NFTs: Past, Present, and Future
While non-fungible tokens (NFTs) have had their roots in the crypto industry for many years, the asset class arguably entered the mainstream consciousness in 2021. This entry was propelled by surging NFT sales and household celebrity names entering the space.
Digital artist Beeple played a significant role in spurring the positive sentiment surrounding the growing asset class as he coordinated an NFT sale for over $69 million. This was not the only event that attracted public interest. Before Burnt Finance, we experimented with burning a physical Banksy artwork so that it would exist solely in NFT form.
NFTs have grown to become a multi-billion dollar asset class. In this piece, we review the impressive growth of the NFT marketplace while also classifying the major components of the current ecosystem. We also consider what the asset class requires to advance further beyond its current state.
A History of NFTs
The earliest versions of what would eventually evolve into NFTs date back to 2012. Assets called colored coins were created on the Bitcoin blockchain as representations of real-world assets such as shares or coupons.
The trend did not enjoy high levels of adoption but led to the birth of collectibles known as the Rare Pepe collection, which went on to be auctioned in New York. Fast forward to 2015, an Ethereum-based game called Etheria pioneered the idea of allowing users to transact unique virtual lands with each plot being represented by an NFT.
However, it was the release of the CryptoPunks collection on the Ethereum blockchain that set the tone for the ERC-721 standard that is now used to create NFTs. CryptoPunks consisted of 10,000 pixelated pieces of randomly generated punk images. These collectibles were initially released for free for anyone to claim. Today, they are among the most coveted sets of NFTs. The most expensive punk sold to date is the “Covid-Alien,” the only one of the 10,000 punks wearing a face mask. The punk was sold for $11.7 million in a Sotheby’s auction.
Another significant milestone in the history of NFTs was the launch of Ethereum-based DApp CryptoKitties. CryptoKitties achieved rapid traction and caused a significant spike in Ethereum gas fees in late 2017. During its peak, the DApp contributed to nearly 12% of the daily transaction volume on the Ethereum blockchain, leading to huge network congestion.
Late 2017 would correspond with the first major proliferation of NFT assets. The interest would die down with the ensuing bearish market conditions but we would not observe another surge until 2021. However, this newfound surge reverberated beyond crypto enthusiasts and attracted enormous mainstream attention. Tech moguls and A-List celebrities scrambled to take part in the growing phenomenon.
Data from NFT tracking website Nonfungible reported that the total value in USD spent in purchasing NFTs until the end of 2020 was a mere $10 million. By mid-May 2021, the value had exceeded $315 million, representing over a thirty-fold increase. The hype did cool down as market conditions changed but NFTs remain a multi-billion dollar segment of the crypto market.
Current NFT Ecosystem
After the latest explosion in NFT interest, the infrastructure surrounding NFT assets has radically expanded. In this section, we cover the major components of the current ecosystem. While the ecosystem has improved considerably compared to previous market cycles, it still remains rudimentary overall with several areas for improvement. In the final section, we will cover some of the critical components of the ecosystem that require further development.
Creators and Collectors
Artists, musicians, photographers, and game developers are part of a wide spectrum of creators in the NFT world. On the other side of the trade is a growing list of collectors which primarily includes fans, gamers, crypto enthusiasts, investors, and other collectors.
We’ve had some big names and artists create and sell NFTs. Twitter CEO Jack Dorsey sold an NFT of the first-ever tweet for $2.9 million. American rock band Kings of Leon generated over $2 million from the sale of an album, and digital artist Mike Winkelmann (a.k.a Beeple) realized $69.3 million from the sale of an NFT art at prominent centralized auction house Christie’s.
Marketplaces
NFTs are bought through marketplaces akin to crypto exchanges. In essence, NFT market places are peer-to-peer in nature so perhaps the most apt comparison for them are now popularized non-custodial decentralized exchanges (DEXs) such as UniSwap.
Given this market structure, NFT marketplaces provide creators with the opportunity to mint and list their assets for sale while any buyer on the platform can bid at an auction or outrightly purchase the listed assets.
Today, the largest NFT marketplaces include OpenSea, Zora, Rarible, Mintbase, SuperRare, Nifty Gateway, MakersPlace, and KnownOrigin. Some new major players have also recently entered the space with Binance and Crypto.com recently launching their respective NFT platforms.
NFT Infrastructure
At this time, NFT marketplaces provide the infrastructure to mint, sell, and buy NFTs. However, the needs of creators and participants in the NFT market go beyond these and has led to the birth of innovative solutions.
New projects such as Metaplex enable anyone to create an NFT storefront on the Solana blockchain using simple plug-and-play tools. At Burnt Finance, we provide tools for anyone to auction NFTs and other digital assets such as synthetics.
Wallets
Wallets allow collectors and creators to store and manage NFTs. The absence of user-friendly wallets was one of the factors that delayed the adoption and proliferation of NFTs.
Recently, a number of solutions have started to show a stronger focus on NFTs which is natural after the explosion in interest. Today, the most popular wallets for NFT users across different blockchain networks include MetaMask, Coinbase Wallet, and Phantom.
What Can Be Improved?
Like most sectors of the wider crypto industry, the NFT ecosystem continues to evolve on a daily basis. The infrastructure built around the marketplace needs to advance in order to better cater to the diverse needs of NFT-focused creators and businesses alike. This section focuses on the areas of the NFT marketplace that are the most ripe for disruption.
User experience and financing: It is still relatively difficult for newcomers to source their desired NFTs, create wallets that support their assets, secure financing for potential NFT initiatives, and execute purchases. The user interface on both wallets and marketplaces have significant room to improve.
Fees: Especially for Ethereum-based projects, the cost of minting and selling NFTs can exceed $100 during periods of peak network demand. Layer-2 solutions and other high-performance blockchains like Solana can solve this particular challenge and help lower costs to less than a dollar.
Decentralization and infrastructure: Much of the infrastructure used to coordinate NFT sales remains centralized. Such centralized infrastructure is unfavorable to smaller-scale players and raises the costs imposed on NFT creators and sellers. We recently reviewed such shortcomings in an article exploring decentralized auctions. Through the development of decentralized protocols with innovative governance mechanisms, the infrastructure necessary for minting and selling NFT assets can be recreated on low-cost, decentralized protocols. Burnt Finance is particularly focused on addressing this challenge.
Content: There is a lack of high-quality content and insights on the NFT marketplace. There are few resources for active market participants to find the most favorable technologies for creating and issuing their NFT assets. We recently launched the Fire Brigade newsletter to address this lack of high-quality information. You can subscribe here for weekly releases.
NFT Marketplace 2.0
The NFT marketplace will continue to expand and innovate beyond its current structure. The latest surge in interest attracted a new wave of players into the ecosystem. While the ecosystem advanced significantly compared to its early years, there remains significant room for further improvement. Burnt Finance and several other upcoming technologies have been hard at work to create a more favorable and decentralized environment for NFT creators and sellers alike.
