Translated by elcreto
- While attempts to verify ownership of assets through blockchain have continued since 2012, NFTs came into being thanks to the arrival of the smart contract feature of the Ethereum blockchain.
- The value of NFTs comes primarily from proof of digital ownership and rarity.
- Gen MZ (born between 1981 and 2005) purchases NFT avatars for various reasons, such as sense of membership (networking and distinction), showoff, brand acquisition, and identity expression.
Is Non-Fungible Token a massive bubble? Does leaving Lamborghini for a picture of an ugly monkey indicate that the world is going crazy? This time, let's take a brief look at the history of avatars (54.1%) and collectibles (15.0%), which represent the largest portion of the NFT market, and explore why some of us became NFT enthusiasts and what possibilities they see.
History of NFTs
2012 | Debut of the Original: Colored Coins
The history of NFT dates back to 2012 when the colored coins were born. Meni Rosenfeld describes colored coins as special tokens that work on the Bitcoin blockchain and carry metadata about the real assets. Of course, colored coins failed to make it to the spotlight due to the limitation that lies within how Bitcoin is hardwired—the limitations of the requirement of unanimous agreement for approval of a particular value and of the capacity of storing metadata. Yet, the attempt was significantly meaningful in that it applied blockchain for the first time to prove ownership of varying forms of real assets, such as real estate, stocks, bonds, and collectibles.
2014-2016 | Counterparty and Rare Pepe
The debut of colored coins was followed by a flood of attempts to tokenize assets. In 2014, Counterparty, an open-source internet protocol and peer-to-peer financial platform operating on top of the Bitcoin blockchain, was released. The way Counterparty works is that it stores additional data in a Bitcoin transaction, which was most widely applied to trades of meme trading cards at the time. Back then, Rare Pepe was the most popular trading card collection, which used Matt Furie’s Pepe the Frog character. Rare Pepe still is the most popular meme character in the crypto industry.
2017 | CryptoPunks, the Beginning of the NFT Craze
Everyone would agree that the CryptoPunks in themselves are history in terms of the evolution of NFT.
In 2017, two years after the launch of Ethereum, a Turing complete decentralized blockchain, John Watkinson and Matt Hall used a program that algorithmically generates thousands of characters to create 10,000 collections of 24-by-8 bit pixel NFT characters. They named them Punks and this was the moment when generative art met NFT. John Watkinson and Matt Hall distributed their work for free so anyone with an Ethereum wallet could own it, but it wasn’t popular at all so only a few people took it. But after Mashable published an article about Punks, they became so popular that they started to trade at tens of thousands of dollars.
2020-Present | Popularization of NFT and Launch of BAYC
Unlike those years between 2017 and 2018 when only a few NFTs, such as Cryptopunk and CryptoKitties, enjoyed popularity, the year 2020 was marked by a much broader interest in NFTs. NFT-related news has started pouring out around the world since and the most talked-about news would include Beeple's NFT digital art sold for $69.3 million at Christie's, or the world’s biggest companies entering the NFT market. As for single collections, Yuga Labs' BAYC (Bored Ape Yacht Club), Doodles, Cool Cats, World of Women, Azuki, and CloneX were a huge success.
What Makes an NFT Valuable?
After numerous trials and attempts, NFT has rapidly grown into a $25B market in a few years. The question here is why: why in the world do people pay up to hundreds of thousands of dollars to own an NFT?
Fundamentally, the value of NFTs stems from the proof of digital ownership and rarity. Before the birth of NFTs, verifying the authenticity of a digital artwork was virtually impossible because replication has always been readily available no matter what digital work one claims to have created. The advent of NFTs has enabled not only proof of ownership but tokenization and sale of varying forms of assets.
This way, NFTs assign rarity to digital data and provoke the desire for scarce commodities. Although its value may be somewhat subjective and most of us do not own an NFT as yet, for some, it has become a commodity that is as valuable as a work of art. While others may think of it as a mere JPEG file, they would even consider it as priceless as the painting of Van Gogh.
Avatar NFTs: Why All the Hype?
Over the years of many studies and upgrades, NFT, which started as a means of proof of digital ownership, has evolved into various forms. Among them, there are a few particularly successful NFT collections, such as BAYC, and there seem to be certain features that attributed to such massive commercial success.
1. Membership-Based Community
This is a case where holders of an NFT collection are provided with the right to purchase goods or membership to participate in various events, games, and community channels. In most cases, these events are open to token holders only and closed to outsiders. This is the juncture where NFTs—once thought to be only used as a PFP (profile picture)—become a powerful networking tool and a medium that sets “us” apart from others. As may have been assumed already, in the case of membership NFTs, community engagement and members are vital in that they are directly linked to the value of the NFT.
