NFT Sector Snapshot

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Shelly Palmer

Sales of NFTs have topped $2.5 billion since January 2021, and more than $2 billion has been invested in the sector this year. Here’s a quick overview of the NFT projects and transactions that have my attention, and a look at some emerging NFT trends.

NFTs Defined

NFTs (non-fungible tokens) are unique digital assets built on blockchains that support smart contracts such as Ethereum, Polkadot, Solana, etc. To learn more about the technology and get a handle on the jargon, please visit our blockchain resource page.

NFTs are extremely simple to create. They have three important attributes: (1) They can represent any type of digital file, including websites, art, music, signatures, certificates, diplomas, patents, real estate, and even physical properties in the real world. (2) Because NFTs are smart contracts, future actions (such as distribution of funds) can be programmed to happen automatically when terms and conditions are met. (3) Because they are written to a blockchain, proof of ownership is (theoretically) guaranteed.

NFT Marketplace

Most NFT transactions take place in NFT marketplaces such as OpenSea and Rarible. The biggest sales tend to make headlines, and while they are not the norm, there have been some very big sales. But more significantly, the trend is toward focused small sales. For example, in early March 2021, the band Kings of Leon generated over $2 million in revenue selling $50 NFTs of their “When You See Yourself” album. If you’re interested in tracking NFT sales, NonFungible.com does a great job of aggregating NFT market data.

NFT Investments

The NFT space has attracted a fair amount of investment dollars this year. OpenSea, the most popular NFT marketplace, raised $23 million in a round led by a16z, then raised an additional $100 million.

Dapper Labs (Crypto Kitties, NBA Top Shot) raised $305 million including investments from Michael Jordan and Will Smith. NBA Top Shot has over 1 million users and was, until recently, the most popular NFT platform. Dapper Labs also raised $65 million in a round led by Mary Meeker’s Bond Capital to fund its NFT avatar platform Genies.

OneOf, a green NFT platform for musicians built on the Tezos blockchain, raised $63 million. Its first set of collectible releases is said to include music by the late Whitney Houston, Doja Cat, Quincy Jones, Jacob Collier, and G-Eazy. So far, there’s just a splash page.

NFT gaming company Animoca Brands (The Sandbox, F1 Delta Time) raised $88,888,888 million at a $1 billion valuation. Chairman and co-founder Yat Sui said the funding amount was “deliberate,” given that the number eight signifies wealth and success in Chinese culture.

By far, the largest NFT funding round of the year was by fantasy soccer NFT platform Sorare. The company raised $532 million on a $3.8 billion valuation.

The NFT Metaworld Trend

A few weeks back, Mark Zuckerberg said that Facebook would ultimately transform into a metaverse company. He may need to rethink that strategy and just acquire one – except you can’t really acquire a decentralized application, because it’s… decentralized.

The Sandbox (Animoca Brands) is an open, NFT metaverse that lets you create, play, and monetize your creations.

Decentraland is run by a DAO, “Decentralized Autonomous Organization.” It is a fully decentralized virtual world and people are already spending millions of fiat dollars to purchase virtual real estate in the Decentraland metaverse. There are all kinds of fun things to see and do in Decentraland (including virtual casinos).

Conventional wisdom says that Decentraland’s growth has been limited by Ethereum gas fees and relatively poor tokenomics of mana (its crypto currency). In April, Decentraland launched on Polygon and growth has picked up. It may be the “canary in the coal mine” for NFT metaverses.

To that point, Axie Infinity, an NFT game that is similar to Pokémon, with players collecting, training, feeding, buying, and trading “axies,” is so profitable for its players that some of them have made it their full-time jobs. It is now the most popular Dapp with over 1 million DAU.

NFTs for Decentralized Media

Theta is a decentralized streaming video platform. For all intents and purposes, Theta is a decentralized version of YouTube. Google, Sony, Samsung, Binance, and other huge players are acting as enterprise validator nodes. But even with support from some of the biggest players in the video and crypto space, Theta is struggling.

Livepeer, on the other hand, is growing fast. It’s built on the Ethereum blockchain and the developer experience is very good. Time will tell.

Audius is a decentralized streaming audio platform. For all intents and purposes, Audius is a decentralized version of Spotify. Audius has over 5 million DAU and it offers music from tens of thousands of artists. However, its long-term success may be limited by its tokenomics, which are, I’m sorry to say, lacking.

Aave, one of the most successful DeFi protocols, is planning to launch a decentralized version of Twitter later this year. It will include tokenomic incentives for users and will be completely decentralized. As an aside, Reddit and Twitter are doing interesting work around incentivizing users with crypto.

Downsides

NFTs are confusing regulators and politicians. It is unclear whether an NFT is a security (which would be regulated in the United States by the SEC just like a stock) or some other kind of asset. It is unclear how NFTs should be taxed. Because NFTs are global, every country in the world is involved. Which rules will apply? The country of origin (where the NFT was originally minted)? These are very early days and no one knows how the regulatory issues will ultimately play out. However, in the United States, the new infrastructure bill specifically calls out NFTs as an asset class and makes them subject to federal capital gains taxes.

Anti-money-laundering watchdog FATF, the Financial Action Task Force, is targeting DeFi, NFTs, and Crypto (writ large). This is a very big threat to the entire sector.

Then there’s climate mythology. Are NFTs using too much electricity? Is crypto bad for the environment? The short answer is that it is no worse than video games or gold mining or a thousand other human activities. That said, when you’re explaining, you’re losing. This myth won’t die.

Intellectual property (IP) rights are another sticking point. Copyright laws vary wildly from country to country. Some countries do not have any restrictions or do not enforce them. This gets very complicated very quickly. For example, if you purchase an NFT that includes a song or video created in the United States, you will most likely enjoy “fair use” rights to the work, meaning you’ll have the same rights to use and enjoy the work as if you purchased a download or bought a vinyl record or DVD. You can’t use it for commercial purposes, but you can certainly sell your record or video collection at a flea market or swap meet. Copyright laws are hard to explain to professionals. When you purchase an NFT, there is no international standard that describes what you have actually purchased or your rights to use it.

Moving Forward

This is an exciting time for blockchain, cryptocurrency, NFTs, smart contracts, and decentralized finance with an incredible range of projects across every sector. I’d welcome the opportunity to learn about the projects you’re working on.

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