Non-fungible tokens (NFTs)

INTRODUCTION

NFTs have been likened to “memorabilia” or “digital trading cards” and are “unique, digital items with blockchain-managed ownership.” Examples include collectibles, game items, digital art, event tickets, domain names, and even ownership records for physical assets, which vary in their tradeability, liquidity, and interoperability. Blockchains provide a coordination layer for digital assets, giving users ownership and management permission. Fungible is “defined as able to replace or be replaced by another identical item”, and is subjective usually as compared to other items in its class. The particular chair you sit on is non-fungible as there is no other identical chair – however a $5 currency bill is fungible because it is always worth $5 (Open Sea). Because these items are unique, they can create a sense of FOMO (fear of missing out) as NFTs create a new kind of scarcity among digital goods where there was none (NYT).

The concept of ownership has not always been the same for physical and digital objects. Digital ownership of objects has not been transferable or tradeable across platforms and users (an item bought in Fortnite cannot be taken to Roblox). The goal for NFTs in Web 3.0 and the Metaverse is to make them according to the principles below so that they can become part of the “single-wallet user experience” (Open Sea). The vision is also for items to be able to transfer from the digital world to the physical world as well, like with PacSun’s for commercial benefits or FunkyMonkey’s for charitable purposes (Grayscale).

• Interoperability: “Non-fungible token standards allow non-fungible tokens to move easily across multiple ecosystems. When a developer launches a new NFT project, these NFTs are immediately viewable inside dozens of different wallet providers, tradeable on marketplaces, and, most recently, displayable inside of virtual worlds. This is possible because open standards provide a clear, consistent, reliable, and permissioned API for reading and writing data.”
• Tradeability: “For game developers specifically, tradeability of assets represents a transition from a closed economy to an open, free-market economy.”
• Liquidity: Instant tradeability leads to higher liquidity.
• Immutability and provable scarcity: Developers can hard code a limit on the number that can be produced and can hard code in restrictions on changing NFTs.

Standards are part of what makes non-fungible tokens powerful. They give developers the guarantee that assets will behave in a specific way and describe exactly how to interact with the basic functionality of the assets (Open Sea).

CURRENT USE CASES

Though initially most popular in the gaming industry (Epic Games made $2.4 billion in revenue selling costumes in their free-to-play game Fortnite in 2018 alone), NFTs have been adopted for a variety of creative uses in commerce, nonprofits, science, museums, pornography, and even national defense. Though the typical use cases are currently the most lucrative as they enjoy the most widespread adoption, there is considerable potential as others adopt NFTs for creative purposes. The challenge to move them out of the gaming market, will be to make buying NFTs as common or easy as “buying a cup of coffee” so that even non-native users willingly adopt them.

RISKS AND MITIGANTS

NFTS currently don’t enjoy interoperability as proposed in the Metaverse and Web 3.0. As such one challenge is that NFTS are often stored on centralized servers- so if a host disappears, so does the NFT. Decentralized hosting on IPFS is one proposed solution to secure long-term viability. Additionally, NFTs have been vulnerable to hacking with $1.7 stolen in a phishing attack on Open Sea NFT trading platform, and $2.2 million stolen from NFT art collectors. In these cases the difficulty is recovering stolen funds without a regulatory authority, leaving recovery to Open Sea itself. Balancing the risk with security will involve looking at how NFTs are stored (in centralized servers or decentralized blockchain) as well as the contracts which govern NFTs.

FUTURE OUTLOOK

NFTs are facing considerable hype with commercialization and FOMO, and for cryptocurrency investors “Many acknowledged an unsustainable momentum behind NFTs as they pull in an estimated $2 billion per month. But investors are still bullish on the underlying technology.” So while NFTs may continue to enjoy profitability in gaming, it remains to be seen whether FOMO or practicality will make them more widely adoptable in other areas, especially among non-natives. In the Metaverse in particular, a foundational human principle which drives commerce is the need for ownership, where the digital world mirrors the physical world. Currently, NFT ownership among investors is highest among males ages 18-44. Here are some quotes about future use:

• Areas for further exploration outside of the “bubble”: new use cases around identity, community incentives, start-up funding, entertainment and fashion. (CNBC)
• Certainly there is a lot of hype… Most people believe there’s some version of a bubble happening. But most of us who are in the space believe that whether it goes up or down it is a new thing that’s here to stay in some version of itself. (CNBC)
• One of the biggest opportunities right now is around user-friendly interfaces and experiences for the everyday person that make NFTs approachable, valuable, and economical,” Judd said. “Once the everyday person feels as comfortable purchasing an NFT as they do buying a coffee, the rest of Web3 will benefit. (CNBC)