An iconic example of the most successful membership NFT is BAYC. As a large proportion of the BAYC community is celebrities like Stephen Curry, Post Malone, Jimmy Fallon, Steve Aoki, and early crypto entrepreneurs, the prestige of membership to this community lies in the fact that BAYC holders are invited to exclusive events like yacht parties, clubs and games. One of the events was the Ape Fest 2021 in NYC, which was held for a week from Oct 31 to Nov 6, 2021, exclusively for BAYC and MAYC holders.
OriginsNFT, LinksDAO, and Flyfish Club are non-avatar yet steadily popular NFTs for which membership is the keystone that props up their value.
2. A Means of Showing Off
Expensive NFTs have now become one of the brilliant ways to show off one’s wealth online. In particular, the persistent pandemic, where contactless has become the new normal, is only fueling NFTs’ value further. This is because, unlike real assets (i.e., luxury watches, bags, clothes, cars, houses), the rare and expensive avatar NFTs can be shown off limitlessly online. In this sense, the psychology behind purchasing NFTs is the same as luxury consumption. It may even be safe to say that CryptoPunks and BAYC, for example, are already recognized as luxury brands. This is also the reason luxury brands like Hermes, Louis Vuitton, and Lamborghini are pouncing on the NFT market.
3. Copyright and Business Opportunities
Because some of the NFT issuers transfer copyrights and licenses to NFT holders, one can own a powerful brand by just owning an NFT. In other words, you can take advantage of owning an NFT and turn it into a good business opportunity. A case in point is BAYC. It appears that a significant number of individual entrepreneurs and companies are already using their BAYC NFTs for their products and projects (see BAYC #3,500 holder Alternate Ending Beer Co.'s product and BAYC #8774 holder's Adidas concept below). Interestingly, after Larva Labs stirred up controversy for not transferring copyrights to CryptoPunk holders, BAYC’s price gained momentum to catch up with CryptoPunks’ price.
4. A Means of Identity Expression
More often than not, owning the one and only NFT leads you to a peculiar experience where one's identity is projected onto the NFT. Over time, emotional attachment to the NFT grows stronger and in their mind, the NFT becomes a priceless asset, making the holder reluctant to sell them but rather wanting to hold them for longer. When holders of the same NFT collection come together, they tend to share a strong bond and quite often, build their own culture.
5. NFTs Becoming a Financial Instrument
Lastly, the latest development in the NFT sphere is the launch of services where NFTs are used as financial instruments. NFT holders can use their NFTs as collateral or receive token rewards in the form of dividends. Two of the most talked-about examples are NFT-collateralized loans and dividend payout to NFT holders:
- NFT-Collateralized Loan: The number of loan services that accept NFTs as collateral is steadily on the rise and NFTfi and Arcade are among the largest providers of such services. Starting this year, Genesis Global Capital, the world’s largest digital asset lender, began to recognize NFTs as an asset with intrinsic value and accept NFT as collateral (as illustrated by the recent $1.25 million loan offering where 10 NFT artworks were pledged as collateral).
- Dividend Payout: Depending on the type of NFT, an NFT holder is entitled to dividends just by holding an NFT. About a week ago, Cool Cats launched $MILK and started offering 1,000 to 1,500 $MILK to Cool Cats holders daily, depending on the rarity of the NFT. This was the first experiment to make NFTs a means of passive income. $MILK is used to evolve Cool Pets and purchase various items within the Cooltopia gaming ecosystem. While currently, the price of $MILK is $0.07, caution is warranted given the strong downward pressure from inflation and overhang risks.
Attempts of using blockchain to verify ownership of assets began in 2012. And with the arrival of the Ethereum blockchain that made smart contract available, blockchain-enabled verification of ownership became a reality in the form of NFT. In the digital world where data can be endlessly replicated, NFT technology—which proves the uniqueness of data and disables the possibility of replication—is introducing many changes. With creators increasingly launching NFTs, creation—which had primarily been done offline—has moved to the digital world and many have already embraced them with enthusiasm. They did not stop at simply owning a piece of digital art but started manifesting their identity using their NFTs and went as far as building an exclusive community dedicated to the holders of the NFT. Recently, protocols that even serve as NFT-based financial instruments are being increasingly released, blurring the boundaries between art and investment. NFT has become a tool to unleash inherent human desire in the digital world as well as a promising technology that various industries are scrambling for. The evolution of the NFT-based service is set to accelerate and that’s why its future is looking even more exciting.