How Did NFTs Become So Popular?
A brief look back on Q1 2021 and NFT’s entrance into the mainstream
Disclaimer: I’m going to assume that readers of this article have a base level knowledge of crypto (e.g., you know what Bitcoin and Ethereum are). If that’s not the case, you may get a lot of terms referenced in this blog. Also, this is for edutainment purposes and is NOT financial advice. Always do your own research.
Non-fungible tokens (NFTs) went absolutely ballistic in Q1 2021.
I’m talking like, literally no one knew what the hell non-fungible meant, and now people like The Weeknd, Paris Hilton, and the Teletubbies are using it in everyday conversation.
I’m talking 26x volume growth YOY compared to Q1 2020, for $1.5B in sales.
I’m talking about a $69 million sale by digital artist Beeple and renowned auction house Christie’s, and hundreds of millions of VC dollars flowing into the space.
And I’m even talking an SNL skit about NFTs that itself was minted into an NFT…
In all this craziness, laypeople are looking around and screaming “bubble”, while creators and artists are claiming this is the next form of monetization.
So, which one is it?
NFT Overview
OK whoa — let’s pump the brakes.
Before we can get into the NFT explosion and what’s next for the tech, let’s set a baseline understanding of terms (crypto vets, skip to the next section).
NFT stands for non-fungible token.
…Which means absolutely nothing because it’s technical gibberish.
Let’s break it down: fungible — according to Google — means “(of goods contracted for without an individual specimen being specified) able to replace or be replaced by another identical item; mutually interchangeable”
So basically something that can be replicated and replaced. Something like a Bitcoin.
It doesn’t matter to me which Bitcoin I own, I just care that I have a Bitcoin.
Non-fungible means the opposite of that: you can’t replicate or replace it with another. It’s unique.
And token means — well — token: like how Bitcoin is a token, or how Chuck-e-Cheese coins are tokens. It’s a representation of some value.
So NFTs hold unique value.
Moreover, NFTs are on blockchains, which in a simplistic sense are distributed ledgers where entries into the ledger have to be correct because, uh… math and game theory and incentives. (DM me on Twitter if you’re actually interested on how it works).
That means, any NFT has to be unique due to the constraints dictated by its underlying blockchain. Any attempt to duplicate said NFT will be deemed “wrong” and cannot persist in the distributed ledger.
TLDR; NFTs are immutable, verified representations of a unique object (e.g., a painting) that has value.
How NFTs got so popular
NFTs were created in 2013/2014 when people realized that they wanted to trade assets — and later collectibles — other than Bitcoin on the Bitcoin blockchain.
The emergence of Ethereum led to the porting of these Bitcoin-centric projects to Ethereum’s virtual machine, leveraging more capabilities from its smart contract layer.
When CryptoPunks and later CryptoKitties came into the scene in late 2017, the NFT scene exploded and gathered media attention.
With CryptoKitties NFTs hit the mainstream. CryptoKitties is a blockchain-based virtual game that allows players to adopt, raise, and trade virtual cats. Cats, on a blockchain! — Andrew Steinwold
(For a full recap of NFT’s history, read this awesome medium article by Andrew Steinwold 👇)
CryptoKitties was so popular — due to a combination of being adorable and people making boatloads of money off of flipping them — that it ended up clogging the Ethereum blockchain.
But afterwards, user adoption went quiet for years… until now.
Honestly, this section title is a bit misleading because I have no idea why January 2021 was the month in which the world collectively decided that NFTs were the coolest thing ever.
If anything, the explosive popularity of NFTs really showcases to me the unpredictable adoption curve of new technologies — because this tech came out years ago.
I remember when CryptoKitties came out in 2017 and I completely dismissed it as a fad and poor use of the Ethereum platform. Many were on the same boat as me, as NFT usage was basically non-existent after mid-2018 until the recent surge.
I stubbornly held that belief all the way until January of this year, when I saw the power of NFTs in empowering artists and the tight knit communities being formed on Twitter and Clubhouse around the tech.
So I don’t know why January 2021 was the month of the NFT, but I do know that an amalgamation of a few factors was the perfect dry powder to ignite NFTs’ explosion into the mainstream psyche.
1/ Bitcoin’s insane bull run to 3x all-time highs from 2017
A smart investor always chases yield, and in a pandemic-driven, low-yield environment, many have flocked to crypto.
More retail investor interest in crypto leads down a rabbit hole for other alternative crypto-related investments (e.g., NFTs, centralized exchanges, mining farms) that have outperformed even BTC.
Conversely, NFTs’ increase in pop culture mindshare have led many curious viewers to investing in crypto as well.
2/ The emergence of NBA Top Shot
Dapper Labs, the creators of CryptoKitties, launched an amazing product in NBA Topshot that highlights the power of NFTs as a vehicle for digital collectibles.
Partnered with the NBA, Topshot is the definitive place to purchase and collect unique moments in the NBA season.
To date, Topshot has been the #1 source of volume for the NFT market.
3/ The convoluted monetization structure of digital content (inclusive of music and video)
A cursory glance into the music scene will show an incredibly complex web of parties involved in the monetization of content.
Where there’s complexity, there’s room for innovation.
NFTs allow artists to monetize their work in a new way, empowering them to cut out money-grubbing middlemen and forming direct relationships with their supporters and fans.
4/ The growing digital collectibles market — especially during the covid pandemic
Too lazy to find hard numbers, but Google “baseball cards covid” and you’ll see plenty of news coverage on the resurgence of interest in card collecting during the pandemic.
NFTs have cracked the problem of digital scarcity, enabling creators for the first time ever to accurately price and safely distribute their works online.
Thus, effectively creating digital collectibles and hopping on the IRL trend that arose from the pandemic.
5/ Two other macro-trends that I’ll dive into in a follow-up post: the Metaverse and Web3
More on these to come ;)
NFTs are absolutely a bubble
Honestly I think all the criticisms of NFTs are warranted.
It’s a bubble of Dutch tulip craze portions. I mean, a red pixel should never sell more nearly $1M. Nor should Jack Dorsey’s first tweet sell for ~$3M.
And I think people have a misconception about what NFTs are. They are digital receipts that verify the authenticity of something — whether it be a tweet, video, art, whatever. They are not the content in of itself.
NFTs are the deed, but not the actual house. They’re the printed receipt from the Gucci store, not the actual shoes.
So when people speculate on the value of art, they need to know that they’re not buying art on a blockchain. They’re buying art, with a receipt that is immutable on a blockchain.
More innovation is needed before we can actual store content on the blockchain.
So what if it’s a bubble?
So NFTs are a bubble, and they are incomplete tech that’s been overpromised to the end-consumer.
So what? That doesn’t meant the underlying tech is flawed. In fact, dismissing NFTs for those reasons would mean missing out on a potentially revolutionary technology that can change the world.
And there is no exaggeration when I say, change the entire world.
More on why I think that way in a follow-up post :)
Intrinsics matter.
If I bought Amazon stock at $5000 per share, would you dismiss the intrinsic value of the company? No, you would chastise me, the investor, for making that purchase.
Also art, being non-fungible, can only be priced by the buyer. Who else can dictate someone’s willingness to pay besides the buyer herself?
Let time will be the judge.
Who’s to say what constitutes a sound investment? Bitcoin was a bubble in 2017, but buying BTC at $19K would be an absolute steal right now (it’s $58K at the time of writing).
Here’s what I say: let it pop, let the noise die out, and let the builders of the underlying tech keep cranking away.
Just like the dot-com days, just like 2017.