Technological development still needed to enable the single wallet user experience, including: Web 2.0 traditional finance payment rails, virtual currencies and virtual assets, Web 3.0 crypto, NFTs and digital assets, digital identity verifiable credentials, know your customer (KYC)/anti-money laundering (AML) compliance keys, and reputation points, multiple aliases to preserve privacy and enable digital freedom, creation of cross-border and cross-metaverse foreign exchange and liquidity solutions, improved user experience for mainstream adoptions of non-crypto/Web 3.0 natives. (JP Morgan)

MARKET STATS, PROJECTIONS, AND QUOTES

• Epic Games made $2.4 billion in revenue selling costumes in their free-to-play game Fortnite in 2018 alone, the market for event tickets is projected to reach $68 billion in 2025, and the market for domain names continues to see solid growth. (Open Sea)
• The market for non-fungible tokens is still quite small, and somewhat harder to measure than the cryptocurrency market given the lack of spot prices for assets. For the purpose of this analysis, we focus on secondary trading volume (i.e., peer to peer sales of non-fungible tokens) as an indicator of market size. Using this metric, we estimate the current secondary market to be roughly $2 – $3 million USD in volume per month. (Open Sea)
• Given its earliness, probably the best way to measure the growth of the market is to look at a leading indicator: developer interest in the space. (Open Sea)
• During Q3 of 2021, total crypto fundraising totaled $8.2 billion with the Web 3.0 & NFT segment comprising $1.8 billion. Within the Web 3.0 & NFT sector, blockchain based gaming attracted ~$1 billion in funding across 14 deals, ranking it the top subsector within the category. (Grayscale)
• The metaverse offers opportunities to transact ($54B annually spent on virtual goods), socialize (60B messages sent daily on Roblox), create, own ($41B NFT Market Cap), experience (200 strategic partnerships to date). (JP Morgan)
• Virtual wealth creation becoming bigger. Enabled by crypto, NFT’s, and blockchain.(Grayscale)
• Walmart recently filed several trademarks that imply the company’s intentions to create offerings based on cryptocurrency, NFTs, and the metaverse. (Yahoo)
• NFT will change the world of investment over the next 10 years as it will be linked to the metaverse which will serve as a key infrastructure. (Shaping Tomorrow)
• Valued at $13 billion in a recent funding round, OpenSea has become one of the most valuable companies of the NFT boom, providing a simple interface for users to list, browse, and bid on tokens without interacting directly with the blockchain. That success has come with significant security issues, as the company has struggled with attacks that leveraged old contracts or poisoned tokens to steal users’ valuable holdings. (The Verge)
• This new paradigm [of Web 3.0] allows users to own their digital assets as Non-Fungible Tokens (NFTs), trade them with others in the game, and carry them to other digital experiences, creating an entirely new free-market internet-native economy that can be monetized in the physical world. (Grayscale)

