The NFTs ecosystem: 2021 boom & beyond

Published in

Paradigm

13 min readJul 15, 2021

On the ecosystem of non-fungible tokens flourishing and growing in its diversity → despite the quasi lull in the second half of 2021

NFTs?

The term ‘non-fungible’ is usually used in economics to denote the possession of unique objects and to describe things that cannot be replaced by others because they have a set of unique properties.

A ‘token’ as a unit of account is a record in a distributed blockchain that is controlled by a computer algorithm of a smart contract, in which the values of the balances on the accounts of token holders are recorded, making it possible to transfer them from one wallet to another.

Non-fungible tokens (NFTs) refer to cryptographic tokens that represent digital files, images, audio, video, videogame collectibles, and other creative products. Unlike cryptocurrency, which requires all tokens to be identical, each NFT is unique or limited in quantity.

To simplify, in each blockchain, all tokens are equal and interchangeable (for example, all bitcoins are the same, one bitcoin can be replaced with another, and nothing will change). Wherein, due to the emergence of NFTs, each token becomes impossible to counterfeit, split or replace. This technology is ideal for securing rights to unique things, namely artworks, computer games’ virtual objects, or even real estate.

Standards

Non-fungible tokens have initially been created as particular token standards to support the use of blockchain in computer games, which include the Ethereum ERC-721 standard for the acclaimed CryptoKitties game and the more recent ERC-1155 standard.

ERC-721 was the first standard for representing non-fungible digital assets on the Ethereum blockchain. The ERC-1155 standard offers ‘semi-fungibility’ and also provides an extended set of ERC-721 functionality (thus, ERC-721 can be built using ERC-1155).

Unlike ERC-721, where the unique identifier represents one asset, the unique identifier of the ERC-1155 token represents a whole class of fungible assets, any number of which the user can transfer to others.

Components based on the ERC-998 standard — are the templates according to which NFTs can be either non-fungible or fungible assets.

While most of the NFT activity is traditionally taking place on the Ethereum blockchain, other NFT-solutions are starting to emerge on different blockchains. E.g., the DGoods project, created by the Mythical Games team, is focused on providing a multifunctional standard for several blockchains, starting with the EOS. The Cosmos project is developing an NFTs module that can be used as a part of the Cosmos SDK. In the Flow blockchain, created by the Cryptokitties team, Cadence programming language presents each NFT as an object that users store in their accounts. It has strong ownership rules provided by the type system. On top of that, blockchains like Bitcoin Cash, NEO, Tron, WAX, and Tezos also have their token standards that determine their use.

Pros ◇ Сons

The main benefits of NFTs are closely related to everything that distributed ledger technologies (DLT) have offered in recent years. Blockchain technically secures the authenticity of the NFTs, and it guarantees direct payments to content creators.

To sum up:

However, despite the apparent advantages of NFT solutions, it is difficult not to pay attention to several problems that formed in the industry alongside their appearance.

Sotheby’s analysts highlight the following technology flaws associated with the rapid proliferation of non-fungible tokens and crypto-art in particular:

Difficulty in determining the value of the NFT;
Difficulty in assessing the uniqueness and understanding how many copies exist;
Difficulty in finding the original owner of the NFT.

Concerning NFT sales, copyright protection issues are arising more and more often. When uploading content to open non-curated NFT-platforms, you never stop wondering that absolutely any media file can be sold on your behalf (no matter it is a selfie taken a few seconds ago or a picture found on the Internet). And many scammers take advantage of this. A case in point was the recent incident with an NFT drawing by Jean-Michel Basquiat, which was put up for auction in April 2021 and removed two days later after discovering that the sellers did not own it.

All these problems remain. Researchers and engineers have yet to puzzle over their solution.

History

The prototypes of NFTs were Colored coins — experimental assets created on the Bitcoin network in 2012. The illustrations of the Pepe frog character were also among the first non-fungible Bitcoin tokens. Lots of them were sold on eBay, and, what’s more, the Rare Pepes collection was later put up for auction in New York.

