Cryptocurrencies are — or at least aim to be — money. This not only means that they need to function as stores of value, media of exchange, and units of account, but that they need to be fungible, in that any one unit of any cryptocurrency should be equal to and exchangeable for any other.
However, non-fungible tokens (NFTs) provide something of an exception to this latter rule. While they’ve remained fairly niche for several years now, they’ve grown in prominence over the past year or so, as tokens representing unique works of art, collectibles, and virtual game items have become more popular.
According to figures specialized in non-fungible tokens, the NFT sector is likely to witness significant growth this year, as demand for unique digital objects expands. At the same time, the sector is likely to intersect with decentralized finance (DeFi) and other areas to produce novel products and services, including “sharded NFTs” and NFTs as collateral.
NFT sector is small, but growing
To put the current NFT scene in some perspective, NonFungible.com provides various figures and data indicating just how large (or small) the sector is, as well as how quickly it has been growing.
For the week ending on January 29, the volume of sales in NFTs was equal to USD 6m. While this is only 0.003% of the daily volume (as of the time of writing) in all cryptoassets (according to CoinGecko), it still represents a noticeable rise compared to previous months and years.
For example, the weekly average volume was around USD 1m as of November, while NonFungible’s 2019 report indicates that monthly volumes were consistently under this figure for much of that year, even dropping under USD 400,000 in September 2019.
Meanwhile, according to Simon Seojoon Kim, CEO and Managing Partner at South Korea-based blockchain accelerator Hashed, so far the NFT market has exhibited graduated growth heavily dependent on powerful individual contents and intellectual properties, which, to note, is contrary to DeFi which grew organically.
“While we are expecting various use cases of NFTs to emerge in bar gaming, it is extremely difficult to predict the magnitude of growth level of the NFT market nor use any metrics as a holistic index,” he said.
Sectors within the NFT sector
So while NFTs remain fairly marginal, the sector is undoubtedly expanding outwards, and according to John Crain — the founder of digital art marketplace SuperRare — this will be driven by a number of specific areas within the NFT sector.
“Digital art, virtual land, and DeFi NFTs will all experience explosive growth in 2021. Digital art is in the leading position and will be the category leader by an order of magnitude,” he told Cryptonews.com.
For Crain, non-fungible tokens provide a long-awaited means to replicate the collectibility of physical artworks, endowing digital objects with a stamp of individuality and uniqueness.
“For the first time we have a simple technical standard that creates digital scarcity for digital artifacts. Humans have been collecting artifacts for thousands of years, and there are now tools readily available to do the same in a digitally native manner,” he added.
While Crain is unsurprisingly optimistic about the future of digital collectibles, analysts and other industry experts largely agree with his forecasts.
“I think crypto art will grow in importance as artists see that they can actually get paid for scarce digital art,” said Fredrik Haga, Co-founder and CEO of Dune Analytics.
He added that gaming is another area where NFTs will find increasing joy in 2021, with Axie Infinity — an Ethereum (ETH)-based game that lets players battle using unique creatures — being the biggest product in the space, racking up some USD 8.1m in total transfers (according to NonFungible.com).
Aave’s Isa Kivlighan is another person who speaks the praises of Axie Infinity, and NFT gaming more generally.
“Axie Infinity is a great example of a play to earn game that gamifies crypto– you play and earn these Ethereum assets and then you can tie them to things going on in the ecosystem. Gaming could be a great way to teach people important DeFi concepts like staking, using interfaces and concepts that people know and understand,” she told Cryptonews.com.
DeFi and NFTs
Kivlighan also suspects that NFTs will become increasingly prominent within DeFi this year, and vice versa.
“NFTs in DeFi is another space with a lot of potential for growth — being able to use NFTs as collateral, for example, is something that people have been looking at. The intersection of NFTs, gaming, and DeFi is another area with huge room for growth,” she said.
On top of this, the intermixing between NFTs and DeFi might result in some interesting creations also.
According to Kivlighan, this includes wrapped NFTs: “you basically bundle a bunch of NFTs in a group and then you can own parts of that block. Every NFT in the bundle has to meet certain classifications, and they’re backed by individual NFTs that have their own value.”
Similarly, Kivlighan also expects “sharded NFTs” to appear. “You can own fractions or ‘shares’ of an NFT, so the ownership is split among many stakeholders,” she said.
Movers and shakers
As for which platforms will grow most rapidly within the NFT sector, Fredrik Haga highlighted three names in particular.
“Currently Nifty Gateway and SuperRare are the ones doing the most volume,” he said. “Opensea is also a great place for trading NFTs.”
Monthly crypto art volume, USD
According to John Crain, SuperRare aims to capitalize on its recent growth by developing its platform and services in 2021.
“We’ll be launching our mobile application, doubling down on [virtual reality] exhibitions, and improving the user experience to accommodate less technical users,” he said.
Other higher volume NFT platforms include Sorare (global fantasy football), Art Blocks (generative artwork), and Decentraland (MANA) (decentralized open-world game with collectibles). However, the biggest NFT platform at the moment, according to NonFungible.com, is CryptoPunks, which has been around since 2017.
Much like CryptoKitties, CryptoPunks lets you buy unique ‘punks’ — digital characters — on the Ethereum blockchain, and has enjoyed over USD 2.87m in sales over the past week, as well as almost USD 12m across its entire history.
Collectible characters are obviously a big draw, and as Isa Kivlighan mentioned above, they may increasingly overlap with DeFi in the coming months and years. This is an area Aavegotchi — a crypto-collectible company that’s being advised by Aave — hopes to mine.
“Aavegotchi’s are DeFi staked NFT collectibles (staked with Aave’s aTokens so they increase in value). To summon an Aavegotchi, you must stake a certain amount of collateral (this depends on the traits of the particular Aavegotchi that you’re trying to summon),” she explained.
Looking to the end of 2021 and beyond, there’s a conviction that NFTs could see significant relative growth this year, even if they’ll remain somewhat peripheral for some time to come.
“I think it will still stay somewhat niche and trail behind the broader DeFi space in terms of adoption, but could still see massive growth,” said Fredrik Haga.
John Crain agrees, reiterating the fact that NFTs provide an ideal technical framework for “facilitating the growth of this nascent market,” namely digital collectibles.
He said, “I think the NFT market will grow massively in 2021. While we’ve seen a large influx of new artists and collectors in 2020, the market is still relatively small.”
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