CoinEx Academy: What Is NFT? What Makes NFT So Popular?
Let us start with a question: how flourishing has the NFT market been for the past six months?
In January 2021, an NFT trading card featuring the Lake star LeBron James’s dunk highlight sold for $71,455 on NBA Top Shot, a platform for digital collectibles. And in April, the bidding price for the NFT card raised to a record $387,600. Later on, “Everydays: The First 5,000 Days” by digital artist “Beeple” (formerly Mike Winkelmann) raked in $69,346,000 on March 11, turning NFT into an overnight sensation.
Since then, one after another, big names in music and painting joined the whopping market to win a share. In February, an NFT song produced by Linkin Park’s co-founder and lead vocalist Mike Shinoda fetched more than $30,000, whereas the tokenized version of the street artist Banksy’s painting “Morons” was auctioned at $380,000, four times the price of the estimated value before it was burned, raising a craze of painting burning.
However, not only music and paintings are considered NFT collectibles. An extended surge in NFTs, such as game props, ownership of virtual land, even a tweet, a pair of crypto socks, a collection of ordinary, digital rocks, and 52-minute fart audio, etc., magically shot to sky-high prices. For a time, the run-up in sales price renders NFT as an enormous pool of wealth, swarming with people from all walks of life.
However, NFT is not just a market hype involving retail investors, for many institutions have already entered the game. On August 23, Visa jumped into the NFT craze, buying a “CryptoPunk 7610” for $150,000. In June, Alipay joined Dunhuang Art Institute to roll out two NFT payment code skins based on AntChain, 8,000 copies of each, priced at 10 Alipay points plus 9.90 yuan. The skins were sold out immediately after release, with some priced at 1.5 million yuan on Xianyu, Alibaba’s second-hand sales platform. Unwilling to lag behind its competitors, the Internet giant Tencent released its own NFT trading platform, “Huan He”, on which 300 “Vinyl NFTs” of “Thirteen Invitations Program” were sold out in an instant with a unit price of 18 yuan.
We may clearly observe how fast the NFT market has been growing for the past six months based on QKL123’s data statistics:
The NFT index rose from 3,794 in February to 28,442 today, up by 649.66% in the first half of this year. In addition, OpenSea, the largest NFT trading platform, has surpassed Uniswap, the largest decentralized exchange platform, in gas fee consumption.
The above shows the high activity in the NFT industry. So what is an NFT? What makes it so popular? How did it ultrahigh premium come about?
What is an NFT?
The NFT or “non-fungible token”, a digital asset based on blockchain technology, is unique and indivisible with exclusive ownership. It is the opposite of the FT or the “fungible token”. A fungible token is a token replaceable with another one identical to it and can be split into smaller units, such as BTC, ETH, paper money, etc. For example, a 100-yuan note in your hand can be replaced by a 100-yuan note from any other person, without any essential difference in between.
In contrast with the FT, non-fungible tokens represent the opposite concept. Each NFT has a unique, non-transferable identity, whose trading value rests in its scarcity.
How did it come about?
In 2012, the appearance of Colored Coin demonstrated the feasibility and potential for putting real-world assets on the blockchain. But before 2017, everyone in the blockchain industry was busy issuing fungible tokens, while the attempt on the NFT release found no taker.
In 2017, Matt Hall and John Watkinson, founders of a software company called Larva Labs, created a software program that could generate thousands of different characters, the prototype for CryptoPunks. Although the founders tweaked the Punks many a time and gave them different accessory combinations, few people were interested at first. In promoting the project, 10,000 Punks were released: the founders kept 1,000 and the rest were issued for free. The Punks ran out immediately, but to everyone’s surprise, it set off a boom in the secondary market later on. Now the price of these ugly-looking CryptoPunks has risen to breathtaking levels, and even the lowest-priced could cost more than $200,000.
After the unexpected prosperity of CryptoPunks, the Ethereum network launched the ERC721 protocol to issue, create, and identify this “unique token”. With this protocol, CryptoKitties, the first large NFT project, was born on the Ethereum chain. It is a blockchain virtual game where players can adopt, feed and trade virtual cats. The most popular feature of this game is the rarity of the CryptoKitties’ appearance and personality arising from gene pairing and breeding.
This has kept the price of CryptoKitties with rare elements soaring, and the boom has in turn drawn users to buy CryptoKitties for breeding and matching in an attempt to produce those with more scarce elements and sell them for higher prices. It’s kind of like opening a blind box. This game once crashed the Ethereum network, a vivid evidence of its then popularity.
After the bear market in 2018, NFT remained sluggish until 2021 when it has staged a comeback.
So, why is NFT all the rage?
1. Taking advantage of the bull run
Following the COVID-19 outbreak in 2020, lots of funds, driven by the need to fight inflation, flood into the digital currency sector. Coupled with the coming Bitcoin halving in 2020, a big jump was seen in the cryptocurrency market. It is a law that segments will rise along with the soaring leaders. The bull run contributed to many big earners, who are motivated to make novel investments with their pockets being full. Moreover, when the market is still on the rise, participants always remain optimistic.
