The Year of the NFT
From underground art scene and niche hobby to Collins Dictionary's word of the year, non-fungible tokens (NFTs) are poised to reshape digital ownership, work, and identity.
2021 was undoubtedly the Year of the Non-Fungible Token (NFT).
It is said it takes 10 years to create an overnight success. Kevin McCoy’s Quantum, arguably the first art ever to be tokenized on a blockchain, was minted on the Namecoin blockchain in 20141. Collectibles like Rare Pepes have been with us since 2016 and CryptoPunks and CryptoKitties made their entrance in 2017. OpenSea and SuperRare, two of the largest and most important NFT marketplaces are nearing their 5th year of operation. And yet until just last year, NFTs were still largely unknown but for a niche group of collectors and traders.
At the beginning of 2021, only about 200,000 Ethereum wallets had ever bought or sold an NFT. Less than 10% of these (18,000) had bought or sold an NFT in the 30 days prior. The top 5 projects at the time (ranked by all-time resales) had only accrued $51 million in sales volume up to that point - with more than half of that coming from the CryptoKitties run of 2017. Dapper Labs’ NBA Top Shot had only just begun to take off, posting $869,000 in secondary sales the previous month across a tiny 910 (!!) buyers. Sky Mavis’ Axie Infinity, currently a multi-billion dollar play-to-earn video game, had yet to migrate to its current home on the Ronin blockchain. And a plot of land in The Sandbox Game metaverse could be bought for around $200 on OpenSea.
Fast forward to today and we find ourselves staring across a nearly unrecognizable landscape. NFTs are a multi-billion dollar industry - a major prong of the newly dubbed web3 revolution - that have received headline attention from popular media, influencers and major corporations and brands. In the span of a single year, all aspects of art, culture and technology have been infiltrated by and injected with NFTs.
Welcome to Metanomics, the new home of market and legal analysis for the NFT economy by Nameless (nameless.io). These pages will deliver timely and relevant research and opinion on everything NFTs to help answer the questions of what, how, and why. Metanomics will consist of regular weekly updates, routine economic reports, and ad hoc commentary by myself, Nameless’ own staff NFT Economist. So join us as we help you make sense of the biggest revolution since the internet.
So for an opening post, we begin with the question: how did we get here?
Interest and awareness exploded in 2021…
While coverage of NFTs and digital art of course existed prior to 2021, even receiving substantial attention by mainstream media during the CryptoKitties craze, the vast majority of people were first introduced through the highly publicized and record breaking auction of Beeple’s Everydays at Christie’s in March. Interest in the term ‘NFT’ surged during that time and continued to draw more and more interest since. Google Trends data for the search term ‘NFT’ barely registers relative to today’s activity.
…which has led to a dramatic increase in the number of people holding NFTs…
The total number of wallets buying and selling NFTs increased 10 fold in 2021. As of this post, over 2.5 million unique Ethereum wallets have either bought or sold an NFT, and over 300,000 have done so in the past 30-days. And while we do not have comprehensive data, we know NFT usage on alternative blockchains has exploded as well.
This is especially true of play-to-earn blockchain gaming which has led the charge for NFT adoption. DappRadar reports over 1 million unique wallets have connected to a game dApp (decentralized app) per day on average. In 2021, an astounding 49% of active wallets had ever connected to a blockchain game. Gaming is leading the way in adoption for a number of new alternative blockchains like Harmony and Arbitrum, while continuing to be an important source of activity on older chains like Polygon.
…and trading them too.
At the beginning of 2021, the size of the NFT market could be measured in the tens of millions. By the end of the year, in the tens of billions.
Over $20 billion in NFT sales were transacted on the major blockchains throughout 2021. While there is not yet an authoritative source for NFT sales data (strange given the public nature of blockchains), all charts look something like the one below - growth early in 2021 driven the intense interest of NBA Top Shot on the Flow blockchain followed by an explosion of activity beginning in July both in the Axie Infinity play-to-earn game on the Ronin blockchain and Opensea trading on Ethereum. Nonfungible.com reports over $15 billion in primary and secondary sales on the Ethereum blockchain in 2021, up from $67 million just one year prior. Likewise, growth on blockchains other than Ethereum have expanded from practically nothing to billions per month.
Digital identity, digital art, and play-to-earn lead the way in NFT adoption…
The growth in NFTs as digital asset identities has been astounding. The top 10 profile-picture projects (collectibles that double as social media avatars) of 2021 combined for $5.3 billion in trading volume. Of this set, only one project, the CryptoPunks, even existed prior to 2021, and up to that point had only saw $6.7 million in cumulative trading volume over the previous 3 years. In retrospect, it is not that surprising that the digital identity category led the way for NFTs in 2021. Profile pictures serve as individuals’ identities, i.e. their digital representation, in an increasingly internet-native world, and leveraging one’s digital identity is an effective way to signal to others their personal interests and values, club memberships, “OG status,” and more. Given the public nature of blockchain transactions, it can also serve as a proof of stake (or social flex) to the rest of the digital world.
NFT gaming has been the largest force for adoption, as the top games now boast hundreds of thousands or even millions of active players. At the top, Axie Infinity has seen almost $4 billion in trading volume and currently has millions of players. NFT gaming promises direct ownership of your digital character and in-game assets, and provides players with a greater sense of connection to the game world they inhabit, and with the community of players that make up that game world. NFTs are also being used to gamify other elements of the crypto space - most notably games like DeFi Kingdoms that incorporate gaming into their decentralized finance applications.
