The non-fungible token (NFT) market is booming. By the end of 2020 its aggregate market capitalization had reached $338 million.
Interest in the sector, besides representatives of the cryptocurrency industry, has been shown by politicians and the creative elite. Tokenised tweets, GIFs, portraits of presidents and music albums have, in the shortest possible time, fetched millions at auction. Only on February 22 did users spend over $64 million on NFTs, not counting expensive lots.
Even venture capitalists saw prospects in developing NFT projects.
Experts are divided on the potential of the niche: some are convinced of a short-lived hype and regard it as nothing more than “a game of the savvy with the wealthy,” while others doubt that the sector will not grow and foresee further qualitative changes to come and its growth.
ForkLog spoke with representatives from both sides.
Resemblance to the ICO boom
Because hype draws enthusiasts of quick gains, the surge of NFT-token creators is often likened to the ICO boom of 2016-2017.
Founder of Credentia Stepan Gershunyi underscores that the hype is driven by demand for tokens, not an interest in the technology — the first NFT standard was introduced in September 2017.
«Things like ICOs and NFTs, as once did various new altcoins, create an opportunity to earn quickly, without doing much. The ability to draw a GIF in two minutes and sell it for Ethereum is similar to how in 2016 one could assemble a team in a week and raise $100 000 for an ICO. I think this hype will pass, but that does not mean the technology is bad or that it will not be used in the future», — he says.
The business has deftly found a new niche for smart-contract applications, as NFT flexibility is vast, says Sergey Prilutsky, Director of Research at MixBytes.
«Thanks to its unique identifier, an NFT can store structured information about a tonne of oil, a car, a game item in an MMORPG, or a work of art with the precision of the last bit, without the possibility of subtle tampering and with the ability to arrange trades of sale and transfer of NFTs between users. The nature of the blockchain allows ownership of NFTs both publicly, and anonymously, and even partially. Therefore the next hype is a fortunate combination of contract-enabled capabilities and market participants’ desires».
It is precisely the uniqueness of NFT tokens that drives demand, agrees Andrey Sobol, researcher of consensus protocols:
«Demand arises similarly to how demand for baseball cards signed by players arises. They cost more than ordinary baseball cards. Just like the guitar played by Paul McCartney, more valuable than a plain guitar».
Founder of the Everstake staking platform Sergey Vasylchuk links the hype to the features of the current “economy of expectations.”
«The more expectations rise, the more they spur people to buy something. People are weak; they want to believe in the future. Moreover, people are greedy — they want to get rich quickly, without doing anything. With such sentiment in markets, everything grows — not only NFT, but also projects that have long been neglected».
Is art moving entirely into the digital realm?
Art objects have proven convenient for representation on the blockchain — they are public, and information about their value should be public and verifiable as well. Because of the high cost of operations, they are relatively rare by IT standards — this justifies high transaction fees, says Sergey Prilutsky.
«NFTs cannot replace artworks; they are their “digital projection” in digital form, but can fully change the ways rights are acquired, authenticity checked and the nature of deals in art markets», — he argues.
Digital rights appear to be the most long-term application of NFT technology, according to Credentia founder Stepan Gershuni:
«All rights that exist today in the form of paper contracts can be transferred to a digital form. This does not mean that if these are rights to the sale of a feature film, the entire film must be inside an NFT-token, but the token can imply the right to show the film in an online cinema or the right to use music for something, or that I sponsored the recording of an album by a particular band».
The transition of art into digital form is inevitable; it is a logical path for a new generation, says Sergey Vasylchuk. However, he does not deny that there will be people who will value classical art.
«Still, the situation where the original Mona Lisa will be of no use to anyone is rather strange», he adds.
NFT Prospects
The NFT market will move along the Hype Cycle curve, according to Everstake founder Sergey Vasylchuk.
«We are currently at the peak of expectations; everyone knows about NFTs. Against this backdrop, a number of scam projects will appear into which people will pour money and lose it. After that the hype will subside, but credible projects will continue to develop, serious business models for NFT tokens will emerge, and the market will return to productivity. Perhaps this will happen within three to five years.»
In the long run, NFT tokens will not work if they exist only on one blockchain, and in principle they cannot exist on a blockchain forever, asserts Credentia founder Stepan Gershuni.
«If we talk about music rights, there are tens of millions of songs in the world and the number grows constantly. It is clear that no blockchain, even the most powerful, could ever handle that. Accordingly NFT tokens should become off-chain; on the blockchain they should be only for trading, swapping, or presentation».
In his view, such a system would be the most scalable — it would not break when gas prices rise, and it would not lock users to a single blockchain. It could guarantee NFT token holders privacy, provability and immutability of information:
«A digital document may represent an artwork, copyright or other right, and I can cryptographically prove to anyone that it truly belongs to me using different technologies, both on the blockchain and directly, peer-to-peer», — added Gershuni.
Andrey Sobol, a researcher of consensus protocols, names collective NFT ownership as one of the promising directions for the segment.
NFTs are any kinds of objects to which digital rights can be attached, so in one form or another the NFT market will not disappear, but will likely transform significantly, says Sergei Prilutsky, Director of Research at MixBytes. The expert doubts that interest in art objects will endure, but hopes that during this time a small but valuable market for such objects will emerge, as public blockchains look attractive for these tasks.
«I think the greatest growth potential for NFTs lies in gaming and entertainment, cinema, where NFTs are used to create in-game economies and the circulation of digital rights. And art, as in real life, will occupy a small but expensive economic niche for the wealthy, close to contemporary art», — Prilutsky says.
More categorical about NFT tokens is Sergey Mendeleev, founder of Garantex and CEO of Indefieco.
«This is all nonsense, of no relation to either cryptocurrencies or art. When money lands in the hands of fools and schoolchildren (and the overall growth of crypto market capitalisation, especially in the DeFi segment, led to this), they start spending it as mindlessly as lottery winners, and with the same result».
Mendeleev notes that Forbes has no one who began their career with a large lottery win. Though there have been tens of thousands of such people over the past century worldwide, all ended up poor, he adds.
«The same thing happens with cryptocurrencies. It does not matter how much money you earned from the rise of various tokens — even tens of millions of dollars. If you do not know how to manage them, you will stay poor. Money always flows from the rich to the smart; it is a law of nature that cannot be stopped».
He reminded that the CryptoKitties hype in 2017 pushed money-rich participants to snap up worthless virtual kittens for hundreds of thousands of dollars. Today, on the basis of the same technology, the most enterprising are digitising contemporary art objects and driving the hype, the expert added.
«Dumb but lucky hustlers yielded to temptation and rushed to buy needless tokens. Money will again flow from the rich to the smart. It is only a matter of time before balance returns. Developing their own blockchains, Binance or OKEx stablecoins is far more promising and interesting than the momentary hype on some nonsense», — concluded Sergey Mendeleev.
For more detailed information on NFTs, see Dmitry Bondar’s cycle of ForkLog articles:
- First Look:
- Bitcoin and collectibles:
NFT as a new class of virtual assets: Bitcoin and collectibles
- Prospects:
Subscribe to ForkLog news on Telegram: ForkLog Feed — all the news, ForkLog — the most important news and polls.