Crypto

NFTs: Four Years On and Two Cents on the Space

NFTs: Four Years On and Two Cents on the Space

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.

The Case Against NFTs

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It’s hard to believe that a multi-billion dollar market, which has gotten a massive boost of credibility, could have significant downsides. However, there are plenty of problems and controversies afflicting the asset class.

Perhaps the most important one is the perceived environmental impacts of NFTs. Most of these arguments are made in bad faith, by people who misunderstand how blockchains work. However, many of the most popular NFT collections operate on the Ethereum blockchain – which is a highly-consumptive chain. Ethereum requires energy consumption on the scale of small industrial countries. As a result, many people relate Ethereum’s outsized impact as an argument against NFTs.

However, there are some even more foundational arguments that go to the heart of why NFTs often perceived by some as bad. One of the boldest arguments is that NFTs are grifty. This argument predominately stems from a disdain for “designer culture” and rich people having more money than sense. In the eyes of NFT skeptics, NFTs are just another nonsense thing to spend money on – they represent rampant over-commodification of ideas and art, and often create value for anybody else but the project’s creators.

These criticisms can be understood. After all, many NFT projects will fail. They are not designed to last, nor to be high art. Many are designed as a speculative asset for investors – almost nobody is buying a collection or NFT because “it looks cool”, nor for the artistic value of it (generative art is optimized for returns.) They’re buying it because they want to make a statement or a profit. That makes NFTs very high risk. For many, it’s a sufficient enough deterrent to stay away. 

To make matters worse, some people have capitalized on the NFT gold rush by stealing other people’s work and selling it as an NFT. This has become fairly commonplace on marketplaces – and given the relatively permanent nature of the blockchain, stolen assets might just exist on-chain or in servers in perpetuity. It’s disheartening to see. But more importantly, it has left many artists and creators with a bad taste in their mouths – rampant theft has discredited many elements of the NFT ecosystem.

There are applications besides generative and stolen art – but environmental concerns and risk are symptoms of many of the other applications. However, perhaps the strongest criticism against NFTs has nothing to do with the aforementioned. Maybe the strongest application is that NFTs don’t solve any problems. Literally, nobody sane is saying: “Wow, what if I could buy a token representing a piece of art generated in part by a computer for hundreds of thousands of dollars on a public database?” There is nothing implicitly or explicitly valuable about NFTs – or their respective applications. The value is almost entirely decided by a limited, potentially illiquid market. 

However, in fairness to the NFT ecosystem – the value of everything is decided by the market; all value is arbitrary, and we construct the reality we want to live in. And to offer additional credit, many of these issues are being worked on by people who care deeply about the future of NFTs, crypto, blockchain, and the emergent industry of web3.

Where Do We Go Now?

Maybe we can learn to balance the good with the bad – the NFT space isn’t perfect, but nothing really is. And what we think is valuable doesn’t really matter. Ultimately, the market – and its many participants – decides what is valuable.

As we’re rolling into the fifth year of NFTs, it’s hard to know what to expect. However, it’s fairly likely that NFTs will not be going anywhere. Last year, major crypto exchanges such as crypto.com, Binance, and FTX all leaned into the asset class by creating marketplaces to rival those of platforms such as OpenSea and LooksRare. In 2022, Coinbase will look to launch its own, allowing users to purchase digital collectibles with both crypto or credit cards.

Generative collections are likely to continue cropping up on Ethereum, and increasingly on other low-fee chains such as Solana, Cardano, VeChain, Polygon, and the like. And yes, other applications will continue to emerge – especially for blockchain gaming, artist solutions, and memberships.

However, NFTs will have to clean up their act if they are to stay relevant and valuable. The ecosystem’s most ardent supporters and contributors will have to find ways to resolve the shortcomings of the space – and speak to some of its least desirable components. Some readers might take us for dumb Boomers given these takes, but public perception is perhaps the most important factor to ensuring the continued success and growth of the NFT ecosystem. Bad press is not going to help the asset class grow – so readers should learn to see the supportive and skeptical take as-synthesized takeaways from a vocal public.

The takeaway here is: NFTs are here to stay, but they’re as wild west as they come. Invest in these assets cautiously.

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