasing hoodies, tees, stickers, figurines as well as several holders exclusives.

Events (SXSW 2022)

The Doodles event was one for the books, with Shopify-backed NFT gated merch solutions, interactive experiences with your Doodle, and an afterparty hosted by Diplo, who also owns a Doodle. The team really stepped up their efforts to show the world that NFT collections are brands of the Metaverse that can attract real-world attention. Doodles are to NFT collectors, what Disney is to children: a house of creative excellence and experiences. Their success at SXSW 2022 is likely to be the first of many with more corporate partners like Shopify to join hands with the Doodles in the foreseeable future.

Source: Twitter

Doodles 2.0

The Doodles have introduced a proposal in March 2022 to scale their project and establish a strong brand following that transcends Web3 and NFT enthusiasts. The ambitious proposal has the goal of bringing the Doodles to the masses by ramping up their hires in a variety of positions such as animation director, product designer, brand strategist, and 3D modeler. They plan on adding newer roles spanning areas such as token and game design too. Given the positive support Yuga Labs received after launching the APE token as well as their plans for a Metaverse platform, the Doodles may be set to compete at the same caliber as Yuga with the right execution.

To scale the Doodles “into the stratosphere” the team demanded that holders to approve a 2022 budget of 690 ETH (~2.07M) to realize this vision.

The vote passed with 81% approval and only 0.16% rejecting the proposal. The Doodles have had a successful start, the rest of the journey now lies in transforming the Doodles from a 10k PFP collection to a household name. There is no guarantee this will happen but some intriguing plans include selling a mainstream NFT, purchasable by credit card, and having the designs cross-licensed from existing collectors’ Doodles. This is interesting because it gives Doodles collectors a stream of licensing revenue over time. They also list three upcoming products at a large to extra-large scale. (They consider the Space Doodles a medium-sized product for reference)

Source: Snapshot

The specifics are unclear but the Doodles model here is akin to a Web3 Disney. Instead of controlling the IP and decision-making, the team will license any derivatives linked to existing Doodles from the holders themselves, all while delegating governance of the project to its holders too. The Doodles are a great example of a strong community attempting to do more than simply sell out vibrant cartoons. Doodles are building a brand, a web3 brand. For the people and by the people.

The Good

Giving Data History & Monetary Value

The internet has done many great things for society, including making the marginal cost to copy or transfer data near zero! This is great, but not every data point should be free. You’re sitting reading this and wondering, does he really wanna charge me to use the internet? No. I’m talking about getting the ones who deserve to be compensated… compensated. Crazy thought right!?

Imagine how much effort and resources content creators put into researching and executing their work; it would suck if any chad on the internet could just swoop in and take it for free with no compensation trickling down to the creator. People could copy or reupload your content, leaving you with nothing — not even recognition. While this is still somewhat possible with NFTs, they significantly reduce the odds of this happening. This is thanks to the history of ownership generated on-chain!

NFTs have a verifiable ledger of provenance, timestamped on the blockchain, you can sit there rest assured that you own a real Bored Ape because, not only is it linked to the authentic collection, but there is also a transparent record of past ownership and activity.

Here is a relational graph on all wallets that interacted with Logan Paul’s wallet. Having time-stamped transaction records allow you to analyze relationships and trading activity by blockchain, collection, and holder. Source: NFTgo

Data having provenance on a programmable blockchain lets us take things a lot further too! At a very cost-efficient rate projects can interact with their holders to coordinate airdrops and community initiatives. Projects can grant existing holders new collections and collectibles sent directly to each owner or even grant pre-sale and whitelist privileges for another collection by taking a snapshot of all holder wallets at a certain time.

This is how RTFKT Studios has been airdropping Clone holders new accessories for their Clones like the MNLTH, Space Pod, and even whitelist access to Takashi Murakami’s Murakami Flowers collection. All for free as a way to reward existing members of their community! The MNLTH is Nike’s first NFT and will be unlocked after the community goes through a series of challenges together with each MNLTH box representing a unique NFT.

The RTFKT x Nike MNLTH, Source: RTFKT Studios

Gucci recently partnered with 10KTF, a Beeple-backed NFT collection, to create a unique experience for holders of several highly sought projects such as the World of Women, Cool Cats, Bored Ape Yacht Club, and more.

Alessandro Michelle and Wagmi-San, Source: Gucci/10KTF

Leveraging the veracity and programmability of an NFT, 10KTF was able to generate a mint pass that allows holders of certain projects to mint a new NFT that combines Gucci outfits designed by Alessandro Michele with the existing NFT you own. These ad-hoc outfits are an entirely new NFT and offer a glimpse into the many creative mechanisms projects can explore to gain traction and offer collectors new experiences.

