The year 2021 marked the first adoption cycle for NFTs as an asset class. NFTs had existed for many years on the Ethereum blockchain but investors and Web 3.0 people had no imagination for what they actually could be used for. In 2021 one NFT collection emerged after the other. Endless money seemed to be pouring into the space and the non fungible tokens attracted a new user base to digital assets. The price fluctuations of the extremely illiquid asset class were extraordinary and speculators rotated money from one project to the next.
How Brands, Politicians and Influencers are Leveraging NFTs
Artists were among the first to adopt NFTs in order to monetize their work. However, they were not the only ones. Influencers and politicians quickly understood that they could use NFTs to engage with their audience. Internet entrepreneurs such as Kevin Rose quickly capitalized on the trend and created utility NFT collections such as Moonbirds. Even the former US President Donald Trump released his own NFT collection. Despite the usual volatility of the collection the Trump Digital Trading Cards remain among the most valuable NFT collections in 2023.
However, it is not only politicians and influencers that issued their own NFT collection. Even consumer brands such as Adidas have released an NFT collection. Adidas Originals is an NFT collection for which minting initially was restricted to other NFT communities such as BAYC.
In general there are three major types of NFT projects: community projects, gaming projects and art projects.
Community based NFT projects
Community based NFT projects originated out of limited supply collections such as Crypto Punks, Bored Ape Yacht Club or World of Women. The value of Crypto Punks is derived from it being the oldest and original NFT collection. Membership in an NFT community grants exclusive rights to NFT holders such as access to private spaces and chats.
Gaming based NFT projects
Gaming on the blockchain is an idea as old as the first advanced blockchain Ethereum itself. Vitalik Buterin said he cried himself to sleep after having a gaming component removed from the game World of Warcraft. He then realized how evil centralized services are which gave him the motivation to create a decentralized network. Therefore the idea of creating trustless game items that can be used independently from any game developed by a specific developer is just as old as Ethereum itself. However, so far no blockchain based game has achieved to create a gaming ecosystem that would survive the end of a crypto hype cycle.
There are several teams trying to develop Massive Multiplayer Online Games on the blockchain. The idea is simple: create an eternal game that can be played forever. In such a setting developers and players may come and go while the state on the blockchain will persist forever. One of the gaming studios that is trying to build such a game is Bibliotehca DAO which is building their eternal game on the Ethereum layer 2 scaling solution Starknet. The further development of layer 2 scaling solutions might be a requirement for blockchain based games to reach adoptions since gamers almost certainly won’t be willing to pay double digit USD fees in order to play their game.
Art based NFT Projects
Digital Art and NFTs were a match made in heaven. Digital Art can potentially be copied and distributed across the internet in an unlimited way. However, with NFTs for the very first time it became possible to prove the ownership of a piece of Digital Art.
Some particularly valuable art collections include Chromie Squiggles and Fidenza by Tyler Hobbs. However, just as other NFTs these collections lost significant value against $ETH compared to their third quarter 2021 valuation peaks.
Other NFT Use Cases
Beyond communities, gaming and art there are further use cases for NFTs such as decentralized domains. Another way to use NFTs is issuing a ticket for a service as a tradable non-fungible token. Lately an Argentinian airline company has been experimenting with issuing airline tickets as an NFT. On top NFTs are also used in the food business with restaurants giving NFT holders access to exclusive dining areas.
NFTs After the End of the Hype Cycle
Prices of NFTs remained stable in the first quarter of 2023 while prices of $ETH increased. Just as DeFi after the DeFi summer 2020 NFTs have fallen out of favor after their initial hype disappeared. As a consequence their prices in $ETH in which they are most frequently traded went down. This pattern is true for almost every NFT collection in 2023. On the other hand the prices of NFTs measured in USD have remained relatively stable in 2023.
The cryptocurrency space is famous for the rotation inside the various assets. Typically Bitcoin season is followed by Ethereum season which then kicks off the altcoin cycle. Traders are aware of these patterns and rotate capital from one asset class into the other. The question remains whether there will be another NFT cycle in the future?
It is worth pointing out that DeFi never experienced another hype cycle after the initial parabolic break out in summer 2020. One of the oldest DeFi tokens is Compound ($COMP) which was around from the start of the DeFi summer until today. In the chart below it can be seen that Compound has lost 98% of its value against Ethereum since the peak of the DeFi summer in July 2020.
The prices of most NFTs are very much correlated with each other. The most prestigious NFT collection is Crypto Punks. The value of Crypto Punks against ETH peaked in October 2021 reaching a valuation of 120 ETH per Crypto Punk. Since then the value of Punks declined more than half to 54 ETH by the fourth quarter of 2023.
It remains to be seen if NFTs unlike DeFi will be able to experience another hype cycle in the next few years or whether they will continue to bleed against $ETH. Such a hype cycle might require a catalyst coming out of one of the NFT use cases that suddenly will get more traction.