FURTHER READING AND SOURCES

• FunkyMonkeys. Available at https://funkymonkeys.io/. Accessed March 2022.
• Open Sea. ‘Discover, collect, and sell extraordinary NFTs’. Available at https://opensea.io/ Accessed March 2022.
• Devin Finzer, January 2020. ‘The Non-Fungible Token Bible.’ Available at: https://opensea.io/blog/guides/non-fungible-tokens/. Accessed March 2022.
• Russell Brandom, February 2022. ‘$1.7 million in NFTs stolen in apparent phishing attack on OpenSea users.’ Available at: https://www.theverge.com/2022/2/20/22943228/opensea-phishing-hack-smart-contract-bug-stolen-nft. Accessed March 2022.
• Tony Tran, January 2022. ‘HACKERS STEAL $2.2 MILLION WORTH OF NFTS FROM ART COLLECTOR.’ Available: https://futurism.com/the-byte/hackers-steal-nfts-art-collector. Accessed March 2022.
• Spencer Bokat-Lindell, February 2022. ‘Is the Web3 Gold Rush the Beginning of a New Internet or a Scam?’ Available at: https://www.nytimes.com/2022/02/10/opinion/nft-crypto-bitcoin-blockchain.html. Accessed March 2022.
• 60 Minutes, June 2021. ‘NFTS and the Metaverse.’ Available at: https://www.youtube.com/watch?v=ANO29CzQXUA. Accessed March 2022.
• Kabir Jhala, February 2021. ‘Is this Video of Petr Davydtchenko Devouring a Live Bat the First Performance Art NFT?’ Available at: https://www.theartnewspaper.com/2021/02/26/is-this-video-of-petr-davydtchenko-devouring-a-live-bat-the-first-performance-art-nft. Accessed March 2022.
• NonFungible. Available at https://nonfungible.com/market/history. Accessed March 2022.
• Hamish Barnes, October 2021. ’10 Tips for Avoiding Scams and Staying Safe on the Decentralized Web.’ Available at: https://opensea.io/blog/safety-security/10-tips-for-avoiding-scams-and-staying-safe-on-the-decentralized-web/. Accessed March 2022.
• Joseph Young, March 2021. ‘NFT Market Rages on.’ Available at: https://www.forbes.com/sites/youngjoseph/2021/03/29/nft-market-rages-on-nfts-market-cap-grow-1785-in-2021-as-demand-explodes/?sh=6cb4bef7fdcf. Accessed March 2022.
• Nicola Jones, June 2021. ‘How Scientists are Embracing NFTs.’ Available at: https://www.nature.com/articles/d41586-021-01642-3. Accessed March 2022.
• Raynor Best, September 2021. ‘NFT Users in the U.S. as of March 2021.’ Available at: https://www.statista.com/statistics/1265821/us-nft-user-demographics/. Accessed March 2022.
• Ad Age Staff, March 2022. “How Brands are Using NFTs.’ Available at: https://adage.com/article/digital-marketing-ad-tech-news/how-brands-are-using-nfts-continually-updated-list/2376086. Accessed March 2022.
• Cuseum, November 2021. ‘How 21 Museums and Cultural Organizations Engaged with NFTs in 2021.’ Available at: https://cuseum.com/blog/2021/11/16/how-21-museums-amp-cultural-organizations-engaged-with-nfts-in-2021. Accessed March 2022.
• WhiteRabbit1111, August 2021. ‘The Origin Assets of the Digital Antiquities Market.’ Available at: https://whiterabbit1111.medium.com/the-origin-digital-antiquities-market-nfts-1ea9b69c03f9. Accessed March 2022.
• Kate Rooney, December 2021. ‘Crypto Investors see Looming NFT Bubble.’ Available at: https://www.cnbc.com/2021/12/03/crypto-investors-see-an-nft-bubble-but-tout-power-of-underlying-tech.html. Accessed March 2022.
• Roger Cheng. March 15, 2022. How Crypto and NFTs Are Funding Ukraine’s Resistance Against Russia. Available at: https://www.cnet.com/news/how-crypto-nfts-are-funding-ukraines-resistance-against-russia/. Accessed March 2022.
• PR Newswire, March 2022. Global Metaverse Market Report 2022-2026: NFTs and Online Events are Booming Creating a Universe of Opportunities for the Metaverse and Related Technologies. Available at https://www.prnewswire.com/news-releases/global-metaverse-market-report-2022-2026-nfts-and-online-events-are-booming-creating-a-universe-of-opportunities-for-the-metaverse-and-related-technologies-301494998.html. Accessed March 2022.
• Ray Parisi, February 2022. ‘Playboy wants to build a new Mansion in the Metaverse.’ Available at: https://www.cnbc.com/2022/02/11/playboy-plans-to-join-the-metaverse.html. Accessed March 2022.
• Cision PR Newswire, January 31, 2022. Pacsun Unleashes Pac Mall Rats, First Unique NFT Series. Available at: https://www.prnewswire.com/news-releases/pacsun-unleashes-pac-mall-rats-first-unique-nft-series-301471051.html. Accessed March 2022.
• Spencer Bokat-Lindell, February 2022. ‘Is the Web3 Gold Rush the Beginning of a New Internet or a Scam?’ Available at: https://www.nytimes.com/2022/02/10/opinion/nft-crypto-bitcoin-blockchain.html. Accessed March 2022.
• Christine Moy and Adit Gadgil, February 2022. ‘Opportunities in the Metaverse.’ Available at: https://www.jpmorgan.com/content/dam/jpm/treasury-services/documents/opportunities-in-the-metaverse.pdf?fbclid=IwAR0vRve80UmnjOvHuTQgoggOGk-Def22KxdVjwWlllqbVnMfsxLVf8CUpLI.  Accessed March 2022.
• David Grider, November 2021. ‘The Metaverse.’ Available at: https://grayscale.com/wp-content/uploads/2021/11/Grayscale_Metaverse_Report_Nov2021.pdf?fbclid=IwAR1-5ll8pVRHx6rsS9xA7kS2fJfaFL7vbcYz66ZnpJNJ-QaDRRDwDneYUz0. Accessed March 2022.
• Yahoo Finance, January 2022. ‘Walmart is Preparing to Enter the Metaverse.’ Available at: https://finance.yahoo.com/video/walmart-preparing-enter-metaverse-163800997.html. Accessed March 2022.

• Shaping Tomorrow. Available at https://www.shapingtomorrow.com/forecastsearch?mitsu=metaverse&itemtypeid=9&searchformtrigger=true. Accessed March 2022.