2020 was great for Non-Fungible Tokens. This market gained volume, fame, and infrastructure. But what all the buzz is about? And what can we expect in 2021? I want to make it clear and to share my thoughts about the future of NFT.
An NFT is a token that is a unique digital asset. In the ordinary sense of cryptocurrencies, we have a large number of units that are interchangeable. For example, 1 ETH in my wallet is exactly the same and equal to 1 ETH in your wallet. But my 1 NFT token represents a unique painting that is not equal to 1 of yours because it’s different paintings with different prices by different artists.
“They cannot be swapped like for like, as no two are alike.” — Decrypt
Every NFT is unique and exists in a single number. Each of them contains identifying information recorded in smart contracts. This information makes each NFT different from the other, and therefore they cannot be replaced by other tokens. Thus, non-fungible tokens are unique and cannot be copied.
The history of NFT tokens started back in 2016 with the Rare Pepe Directory project and tokenized memes about Pepe the Frog. Another famous example is CryptoPunks pixel portraits: there are only 10,000 of them; initially, they were distributed for free, but now they are precious blockchain antiques.
In 2017, the Counterparty project became popular, and the real boom in this area began with CryptoKitties. A breakthrough innovation was the ability to create new NFTs: you just breed two kitties together. The offspring will have different rarity levels, which will determine the market price of this new NFT.
Just after that, many projects started experimenting with NFT breeding mechanics, adding other gameplay elements to it. I’m sure the most interesting is Aavegotchi, which blends the DeFi service Aave mechanics and the tamagotchi toy.
Most non-fungible tokens are created on the Ethereum blockchain in three main standards:
- ERC-721 - the very first standard, each type of token requires a separate smart contract;
- ERC-1155 - the improved standard that allows working with several types of tokens through one smart contract, E.g., such contract can contain both NFT and fungible tokens at the same time;
- ERC-998 is a new evolving standard that allows creating "composable" tokens - a digital asset that "owns" another digital asset. This extension of the ERC-721 standard to enable ERC721 tokens to own other ERC721 tokens and ERC20 tokens. For example, the rights to own a game character in a computer game represent one non-fungible token, and the rights to its equipment represent another. ERC-998 allows you to combine them into one token.
N.b. there are also NFTs standards on the NEO, EOS, TRON, FLOW, Binance, and COSMOS blockchains, except Ethereum.
I think the standardization of NFTs is crucial, and it makes a higher degree of interoperability, allowing such non-fungible tokens to be transferred between different Dapps.
Moreover, thanks to modern blockchain and the Ethereum ecosystem, the problem of liquidity is solved in particular. Digitizing the rights to any type of content is only part of the issue; another important part is the ability to buy/sell it. Modern marketplaces (e.g., Rarible or Sorare) successfully solve such issues.
“Thus, we can view NFTs as liquid intellectual property (“liquid IP”) for all forms of digital content, a marketplace which is measured in trillions of units that is about to be tokenized.” Jake Brukhman, Founder of CoinFund
2020 was a breakthrough year for NFTs: huge trading volume and attention from large companies and celebrities. The main reason for this growth was the maturation of the market itself: the number of projects, the number of celebrities interacting with NFT increased only (remember about Justin Bieber's NFT-avatar in the Genies project?).
Many well-known companies have gone further and created their own NFT tokens. Here are just only a few examples:
- Nike. The company has tokenized its sneaker collection with NFTs. Owners of the tokens can exchange them, sell them on the market and exchange them for real shoes.
- Formula 1. Representatives of the racing series entered into an agreement with video game developer Animoca Brands to create a blockchain game F1 Delta Time, in which users can create a collection of NFT. Tokens, among other things, can be used to confirm ownership of cars and other in-game items.
- Samsung. The company's developers created a cryptocurrency wallet Enjin for their smartphones, which has functionality for storing NFT.
Louis Vuitton, the NBA, Barcelona and Real Madrid, Vodafone and other major companies have also used NFT. A collection of digital Batman pictures as NFTs was sold for about 540 ETH (approximately $200,000 at the time of the sale). On November 30, a collectible NFT card featuring Paris Saint-Germain FC forward Kylian Mbappé was sold for $65,000. There are more and more examples of investors willing to invest thousands of dollars in NFTs.
According to NonFungible, the total sales of the ten most popular NFT-projects amounted to more than $115 million, of which more than $3 million was only during the last seven days. As you can see, the NTF market is still quite small. But much more importantly, its volume is steadily growing.
NFT is a promising sector of the crypto market with hundreds of millions of potential users: sports, pop culture, computer games, and art lovers willing to pay for their hobbies. Most likely, we will see fierce competition for these markets soon.
It is important to note that these spheres are going digital right now. At the same time, they already have a multi-million audience and can radically increase the inflow of new people into the cryptocurrency industry.
On the other hand, these people will face a high entry level threshold and technical difficulties. Ethereum tokens are too dependent on its network, which is not yet suitable for mass use. That's why the same game CryptoKitties switched to the new Flow blockchain in May 2020. However, once Ethereum's upgrade to state 2.0 begins, the scaling problem may gradually resolve.
I think that here’s one more concern, as there’s a huge lack of efficient price-discovery mechanisms for NFTs. NFTs are notoriously difficult assets to price, as they are both non-fungible and low-velocity (they don’t change hands very often). This makes it very difficult to find the price of NFTs. If an NFT only changes hands once every six months, how do you know how much you should pay for it? So, real-time NFT prices are going to be a game-changer.
“Using more efficient price-discovery mechanisms for NFTs gives us a way to track their prices in real time - basically turning them into fungible assets. That enables indices, synthetics, etc and that's just the beginning.” - Nick Emmons, Co-founder/ CEO at Upshot
I also see the fascinating parallel between the DeFi and NFT popularity; and how these technologies blend into NFTFi. So you can farm or fractionalize your NFT, use it as collateral, etc. I'm also sure that huge number of NFTs are going to start to look and act more like fungible tokens over the next couple of years.
“NFTs are not just cat pictures that people trade on blockchains. Today digital art, collectibles, and in-game assets are the most visible use cases for these nifty non-fungibles.” - Jake Brukhman, Founder of CoinFund.The possibilities and potential of NFTs are endless. And the huge mark for me is that Morgan Creek digital co-founders Anthony Pompliano and Jason Williams have reportedly made a “big bet” on digital art NFTs surpassing the physical art market.