USV: NFT continues to evolve, NFT will last forever

Enthusiasm and bubbles are a natural and integral part of the emergence and maturation of major technological changes.

Written by Nikhil Raman, Analyst, Union Square Ventures Investment Team

Compiled by: Luffy, Foresight News

USV (Union Square Ventures) first began exploring the NFT field in 2017. At that time, Rare Pepes had just begun to become popular on a small scale, and then the popular on-chain game Cryptokitties came out. Shortly after that exploration, we invested in the team behind Cryptokitties and wrote:

We believe that digital collectibles are one of the many amazing things that blockchain can enable that were virtually impossible to achieve before this technology came along.

Since the birth of the Internet, digital goods have been synonymous with abundance and proliferation, and the concept of ownership exists only within the confines of a closed system with a centralized arbiter. The emergence of public blockchains has unlocked the ability to own digital items that are unique and entirely in the hands of an individual—a concept that is as powerful today as it was six years ago. The ideas of ownership and verifiable provenance in the digital world are transformative, and these ideas will have significant implications for our digital existence, of which we are currently only scratching the surface.

Foam

The NFT explosion started in 2017, and as many of you may have observed, a lot happened over the next few years. The following is a statistical chart of weekly secondary market sales of NFT across all public blockchains:

Monthly secondary market trading volume for NFTs across all blockchains peaked at approximately $6 billion in January 2022, bottoming out in October 2023 when the figure dropped to approximately $300 million, before rebounding last month to approximately US$1.7 billion. Among them, NFTs in the Bitcoin and Solana ecosystem have grown significantly.

NFTs, especially NFTs as collectibles, have experienced large-scale hype cycles marked by asset bubbles. When the bubble burst, asset prices and secondary market trading volumes dropped sharply, by more than 85% and 95% respectively. The markets are in an extremely dangerous, zero-interest-rate environment in 2021, and we are facing very dramatic rises and falls.

If this story sounds familiar to you, that’s because it fits nearly every emerging innovative technology. NFTs are a microcosm of the larger crypto ecosystem, both of which have recently experienced periods of irrational exuberance. In the framework of Carlota Perez (whose seminal work we often cite), we seem to be going through an installation phase of these technologies, where the core infrastructure continues to be laid out.

Despite this “crazy” period and collapse in asset values, the promise of NFTs remains unchanged. They are an innovative substrate, a novel tool that represents an irreplaceable part of our digital lives, and they can be used in a wide range of scenarios: tickets, memberships, collectibles, receipts, art, media, likes.

In our view, the various bubbles we see in the cryptocurrency market, including this NFT craze, are a natural and inevitable part of the process of major technological changes emerging and maturing. They also provide a direct benefit: Speculative market bubbles provide, in part, the capital needed to build the next phase of supporting infrastructure.

Innovation

The rise and fall of cryptocurrencies help illuminate problems in the space, such as excessive transaction costs and poor usability for the average consumer, while wild price swings also help fund solutions to these problems and drive construction and The relentless pace of innovation.

Over the past 24 months and after years of development, numerous Layer 2 blockchains have entered the market, opening up the market for cheaper block space and achieving faster finality while still retaining Ethereum’s strong security guarantees. Solana launched compressed NFTs (compressed NFTs), allowing developers and users to create NFTs at a cost of approximately 0.01 cents. Embedded wallets now provide a way to build low-friction crypto applications without sacrificing trustlessness. New standards such as ERC-6551, which allows NFTs themselves to act as accounts or wallets, are opening up new design space for NFTs. Also, networks like Arweave have matured and largely solved the problem of storing arbitrary content on-chain (not just metadata).

The net result of these improvements is that the realm of what NFTs actually represent is rapidly opening up, and interacting with NFTs is becoming increasingly cheaper and easier. In many cases, we now have the tools to completely abstract the technology and allow users to participate in digital experiences powered by NFTs behind the scenes. Artworks and collectibles are only a small part of the vast puzzle. Any digital industrial product in our lives can be represented by NFT, and they may all be represented by NFT in the future.

Artwork and Collectibles

Digital collectibles, including artwork, are how NFTs initially expressed themselves on the blockchain and gained initial adoption. They are still part of NFTs and account for almost all NFT sales and market capitalization to date. Although asset bubbles exist, they will still exist in the blockchain industry and will not go anywhere.