Seeing the unexpected premiums in NFT trading, plenty of investors “fear to miss the opportunity”. There was even a saying that if you missed last year’s DeFi, you can’t let go of NFT in 2021.
2. NFT enables more “economic” application scenarios
There will be no followers when “no money can be made”. Two years ago, many of NFT’s application scenarios were imaginary, and they could not create wealth. But the Metaverse and GameFi craze this year made NFT profitable.
Humans are going digital. Metaverse, the next generation of computing platforms and content media, is considered the virtual world humans will ultimately embrace. As 5G, VR, and other technological upgrades are involved, it will surely bring about changes in business models in the fields of gaming, social, content, and consumption. The iteration of the carrier for each field may bring along profit-making opportunities. That is why countless companies are investing heavily to explore it. Instead of hype and bubble, the participants are Internet giants that are making great fortunes in the Internet revolution, like Facebook and Tencent. No one can know better how important it is to capture the dividends of the era. NFT is seen as the infrastructure of the future economy.
NFT is a must for Metaverse to virtually map the real world, to be specific, to identify such different elements as identity, friends, immersion, low latency, diversity, anytime & anywhere, economic system and civilization, and information pass. Only NFT can be a reliable carrier to accurately map everything in the real world to the virtual world.
Before the distant future of Metaverse when real elements like consumption, finance, education, work, and life are integrated into virtual reality, immersive pan-entertainment combining games, social networking and content remains a pioneer. That’s why GameFi becomes a hot spot this year as expected after Metaverse went viral.
The NFT acts as the bridge between the real economy and the game economy. Only after that, GameFi chain game Axie Infinity, launched in 2018, can overtake Honor of Kings, the world’s highest-earning mobile game, in terms of single-day revenue. The fact is that except for the battle system and better aesthetics, Axie Infinity followed the old model of breeding and trading in CryptoKitties, another chain game that went popular in 2017. That is enough to prove what magic NFT can do to the game economy.
So, is it all? NFT can empower more than just games and virtual reality. Collection and artwork trading is the bigger market for NFT for the time being.
3. Trading platform boom sets off the NFT trading prosperity
Before 2018, there were very few platforms for NFT trading. But now more and more such platforms are popping up, such as OpenSea, Nifty Gateway, MakersPlace, Rarible, SuperRare, and VIV3. These platforms can not only display and trade artworks but also closely connect artworks with their precise “consumer groups”. In addition, the infrastructure platforms based on blockchain technology have created more derivative ecosystems for the market and provided more liquidity pools for NFT trading. Take MEME which has introduced yield farming. Users who stake MEME tokens can obtain pineapple points in exchange for NFT collection cards, which can be put on OpenSea for sale. Operations of this kind have drawn enthusiastic small speculators to the NFT feast.
Another example is to use artworks to generate tokens for issuance. It must be surprising for you that the auction of “Everydays: The First 5,000 Days”, which was closed with a sky-high price and went viral even beyond the blockchain circle, was a related transaction. A survey showed that the real name of Metakovan, who acquired the above-said digital painting for $69 million, is Vignesh Sundaresan. He is not a traditional collector, but an insider in the cryptocurrency circle. In 2012, he founded a cryptocurrency exchange (coins-e.com) in Canada, which has long ceased to exist (it was charged with fraud by users for loss of coins); in 2013, he founded an enterprise to produce Bitcoin ATMs; and in the 1CO boom from 2017 to 2018, he issued LST, another cryptocurrency, the price of which has now dropped back to zero. Now amid the cryptocurrency bull market in 2021, Vignesh has issued B20, a coin generated from the 20 works of Beeple he bought for $2.2 million. With the issuance price of $0.36, 59% of the total supply (10 million) goes to Vignesh, while 2% coincidentally goes to Beeple, thus raising the doubts as to whether or not the $69 million auction of “Everydays: The First 5,000 Days” was a related transaction.
Just after the auction of “Everydays: The First 5000 Days” at Christie’s, the price of B20 soared to $25, raising the value of Vignesh’s 5.9 million tokens to 147.5 million. Even if they cannot be fully cashed, Vignesh has made a fortune. Once people profit from speculation, they probably will do it again. This may explain why the exposure of this“scandal” didn’t crash the NFT’s “sky-high price” in auctions but fueled it to the extent that even a digital stone could fetch millions of dollars.
To put it more bluntly, while the convenience of the blockchain infrastructure and the popularity of NFT trading platforms lower the threshold and improve the efficiency of real collectibles and artworks trading, speculations are also made more convenient.
NFT may have a promising future in the future Internet economy. But now it’s too early to apply NFT extensively because the field is full of speculators at this moment. Don’t worry. The crypto industry is no stranger to speculation as blockchain investors always hold the idea that “the dividends of the industry only belong to those who are always curious, fearless to try, and willing to take risks”. Therefore, even those hesitant and doubtful cannot resist the lure of the huge wealth and rush into this field at the very beginning.