NFTs or non-fungible tokens, shot to prominence in 2021. Sales for the tokens crossed billions of dollars, and celebrities, artists, investors, and finance enthusiasts were all attracted to the potential they offered. However, now that the hype and speculation are over, the industry is at a point of correction.
We have been following the NFT craze since the past few years, and can provide the neutral stance needed to uncover the future potential of the digital tokens and the current state of affairs.
What are NFTs?
An NFT is a non-fungible token that another item cannot easily replace. Anything that is one of a kind is known to be non-fungible in nature. Digital art, collectibles, videos, music, and other identical items, are grouped as NFTs.
The NFT could be used as a means to certify ownership over literally anything. Common things from memes, drawings, and digital arts are being sold as NFTs.
After the initial peak in 2021, NFTs failed to register themselves or sustain meteoric growth. Daily sales volume has dropped by 90 percent since January 2022 according to NFT statistics, and the future of NFTs looks bleak for digital art and finance aficionados.
In this article, we will take a closer look at the current state of NFTs and the future prospects they hold for the time to come. In short, we will find out whether NFTs really are dead.
Overview of the NFT Market
From what we know, consumer interest in NFTs gained momentum in 2017 when Ethereum introduced token standards for developers. Token standards were introduced within smart contracts, allowing developers to initiate and deploy tokens linked to their art. Software developers Matt Hall and John Watkinson started their own NFT line and introduced Crypto Punks.
The NFT craze started peaking in 2019. We think it all started with Canadian singer Grimes pocketing millions for simple digital art. By 2021 Grimes had made over $6 million in NFT sales. Following this ‘Nyan Cat', an internet meme dating back to 2011, was sold for over $600,000.
NFT gaming and metaverse soon picked up and introduced Decentraland, a virtual VR platform on the Ethereum blocks. The platform allowed players to introduce collector items and pick them up while playing games.
The stage was now set for a mainstream NFT takeover, which eventually happened in 2021. The fact is, NFTs were being sold like crazy during 2021. We remember the craze surrounding NFTs then, those who knew about NFTs wanted to buy them, and those who didn’t, wanted to learn more.
2021 – The Year of NFTs
As per our understanding, one of the biggest catalysts behind this change was the growth in the art market. Great art auction houses such as Sotheby's and Christie's took their art auctions to the digital world.
We believe the breaking point was when Christie's generated a $69 million sale from NFTs, creating a ripple in the market. Other digital art creators jumped in and the tokens were being traded B2B, B2C, and C2C.
The final surge came from Facebook's decision to rebrand itself as Meta and move into the metaverse. The metaverse led to a surge in digital tokens, with NFTs gladly receiving all the interest.
We studied NFT trading trends and found out that 2022 January saw a peak in NFT transactions. OpenSea — the largest NFT marketplace — generated over $4.87 billion in sales during the month.
Our analysis of the same trends now reveal that sales have died down to a little under $300 million this first quarter of 2023. The cumulative sales for the first three months of 2023 were 7 times less than the sales achieved in January 2022 alone.
Challenges and Criticism of NFTs
As is the case with most investments, the lull surrounding NFTs has led to a new set of challenges and criticism from across the board.
Lack of Regulation and Potential for Fraud
The lack of price regulation and the potential for fraud pose a significant challenge to the NFT market. Having studied NFT trends and the price caps for different NFTs, we believe that price floors are more regulated than caps.
Digital creators and resellers fear price floors being breached more than price caps. Once the price floor is breached, the value of an NFT falls to extreme lows. We notice similar price floors for collections including the leading Bored Apes series.
Also, the NFT market has no regulations concerning what can and cannot sell. While we do believe that aesthetics and trends determine the price for art, NFTs have a poor price mechanism, making it hard to understand the pricing and utility.
Environmental Concerns Related to NFTs and Blockchain Technology
To add to the lack of regulations, environmental concerns related to Non-Fungible Tokens (NFTs) and blockchain technology have become increasingly prominent and are one of the greatest challenges facing NFTs today.
After studying the literature concerning the problems of NFTs, we believe environmental concerns stem from the vast amounts of energy the underlying blockchain networks consume. These concerns are directed towards networks that rely on Proof of Work (PoW) consensus mechanisms, such as Ethereum and Bitcoin.
PoW requires miners to solve complex mathematical problems to validate transactions and add new blocks to the chain, a process that demands substantial computational power and electricity.
Our analysis of reports by environmental watchdogs revealed that at least 4 trees are needed to offset the carbon emissions produced by one single NFT.
As NFTs are predominantly created, bought, and sold on the Ethereum blockchain, their proliferation further amplifies the environmental impact. Critics argue that the growing demand for NFTs and the expansion of blockchain technology exacerbate existing environmental issues — necessitating the exploration of more sustainable alternatives.
Criticisms of the Market’s Speculative Nature
We understand that the cryptocurrency market in general is based more on speculation than actual reasoning. Even then, the speculative nature of the cryptocurrency market in general and NFTs in specific is a constant criticism facing the latter.
Including our experience with the sudden decrease in NBA’s NFT, there have been instances where NFTs have gained or lost value based on unnecessary speculation in the market. While NFTs thrived on their volatility and rapid gains, investors are now having a hard time digesting the rapid losses that come as part of the equation as well.