Finally, digital art, the original use case for NFTs, also saw massive growth in 2021. NFTs allow artists to provide cryptographic signatures for their work that make it very easy for collectors to establish provenance of the work they buy and collect. Generative art (where an artist produces art via a programmed algorithm that generates individual works with varying degrees of randomness) has found a natural connection to NFTs as a medium of expression. After half a century of indifference by the traditional art world, generative art NFTs have taken center stage as a graceful and idyllic way to merge code and art, and express code as art. The massive success of the Art Blocks generative art platform has vaulted it to one of the top five NFT projects of all-time. Moreover, Beeple’s “Everydays: The First 5000 Days” sold for an incredible $69 million at a Christie’s auction in March 2021, which makes it the third most expensive artwork ever sold by a living artist. In my own country of Canada, the highest selling artwork by a living artist is now an NFT - Dmitri Cherniak’s Ringers #109 - which sold for $6.9 million. All told, over $2 billion in digital art NFTs were traded in 2021.
…followed by a number of corporate brands dipping their toes.
From Taco Bell to Visa to Budweiser to Pepsi, an increasing number of large publicly-traded companies began to test NFT markets and consumer engagement in 2021. Early on, corporate brands only lightly experimented with NFTs through small collections; for example, Coca-Cola sold a single NFT for 217 Ether in the summer of 2021. As the year progressed, we began to see large brands pay greater attention to NFTs. In August 2021, Visa purchased CryptoPunk #7610 for their corporate collection, and Budweiser purchased the Ethereum address “beer.eth” (an Ethereum-based web domain from Ethereum Name Service (ENS)). Following the launch of an NFT collection by Twitter, Twitter has since teased development and integration of NFT verification for the Twitter app.
But the largest splash has come by way of digital fashion. Dolce & Gabbana unveiled a collection at their Alta Moda show in Venice, Italy in August. Soon after, both Adidas and Nike each partnered with prominent NFT collections to signal their entry into the NFT market. These brands are making a big bet that digital wearables will increasingly become an important component of digital identity.
Still early days…
Even after the massive growth we saw in 2021, the overall size of the NFT market is still relatively small. Minecraft typically has 2-4 million users concurrently at any given time. That’s likely more people than have ever owned an NFT! Twitch, the popular streaming site, has 140 million monthly active users. Fortnite, which has an active in-game marketplace using its own currency v-bucks, does $5 billion annually in revenue alone. Even the traditional art market, often noted for its low liquidity and slow transaction speed, sees 10s of millions of sales per year. So yes, the NFT market is still very early in the grand scheme of things.
The global fine art market still does about 25 times the sales volume ($50 billion in 2020) as the NFT art market, even while being much more illiquid. The collectibles market is estimated to be anywhere between $300-$500 billion. Revenue from video games is estimated around $180 billion. Even ignoring the potential for NFTs to help build entirely new markets like they have with digital identities, there is still a lot of opportunity to capture market share in these industries.
While many NFT releases by corporations have seen success, we have yet to see anything that could be considered large-scale adoption. This is somewhat surprising given that NFT technology is well-suited for mass distribution of merchandise or prizes. Will 2022 bring NFTs to your cereal boxes or ‘happy meals’?
…but 2022 promises to deliver.
Market predictions are almost certainly to be wrong. As the last 12 months have proven, a year is a long time in the NFT space. However, there are a few storylines that we will be keeping our eye one here at Metanomics:
(1) The rise of the metaverse.
The tail end of 2021 saw prices for digital real estate spike sharply. 2022 will likely continue this trend. The Sandbox Game is already beginning to host events in its public alpha, Samsung is setting up a store in Decentraland, and Axie Infinity is releasing its Project K game allowing players to build on its land. Dozens of other games and open metaverses have also begun to launch in what will surely be a second gold rush for user attention. We will also begin to see what direction private metaverses like Minecraft, Fortnite, the multitude of MMORPGs, and the hinted-at Facebook’s Meta will go.
(2) The integration of decentralized finance.
The story of 2020 was the rise of decentralized finance. The story of 2021 was the rise of NFTs. The story of 2022 may well be the rise of NFTfi. Ironically, one of the weaknesses of NFTs is their non-fungibility. This is especially a problem for those pieces that have appreciated considerably in value. Liquidity, especially for top pieces, is very thin leaving holders at the mercy of the overall market without being able to increase or trim their positions. 2022 will likely unleash a flurry of experimentation both on the securitization and collateralization of NFT assets. This trend is already happening in the traditional worlds of art and finance so its extension to crypto is only natural.
(3) Increased regulatory certainty.
NFTs in many countries still remain in legal and regulatory limbo. Questions about intellectual property, commercial rights, right of resale, imposition of sales taxes, income tax treatment, and status as a security, among other things, still remain largely untested in the courts. However, given the rapid rise of NFTs last year, it seems inevitable that legislators, regulators, and perhaps courts, will begin to address these issues in 2022.
Join us in the metaverse.
2022 promises to be another exciting year in the NFT market. Metanomics is here to keep you informed on the latest developments so you don’t miss a beat. On top of regular reporting on key NFT markets such as digital real-estate, the play-to-earn economy, and fine art, we hope to help you understand what’s really happening under the hood. We’re excited for you to come along for the ride.
Artist Martin Lukas Ostachowski maintains a comprehensive timeline of early crypto art here: https://ostachowski.com/about/what-is-crypto-art-or-nft-art/history-of-crypto-art/. For a timeline of all early NFT collectible projects, @LeonidasNFT maintains a timeline on their twitter page.