All NFT images were initially hosted on Counterparty, a peer-to-peer financial platform that supported asset creation and trading, with its decentralized exchange and a crypto token. However, at the end of the 2010s, with the advent of similar platforms, Counterparty lost its monopoly on hosting NFTs.

The Ethereum-based pioneer of NFTs was the CryptoPunks project. The collection consisted of 10,000 pixelated images of punks, each with a set of unique characteristics. Every punk purchased using popular wallets such as MetaMask, which has significantly lowered the interaction barrier with NFTs. Curiously, CryptoPunks did not meet the ERC721 standard as it had not yet been invented, representing a hybrid of ERC721 and ERC20. Today, given their limited supply and a proven brand in the crypto community, CryptoPunks are probably seen as the mainstream digital antiques.

Worth saying, the question of the CryptoPunks’ primacy remains open, as in 2015, two years before the project appeared on the Ethereum network, the Etheria game was created — a virtual land on which users bought hexagonal plots NFTs.

Etheria, a virtual world as old as the Ethereum blockchain (2015).

At the end of 2017, CryptoKitties, an online game that allows users to breed digital cats, gained significant recognition, opening the way to mass adoption. The game runs on five Ethereum smart contracts, and users easily interact with it through their Ethereum addresses. The game was so intuitively simple and immensely popular that it accounted for about 25% of the traffic on the entire Ethereum network shortly after launch. The project soon raised an investment of $12.5 million and due to the hype some kittens have been sold for over $100K.

CryptoKitties became an example of how mass non-financial application was deployed on the blockchain basis for the first time. At that moment, the crypto-community realized the potential of NFTs, and their supply significantly grew. After the CryptoKitties excitement, the existing projects increased their audiences, and in the following years (2018 & 2019) more than 100 NFT projects appeared. The NFTs landscape began to evolve with unprecedented ardor, insomuch that, even Cryptotitties project popped up.

2021: Part 1

In 2021, the NFTs ecosystem continued to grow at an unprecedented rate. According to the report from NonFungible.com with NFTs industry statistics, the market of non-fungible tokens surpassed $250 million in early 2020, up nearly 300% from the previous 2019. On top of that, within a couple of months, crypto investors poured $90 million into NFTs and digital collectibles, causing the overall market cap of digital marketplaces to rise by 1785%, from $23 million at the beginning of 2021 to $432 million near the end of March.

Of all NFTs segments, virtual worlds and artworks occupied the most part. Still, computer games were ahead in the number of transactions (almost 50% of NFT transactions in 2020 were associated with them), and collectibles were not far behind.

The most used NFT-marketplace is a universal OpenSea platform that allows users to mint and trade NFTs, including the ERC721 and ERC1155 standards, view data on them, and check statistics. Created in 2017, today, it offers over 300 types of assets and over 10,000,000 minted tokens. Almost all crypto collections are available to users, including CryptoPunks and Hashmasks, as well as items from many popular blockchain games, such as SoRare, CryptoKitties, Axie Infinity, Gods Unchained, and much more. In June 2021, OpenSea’s sales hit a record high of around $150 million.

Another popular marketplace for buying, selling, and creating NFTs, is Mintbase which excels in covering niche NFTs categories such as music, photography, and news.

Rarible and Zora platforms won great success among fans of crypto-art and artists themselves since they are not curated. To upload the art-NFTs on them, users only need to register and pay for the transaction fee to mint a token. Unlike them, on curated services like SuperRare, Nifty Gateway, MakersPlace, or Known Origin, to start selling the digital artworks, content creators need to submit an application form, which has rather severe selection criteria and a long waiting period for the experts’ decision, which often scares off the creators of NFTs.