The Impact of Celebrity and Influencer Endorsements on NFT Popularity
As mentioned earlier, 2021 saw a massive spike in celebrity interest in NFTs. From Jimmy Fallon to Gwyneth Paltrow, Paris Hilton, Justin Bieber, and Madonna — many A-listers promoted and supported NFTs.
However, since lady luck stopped shining on NFTs, we understand many celebrities have either backed out of NFT affiliations or liquidated their investments. In fact, there have been lawsuits where celebrities have been called to defend their unprecedented interest in NFTs during 2021 and whether the promotions were manipulative in nature.
Market Saturation and Oversaturation of Low-Quality NFTs
Lastly, one of the primary challenges facing the NFTs market is the oversupply of low-quality NFTs. Naturally, as NFTs grew in popularity, there was a surge in new tokens and art pieces. The overflow of NFTs eventually oversaturated the market and dwindled buyer interest.
We studied most of the new projects in the NFT market and found that they lack creativity, utility, and originality. The emergence of low-quality NFTs can kill buyer confidence and also kill the price parable concerning rare and meaningful NFTs.
The Current State of NFTs
Not many NFTs have been able to withstand the storm of the first two quarters of 2023, and financial activity is at record lows after hitting a peak in January 2022.
Examination of recent trends and developments in the NFT market
Based on our reading of a research by analytics firm Nansen, one in three NFT collections have essentially expired. We believe the rest of the operational NFTs are trading well below the amount it costs miners to mint these tokens. The stats by Nansen were based on 8,500 collections with almost 19.35 million NFTs on the Ethereum blockchain.
Comparing the Current State of NFTs with ICOs
From our understanding, the current state of NFTs can be compared to the ICO bust of 2018. Initial Coin Offerings were quite the rage in 2017 when investors would throng exchanges to get their hands on ICOs by new blockchain-based cryptos. However, ICOs soon became useless when regulators and experts warned that they aren’t much more than unregistered securities.
The plunge of NFTs has followed the same trajectory, with interest dwindling within a year's time. While 2021 and the first half of 2022 saw heightened activity, 2023 has signaled the complete opposite.
During our research of numbers on OpenSea — the biggest NFT marketplace — we found that trading plunged by over 66 percent during the month of March 2023.
Case studies of successful and unsuccessful NFT projects
After taking a closer look at the current trading NFTs, we found that examples of NFT collections performing poorly include EL by Reza Milani and the Baby Ballers project by NBA player John Wall.
EL by Reza Milani offers a collection of 1,456 people and has had no trading yet. Additionally, Baby Ballers has fallen in popularity due to claims that the caricatures were duplicated from video games.
However, some interest has been shown in the Bored Apes collection. Madonna recently made a purchase of $500,000 from the Bored Apes collection in 2023, triggering some related market activity and creating headlines.
Future Prospects and Potential
Although the current state of NFTs is bleak, there are positive expectations for the future prospects and potential of NFTs.
Exploration of potential use cases beyond art and collectibles
While NFTs have gained significant popularity in the art and collectibles sector, their potential extends far beyond these domains.
We can think of a use case in the realm of digital identity and ownership. NFTs can be used to represent unique digital identities, allowing for secure and verifiable ownership of digital assets such as domain names, social media handles, and even personal data.
Adoption of NFT technology in various industries
Another promising area is the tokenization of real-world assets. NFTs can be utilized to represent physical assets such as real estate, luxury goods, and even intellectual property.
We also believe the gaming industry can leverage NFTs to enable true ownership of in-game items, allowing players to trade and sell their digital assets freely. This can create new revenue streams for game developers and foster a thriving digital economy within gaming ecosystems.
According to our future predictions the music industry can also benefit from NFTs by allowing artists to tokenize their work, giving them greater control over their creations' distribution and monetization. This can lead to fairer compensation for artists and a more direct connection with their fans.
How the Market Might Evolve and Mature
As the NFT market continues to grow and mature, we can expect increased standardization and interoperability between different platforms and blockchains. This will enable seamless transactions and collaborations across various ecosystems, further fueling the growth of the NFT market.
Moreover, as more industries adopt NFT technology, the market is likely to diversify, with new asset classes and use cases emerging. Our emphasis on diversification will lead to a more robust and stable market, reducing the risks associated with speculative bubbles and ensuring the long-term viability of NFTs.
What's to say that this correction might work in favor of NFTs and open doors for better regulation and quality activity on the platform?
Conclusion
We now know that concerns regarding the future of NFTs are, in fact, true. Activity levels are at all-time lows, and public/investor interest is falling.
However, we believe it is unfair to pin the poor performance and failure of some NFT collections on the industry as a whole. It is true that NFTs have underperformed for well over a year now, but it is also true that this correction is equivalent to a detox where all low-quality tokens will be flushed out of the system.
Are NFTs dead yet? No, not at all. Will the industry see a correction and neutralization of sorts? Yes, it will. For now, we have our hopes pinned on real-world applications of NFTs, where the tokens can sell on the basis of utility over speculation. We believe the tokens can be used in real-world applications, with gaming and real estate set to benefit the most.