Source: OpenSea

Degens with Benefits and Passive Income

If the Marketing & Sales department at Hérmes were tasked to send NY Fashion Week tickets to every person who purchased 10+ items in the New York store, both primary and secondary sales, that would be a daunting task. If I asked them to collect 10% from every secondary sale, that would be impossible.

Guess what? You can do both of those things with NFTs pretty easily!

Airdrops & Benefits: Increase engagement and reward loyal users

As discussed with the RTFKT Studios example. Every NFT collection can query a list of all historical holders and airdrop a token to their wallet, even further segmenting them by how early they were to join and getting as granular as to what traits each holder’s NFT has and how many NFTs they hold. This level of cohort visibility and segmentation is unparalleled!

A crypto exchange could send out a lifetime 10% discount on trading fees to their first 1,000 holders, an additional market insights report for holders of a certain attribute, or even an extra 5% discount for wallets holding more than 3 NFTs. Another strategy to bring in early supporters is variable pricing-offering the first X users a mint price of Y. This way you can engage with your community and reward them for their early patronage and loyalty in any way the team sees fit.

Royalties: Passive Income

If you create an NFT collection you not only receive the money earned from your primary sales but can also collect a programmable royalty on the secondaries. Say you sold a one-off NFT for $1000 and inputted a 10% Royalty fee. Every time the NFT changes hands, you get to keep 10% of the sale.

This means should the NFT later on sell for $2000, the owner of the collection makes $200. NFT collections can consist of thousands of items and this creates a passive income stream to build the project’s treasury and fund future expenditures all while being 100% independent. It also forces the creator’s incentives to prioritize the long-term. Should the project succeed the team is destined to generate more royalty revenue and in turn cumulative revenue.

Why people have an issue with this is beneath me especially when thousands of musicians and artists sacrifice a percentage of their incomes to simply share their work effectively. NFTs completely flip this structure on its head and allow the creators and builders to share their work with every netizen and cut the intermediaries out.

Source: All In Podcast

Aligning communities & creators for the first time in a long time

Incentives are very important. They make or break most business models. In the case of NFTs, there is strong potential for the community and creators to be aligned in ways unimaginable before. This is a great way for a brand to form a close-knit community of loyal patrons and fans. Instead of sharing exclusive content by a paywall or premium subscription, you can instead gate it behind an NFT which gives the creator more granular capabilities to personalize their community interactions, such as trait-specific roles and capabilities. Different traits can reveal different forms of content and even reward users to grow a sticky userbase.

Create your own evangelists by running a contest for the best fan art, memes, and promotions in exchange for an exclusive NFT and watch your community grow organically. A caveat here is that overdoing this will diminish the project’s integrity and perception, the balance lies in growing your reach while instilling holder confidence in the team’s ability to deliver. It is still an upgrade compared to web2 referral models as rewards flow through the creator and trickle down to the community with no intermediaries.

Disrupting the Platform-User relationship

Source: Chris Dixon

There are two stages in the lifecycle of a platform and its relationship to users. As visualized above by a16z’s Chris Dixon, Platforms go from attracting users and cooperating with complements to eventually having to extract from users and compete with complements once growth plateaus (peak of the S-curve).

In Web3 this model is completely disrupted as platforms can align incentives between users and the platform. This is powerful because it gives both sides the same goal: growing the platform. Now that the users own pieces of the platform, whether, through governance or utility (such as a portion of fees), they seek to benefit from the success of this platform.

The ownership and decision-making processes are no longer limited to those behind the platform but allow the users themselves to enjoy a piece of the pie. The larger the pie gets, the larger the user’s piece. These platforms can attract while they extract, and cooperate with complements through collaboration all while they compete with external entities. The outcome is far more positive-sum as the community is rewarded for their efforts and the platform is rewarded for its products and services.

Superlocal: Using NFTs to increase network adoption

Source: Superlocal

Superlocal is a social network that rewards users with tokens for checking into places. The unique model Superlocal is attempting is to incentivize local interaction by curating social feeds according to a user’s check-ins. The end goal is to give people information on the happenings nearby in their communities and push them to explore them. If I were to check in to Snell Library and post a photo and caption as a check-in, I earn LOCAL tokens while I sit in Snell and earn more tokens when others check-in as well.

Source: Superlocal

Superlocal offer a Localtrotter NFT that people can mint for 0.04 ETH. The benefits of owning a Localtrotter include early access, a 5% bonus on check-ins, and a verified badge. The reason I chose Superlocal as an example is that Superlocal leverages the methods mentioned in this previous section to help grow its network effect while aligning users with the same goal.

The Bad

The Climate

As climate change becomes a more pressing concern, inefficient uses of energy are subject to more scrutiny than ever. Recently NFTs have taken a hard hit from environmental activists due to the high energy usage required to power blockchains that support NFT trades.

