October 05, 2022
2021 proved to be a breakout year for non-fungible tokens, or NFTs for short. In fact, it’s hard to say any other asset class had as great of a year as digital blockchain collectibles. That might be new news to you if you’ve never heard of them – but although crypto, stocks, and alternatives had a great year, NFTs medalled for the first time in the mainstream. In other words, it was the NFT ecosystem’s world – and we were just living in it.
As the name implies, non-fungible tokens are tokens that represent ownership over unique digital collectibles on a blockchain. The first (unofficial) NFT collection, the CryptoPunks, are credited with creating the foundational idea of NFTs in June 2017. Since then, a number of other names have cemented their permanence in the ecosystem – such as NBA Top Shot, The Bored Ape Yacht Club, CryptoKitties, and Axie Infinity.
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However, there’s more to NFTs than just those five names. To borrow a Titanic analogy, these projects are the tip of the iceberg. They’re just sticking out of the water – and that’s why you might recognize them by name. However, below the surface, the iceberg is much larger… and that’s the rest of the NFT ecosystem.
What will come of NFTs in 2022 is hard to discern, especially given the state of the crypto markets and a discernible amount of controversy around the emergent asset class. However, as NFTs (as an asset class) wrap up their fourth year, now is an excellent time to reflect on the state of the ecosystem, its prospects, where it has been, and where it’s going.
The Abbreviated History of NFTs
If you ask most reasonable blockchain maxis where NFTs got their start, they’ll probably point to the CryptoPunks. The Punks were a collection of uniquely generated, pixelated characters on the Ethereum blockchain. The 10,000 CryptoPunks were free for the taking when they launched in June 2017. However, since then, the Punks have become highly valuable – some have sold for north of $1 million. Their cultural significance can not be understated with respect to the blockchain, crypto, and NFT space – and that’s the main reason for their value.
In effect, the Punks laid the foundation – which was built upon by CryptoKitties, a blockchain game developed by Dapper Labs and launched on Nov. 28, 2017. The game allowed users to collect and breed virtual cats, which were represented by NFTs. The game was a smash hit, but it also marked the creation of the ERC-721 token – this would become the de facto framework for all NFTs on the Ethereum blockchain, and consequently, an inspiration for plagiarism on other blockchain networks.
Since the days of the Punks and Kitties, NFTs have been demonstrated for a variety of use cases. They’ve also moved beyond Ethereum, with many collections finding footing on emergent blockchains such as Polygon, Solana, and Cardano. However, NFTs have been most closely associated with so-called profile pic (PFP) collections. PFP collections take after the Punks, but instead of giving them away for free, the teams behind modern collections usually sell them. Many people buy NFTs because of a desire to sell them – however, they’ve also become a distinguishing feature for high-value people in blockchain circles.
Ultimately, the NFT space draws a lot of mixed reactions – some people are intrigued, others are disgusted; some see opportunity, but others see grift.
Now that you have some context – it might help to elaborate on the cases for and against NFTs.
The Case for NFTs
The NFT space got a huge vote of confidence from the mainstream this year – and it’s unlikely it will erase that anytime soon. In fact, the NFT marketplace has gotten a real vote of confidence this year, namely in the way that it has moved beyond blockchain maximalists and into mainstream, celebrity adoption.
High-value collections such as the CryptoPunks and Bored Ape Yacht Club now see their cheapest constituents (NFTs in the collection) retailing for hundreds of thousands of dollars. Owning one of these NFTs has always attracted clout in the blockchain space, but the mainstream is increasingly aware of the exclusivity – and priciness – of these NFTs. In short, NFTs have become a status symbol; almost like designer clothes, rare items from popular video games, or expensive cars and houses. All of these things are arbitrary luxuries – but people are obsessed with flexing their social and financial wealth.
However, outside the most valuable collections, there are a lot of other emergent use-cases for NFTs. For example, blockchain games are increasingly using NFTs to represent ownership over in-game items. The CryptoKitties were the proverbial first-movers on blockchain gaming, but another blockchain game called Axie Infinity exploded in popularity this year – and the total value of its in-game assets now numbers in the billions.
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NFTs have also been used to represent ownership over digital property – in virtual blockchain-based game Decentraland, users can buy and develop digital real estate called LAND. LAND tiles now retail for tens of thousands of dollars in the game. And users can also buy blockchain-based domains to replace their long-winded crypto addresses with a .eth, .sol, or .crypto address.
And, as we’ve already said, that’s just the tip of the iceberg – increasingly emergent are NFTs applications beyond generative collections, blockchain games, and digital property. Artists are already selling NFTs of their art, effectively turning the blockchain into their own version of Sotheby’s. Some even sell NFTs representing ownership over their art or creations – which might even pay royalties. Meanwhile, others are selling subscriptions to their newsletters, websites, clubs, or decentralized groups (DAOs) as NFTs. It’s probably only a matter of time until NFTs are used to represent ownership over real-world assets, too.
With all of these great things going for them, it’s hard to see the downside of this multi-billion dollar asset class. However, there are some shortcomings.