Forby, many digital artworks are already placed in online collections of virtual worlds. Cryptovoxels, the first blockchain-based virtual world, has several art galleries where users can buy art in the form of NFTs. As the virtual reality space becomes more popular, displaying digital art in it becomes more common and exciting to the crypto community.

Experts argue that 2021 has established itself as a boom year for art NFTs. In the first few months alone, there were lots of massive sales. E.g., in February, Canadian singer Grimes sold 10 digital paintings on the Nifty Gateway platform for about $6 million. Later that month, NFT featuring the Nyan Cat meme sold for just under $600,000.

‘Everydays: The First 5000 Days’ is a digital image in JPEG format with a resolution of 21,069 × 21,069 pixels, a collage of images from the Daily series created by American artist Mike Winkelmann (Beeple).

The most notable event was the sale of Beeple’s work ‘Every Day: The First 5000 Days’, the first NFT artwork auctioned at renowned Christie’s. It was sold for $69.3 million, making this NFT created by Winkelmann the most expensive in the whole history of crypto art.

After this record-setting sale of Beeple’s work, the auction house announced a sale of a single lot of nine CryptoPunks which was bought for $16.9 million in early May. It was the first time NFTs have been offered alongside Andy Warhol’s and Jean-Michel Basquiat’s artworks.

At the same time, Jack Dorsey of Twitter, sold NFT presenting his very first tweet, for more than $3 million, and Elon Musk tweeted a potentially salable techno track about NFTs.

All these events and many others have resonated with a broad audience and potential new content creators, whose number increased exponentially in the first months of 2021.

2021: Part 2

Despite the apparent calm, interest in the NFT field, and as a result, their market is still growing. Sales volumes remain at a consistently high level and continue to break records.

In the first six months of 2021, NFTs’ sales reached $2.5 billion (according to DappRadar). At the same time, this figure is greatly underestimated since the source tracks only on-chain sales, that is, on the blockchain, without taking into account large off-chain sales of NFTs, for example, from auctions. NonFungible.com’s number is $1.3 billion, excluding around $8 billion of DeFi NFTs.

The NFTs weekly trading volume on the leading exchanges grew from the beginning of the year to a peak in February, falling 82% in May to $35.3 million. However, since then, NFT activity has grown, reaching $78 million in transaction volume in the last week of June, which is 120% more compared to the previous month.

This rebound can be attributed to a renewed interest to the ecosystem. By this point, the creators of NFT solutions have learned how to interact with communities and invest incentives in their NFT platforms to properly energize audiences and nurture native evangelists.

Now, news related to NFTs continues to cause a feverish revival in the crypto and art communities with roughly the same degree of excitement.

Banksy’s ‘Love is in the Air’ sold for $ 12.9 million at Sotheby’s for cryptocurrency.

In terms of the latest iconic sales, Sotheby’s auction house sold Banksy’s ‘Love is in the Air’ for $ 12.9 million, marking the first experience of organizing an auction for a physical artwork with the possibility of paying with cryptocurrencies.

Founded in 1744, Sotheby’s sold the rare 101.38-carat diamond for about $ 12.3 million in cryptocurrency. Trades took place on July 9 in Hong Kong. Bets were accepted in traditional currency, Bitcoin and Ethereum. Information about the buyer and the cryptocurrency of the sale was not specified.

These episodes were pivotal for the adoption of cryptocurrency by the global art community.

In late June, media giant Twitter handed out 140 NFTs featuring various Twitter logo images and a virtual Tamagotchi pet through the Rarible platform, supporting and continuing the trend.

Worth mentioning, The Bored Ape Yacht Club, a set of 10,000 unique digital ape NFTs, has become a hit among collectors lately. Their total sales have jumped to $61 million, while the average ape sold on OpenSea of July for >$3,500, up 1,500% from the launch price in April.