The largest network for all NFT activity is Ethereum, which follows a Proof of Work (PoW) consensus mechanism. This means Ethereum requires miners to solve complex calculations in hopes of receiving a reward once they solve them. This is how the network maintains state integrity and security while maintaining decentralization. The problem at the heart of this critique is that it’s missing key information.

You see, the Proof of Work (PoW) consensus mechanism is a strong driver of energy consumption. The most popular public blockchains that use this mechanism are Bitcoin and Ethereum. In fact, newly launched L1 Blockchains such as Solana, Avalanche, and Terra all decided to use a Proof of Stake (PoS) model instead. The Ethereum Foundation has also been working to shift its consensus architecture to Proof of Stake (PoS). Proof of Stake still consumes energy but reduces consumption by 99.9%!

The Merge, the event used to describe Ethereum merging its mainet with the PoS chain, is expected to roll out in mid-2022 and is going to be a positive for environmentalists and Ethereans alike. Thanks to the rise in popularity of Proof of Stake and its attractive perception by ESG investors, the elephant in the room is set to downsize significantly.

Ethereum is not the entire market but when it comes to NFTs in specific, it has more than 60% share of all volume traded across chains. Assuming a 99.95% reduction in energy consumption for 60% of NFT volume roughly leads to a 59.7% reduction in energy consumption for the entire NFT market.

Source: The Block Crypto
Source: Digiconomist

Slashing energy consumption by 99.95% has profound implications for the environment. The electrical energy to facilitate a single transaction on Ethereum would decline from 265kWh to ~1.3kWh and assuming the carbon footprint-electrical energy ratios hold constant Ethereum is estimated to decline carbon footprint to ~0.7kgCO2. For reference, burning a gallon of gas emits 12x Ethereum’s carbon footprint post-merge.

The calculations may be surface level but the implications are deep. Inefficiency is a symptom of disruptive innovation, going from 0 to 1 is not the same process as going from 1 to 2. Think of airplanes, software, and even cryptocurrencies during the first few years of the invention.

Now that the space has had its 0 to 1 moment, expect smoother sailing and a focus on operational excellence from here. We have already seen projects like Azuki create gas-optimized contracts to reduce gas fees and in turn their carbon footprints and hope to see more initiatives and strategies in line with the collective societal goal of mitigating climate risk for everyone. The adoption of Layer 2 networks coupled with the imminent Merge lay the groundwork for sustainable NFT markets in the near future.

Using Web2 applications to facilitate Web3

Despite the traction that Web3 has gained recently, users are still stuck with Web2 platforms such as Discord when it comes to communication and social messaging. This has many drawbacks, the most obvious being that it isn’t a Web3 platform and lacks incentive alignment as discussed in the Web3 platform-user relationship. Web3 social is improving and more projects have started to build in this space but Web3 social is in its early stages at the moment. Platforms that are working to bridge this gap include Context, Circle XYZ, and Kwil.

Another issue is security, specifically in the P2P trading channels that NFT collections create in their discord servers. Hackers have tried all sorts of tactics to dupe NFT holders into giving them access to their wallets and NFTs through false links, screen sharing exploits, and even phishing scams. On the UI/UX front, Discord servers have weak filter/sort functions plus a sea of messages to sift through to find what you want. This is not to bash Discord, at the end of the day Discord is a communication app for gamers, it only makes sense for Web3 projects to have an app tailored to their ethos and needs.

Leveraging wallet integration, a tailored UI/UX for NFTs, and a secure P2P trading mechanism are all ways in which a Web3 native app can outperform Discord and facilitate a better experiences for users.

The Ugly

Scams on Scams on Scams…

Where there are billions of dollars changing hands, there tend to be a few bad actors. NFT scam projects have ramped up as NFTs gain popularity with a series of rug pulls (anonymous teams churning out fake projects that have no real roadmap or collections to offer).

This is a sign of the times and speaks mostly to the state of the NFT market: unfettered euphorics searching for the next 100x investment. While there’s nothing wrong with flipping NFTs, the lack of due diligence or skepticism in markets will be manipulated until a large-enough scam leaves collectors in the dust. This is inevitable, nature will heal and investors will learn and develop “muscle memory” from past market trauma.

Pixelmon

One of the most hyped NFT drops at the start of 2022, Pixelmon, raised $70M through a dutch auction mechanism that started at 3 ETH ($9,000). Pixelmon was planning to create a Web3 open-world fusion of Pokemon and Minecraft. The project launched with no working alpha or beta and no doxxed team. The teasers posted on their Twitter page and Discord server were very professional and the project garnered interest from renowned figures in the NFT space. The reality of this project was shocking. See the images below for a comparison between the teaser and the reveal. It’s not pretty…

How it started
How it’s going…. Source: Twitter

On-chain sleuth Zachbxt helped uncover that Pixelmon actually bought most of the artwork from the Unity Asset Store and was all bark no bite. They even took 400ETH and went on an NFT buying spree after the auction.