NFTs represent a huge opportunity for digital artists and creators, who can now monetize their work and meet the growing demand for digital creations. Collectors, speculators, and sponsors can finally own and transfer unique and scarce digital collectibles without permission, which in turn creates a vibrant market for many of these assets. The internet-native financial channels provided by blockchain also make it easier for creators to sell their works to a global audience. Blockchain is also catalyzing new art forms, giving rise to new elements such as randomness as we interact with creative works.

Furthermore, we live in a digital world where the pool of internet-native capital is steadily growing (thanks to cryptocurrencies) and digital creations are becoming ubiquitous (thanks to artificial intelligence). The logical endpoint of these trends is for more people to store more value in a wider range of digital objects.

Behavioral Change

Despite severe declines in trading activity and market capitalization, the pace of cryptocurrency creation remains strong and solid. Thousands of creators are still creating digital, generative or AI art every month. Each month, new (and existing) cryptocurrency users will receive pieces from these collections.

We are also seeing new NFT behaviors emerge. Open edition style minting (often offered at zero cost, with users only paying fees for on-chain transactions) will become increasingly popular in 2023. An example usage would be for a project to launch an open edition series of digital collections when launching their product, which consumers can mint for free within a given time window. Consumers choosing to mint NFTs are not an act of speculation, but a way to plant an indelible flag and show support—an act of patronage for which consumers can potentially reap rewards. In some cases, low- or no-cost casting is becoming a new social primitive, similar to “like” or “retweet.”

These new behaviors have led to continued growth in low-cost minting of NFTs. We can see that despite secondary market trading volume drying up in 2023, there are still more users minting more NFTs than ever before. The following data chart illustrates this emerging trend:

Address growth for minted NFTs (the number of addresses roughly represents the number of users)

NFT compression technology (such as Bubblegum) promotes the growth of mintage on Solana

Everything is NFT

Much of this article focuses on the specific area of NFTs and their resurgence and evolution, but the reality is that NFTs are just an underlying technology that can represent almost anything.

The Ethereum Domain Name System (ENS) uses NFTs to represent identities. Uniswap uses NFTs to represent the liquidity provided to the capital pool. Blackbird represents every relationship a user has with a restaurant as an NFT. Paragraph represents reader subscriptions as NFTs. Helium will represent those eligible to receive network rewards (such as hotspot operators) as NFTs. The list goes on.

We are also excited to see more behavioral and industrial products represented as NFTs. From concerts and movies to airline tickets, everything should be an NFT. Anything that can benefit from mixing true ownership with the value of an open, permanent system should be an NFT.

It makes no sense that NFTs are not always meant to be transferable. For example, many reusable KYC providers issue Soulbound Tokens. Moreover, NFTs don’t always have to represent digital objects. In scenarios where non-fungible real-world assets seek to leverage blockchain technology, NFTs can often serve as digital twins, representing everything from trading cards to luxury handbags.

NFTs, like other blockchain standards, benefit from the openness of blockchain and the consistency of standards. They are portable and can be transferred with the user to any application, which in turn is determined to understand what the NFT is and take appropriate action, further extending its utility. This also means that for any issued NFT, it will have immediate access to all existing tools built for this standard. Generally speaking, this means that any NFT created can be immediately traded, loaned, or donated on an exchange.

The composability and openness of blockchain data through extended NFTs holds great potential, but it is not without its problems. They can deliver novel experiences and enable applications to learn more about their users, but we’re still in the early stages of building these systems in a privacy-preserving way. They can allow for the transfer of value, such as transparent and programmatic minting fees or royalties, but they can also allow applications to circumvent these rules (royalties were once a boon to creators but have since disappeared. We are now seeing that again Revival, as newer ecosystems are choosing to enforce standard-level royalties for NFTs.)

Summarize

Like many other technologies before them, we are witnessing the continued development and evolution of cryptocurrencies, specifically NFTs. We believe that NFTs are an extremely simple yet extremely powerful primitive that is unique to blockchain, and we are excited about the experiments and new experiences to come. If you’re building something that leverages this primitive to build novel experiences, we’d love to chat with you.