As another potential use case of NFT technology, music also opens up opportunities for monetizing artists’ creativity. In the spring of 2021, Justin Blau (3LAU) became the world’s first artist to tokenize his music album and sell it for $11.6 million. At the same time, the American band Kings of Leon released their eighth studio album as a non-fungible token, selling it for $2 million. Artists such as Steve Aoki, Linkin Park’s Mike Shinoda, and Deadmau5 have supported the frenzy surrounding the benefits of NFT technology by their own example.

💿 To learn more about the impact of NFTs on the music industry, tap here.

Besides visual arts and music, video NFTs are increasingly gaining popularity. For example, recently, CNN put up historical news items for sale in the form of NFTs. Among them are exclusive materials, presidential election results, space travel, and other significant events. Also, the new feature-length film Zero Contact featuring Anthony Hopkins will be distributed only in the form of non-fungible tokens on the specialized marketplace NFT Vuele. Access to it will only be available upon purchasing the corresponding token.

The popularity of crypto games is stably rocketing. In such games, cryptocurrencies and NFTs are usually used as in-game items traded and exchanged by players. Probably the most famous of these games is Gods Unchained, an Ethereum-based card game, where each collectible card is confirmed by a smart contract. The game supports the sale of cards and entire collected decks.

Another trendy crypto game is Axie Infinity. The crypto community remembered it for the land purchase by one of the players for $1.5 million. Specifically, this land consisted of nine contiguous genesis blocks — the most valuable land pieces in the game. The price was so high since there are only 220 of these parcels. It is likely that as more gamers join the game, the cost of this limited number of pieces will rise even higher.

NFTs-related activities go far beyond this. Variations with their creation never cease to amaze.

An animated rendering of the source code for the World Wide Web auctioned as an NFT by internet pioneer Tim Berners-Lee at the end of June 2021.

In early June, Tim Berners-Lee, a British computer scientist, and inventor of the World Wide Web, auctioned off some of the source code as a non-fungible token. A collector who remained anonymous bought it for $5.4 million.

Meanwhile, biology pioneer George Church and the company he founded, Nebula Genomics, announced their intention to sell Church’s genome as NFT. The idea has sparked controversy in the scientific community, as Church, the geneticist at Harvard University in Cambridge, is already well known among academics for his controversial proposals that include the creation of a dating app based on DNA and the idea of resurrecting the mammoth.

Btw, talking about the resurrection. This summer, Gone to Mars, an Ethereum-based project of a virtual decentralized cemetery, was launched. 1089 NFT capsules are already ready for sale and await their future owners. Sealed until 2050, they will be passed on along with messages from their holders to the next generations.

Since 2020, an advantage to combine the pros of NFT technology with the functionality of decentralized finance has appeared. For example, in the Aavegotchi game, each character is the user’s collateral stored on the Aave lending platform, on NIFTEX it is possible to borrow and lend NFTs, to maintain fractional ownership, on NFTfi non-fungible tokens can be used as collateral when obtaining a loan. And these are just a couple of examples.

Thanks to Berners-Lee’s original invention, the sky is the limit for imaginative representation forms of digital content as well as for non-fungible tokens’ use cases. NFTs are present in fashion, art, photography, finance, etc.

Today, the NFTs ecosystem continues to evolve and thrive. Many of the projects listed above have been successfully using blockchain technology for a long time, already have a significant base of creative human capital, collectors, and a loyal audience.

At the same time, more and more content creators are discovering the possibilities of monetizing their creativity. Blockchain technologies and NFTs are gradually being recognized by influencers and major players in related fields. The masses are consistently showing interest in this area. According to the NonFungible, from 10 to 20 thousand people per week are interested in buying NFT. Projects based on beautiful and original ideas constantly appear, opening up new possibilities for using the technology of non-fungible tokens at the boundaries of sciences and industries.

After the boom in early 2021, one thing remains clear, the once-seemingly niche ecosystem of NFTs has forever emerged from the underground of small crypto communities, becoming an equal player in the world of finance, art, games, and many other leading creative industries.