At the moment, NFTs require self-regulation and a network of watchdogs to ensure malicious activity is broadcasted for everyone to see. I do hope more on-chain sleuths like Zach enter the space as for now, this is the only sustainable way to keep collections in check while avoiding a centralized reputation mechanism.

Regulation is a topic that discourages most technologists but in this case, regulation will help mature the NFT market. Being forced to disclose paid promotions would solve a major source of rug pulls in the space. Celebrities are no exception to the fraudulent activity taking place with multiple projects hyping releases by compensating celebrities to post endorsements on their social platforms. Examples of celebrities who have supported these projects include Lil Xan, Floyd Mayweather, and David Dobrik.

Lil Xan promoted the Baller Ape Club in October only to see it deleted months later, Lil Xan was paid and the post was eventually deleted from his Twitter. (See screenshot below)
Source: Twitter

Bubble-esque behavior

The scams were the first tell, the valuations are the second. Let me be the honest abe in the room here and say that 90% of existing NFT projects will lose value over the next few years. This is the way things always have been, from the Dot Com to the ICO bubble. NFTs are relatively nascent and functionality is primitive and nowhere near the desired end state. When you think of complex and ambitious concepts like the Metaverse and scroll through an NFT marketplace the disconnect screams through the screen. The collections we will see over the next decade will surprise even the most initiated people in the space.

This is a frothy market, especially if you’re new to the space. Market volume on Ethereum, the most used network to trade NFTs, has dropped by 75% since a local top of $1B in mid-January.

Valuations ran ahead of themselves and traders were acting euphoric. Seeing the animal spirits cool off is reassuring in the long run…

Source: Dune Analytics @SeaLaunch

Looking at unique buy/sell activity in the chart below, activity peaked around the end of September and has stagnated over the last 6 months. This is a good sign as bear markets purge weak projects & scams, they also push teams to think outside the box to garner traction. The chart above shows market volume hitting all-time highs in February but looking at the unique buyers and sellers below we see that the number of participants did not near all-time highs, suggesting a slowdown in adoption for now.

Data Source: Nonfungible.com

The launch of Coinbase NFT and the evolution of reputable projects will be the key components to starting the next bull run in the space. NFTs are here to stay in a big way but several breakthroughs and experiments in business model and utility will help evolve the industry, similar to the shift from monolithic to modular blockchains.

Coinbase NFT will be an influential market event given the waitlist is currently sitting at 3M users. For reference, the potential userbase (going off the waitlist) is 50x the all-time high of unique buyers which will lead to significant inflows into projects listed on Coinbase NFT.

An old waitlist showing 2.4M signups, source: Brownstone Research

The Imitation Game

We like the Doodles but that doesn’t mean we need another twenty derivative projects on top of them. The Bored Apes are nice, but who thought adding an adjective before the word Ape meant you had the next best collection? Bored Apes are now Gaming Apes, Wicked Apes, enough is enough. What’s next, a Broke Ape Yacht Club? That’s where things are headed if projects continue to recycle what works and abandon the creative exploration that led to this parabolic growth in the first space. New projects mimicking styles that have already succeeded in the market are minting ad nauseam but this will fade over time as collector scrutiny increases.

These are all different collections based on the BAYC, Source: OpenSea
Another set of derivatives based on Azuki, Source: OpenSea

I mean seriously, this is like someone fusing Mickey Mouse and Daffy Duck into one and selling “Dickey” merchandise. It’s lazy and expected. If anyone reading this is looking to start an NFT project, creativity matters more than it ever has. The most successful and cohesive NFT communities were unique and created an identity that new holders sought to attribute themselves with and form connections through. There is no easy way to do this and the low barrier to entry makes starting a collection highly competitive with the market setting its bar to the stratosphere recently. It certainly won’t help if you bring nothing new to the table.

Final Thoughts

To end things on a positive note, NFT collections come in many shapes and sizes. Whether it’s a profile picture, some 1/1 art, a gaming skin, or access to an event there are thousands of collections to choose from across many chains.

Exercising caution and conducting due diligence are key in the space. It pays to be early, but only if you live to tell the tale so purchase NFTs you support the same way you would buy other Veblen goods and remember they are not as liquid as stocks and cryptocurrencies so do not overextend yourself, find a level of risk tolerance that comforts you.

There are thousands of projects that lack the competence and creativity to thrive and build but the few that do will go on to achieve great things and usher in a new wave of collections seeking to capitalize on emerging trends and opportunities.

The future will always be uncertain and fear-ridden and only through learning and understanding it can we minimize the fear, uncertainty, and doubt it brings.

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

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