In early July 2020, the total sales of nonfungible tokens, or NFT, hit $100 million. And that is just the start. As the DeFi market reached $4 billion in locked value and leading cryptocurrencies started their rally to yearly highs, we might soon see a hockey-stick growth pattern in the NFT space. Let’s have a look at why it might be the case.
Where do NFTs come from?
It’s no secret that the best thing a project can do during a crypto winter is to build — and that’s exactly what the most popular NFT projects of today have been doing during the past two years. Decentraland, which raised over $20 million in 2017, successfully launched this year. It was overtaken in volume by single-developer project Cryptovoxels that finances itself by selling parcels of digital land. Meanwhile, VC-backed Dapper Labs, the author of the famous NFT collectible game CryptoKitties, has been working on its own blockchain to offer a higher throughput environment for NFTs.
We could argue that the crypto ecosystem, in general, has just made another infrastructure leap during this time. Remember 2017: All you could do is to take part in a project with Ethereum, while MetaMask was just starting to gain momentum.
Here’s what we have now: Stablecoins for sustained pricing; non-custodial wallets; fiat on-ramps; funds management platforms; decentralized storage solutions; and digital identity providers. Boom. None of that was around a couple of years ago.
With great use cases and impressive returns brought by decentralized finance, Ethereum has been eyeing a new cycle of user behavior already seen in crypto multiple times. The first hype curve has already started and will only rise — the markets are inflating, and people will bring in more money to the ecosystem.
The best entry point
Here, the NFT market finds itself in a win-win situation. The NFT space has been massively benefiting from all of these technical innovations while serving as a perfect gateway for the new kids on the crypto block.
To make a forecast, I believe that 40% of new users will soon be coming to crypto through NFTs, will then educate themselves, and steadily transfer to other segments. While it might sound bold, it’s a rather native concept for technology: Games have always been a mechanism for onboarding. Remember the first thing you used on your computer. Microsoft created Minesweeper to teach people to use a mouse and click into small objects; Solitaire was designed to practice the drag and drop.
Why are NFTs native to human psychology?
Reason #1: Simplicity and fun
The process of collecting digital art, in-game assets (swords, garments), cards and kitties is a very easy and fun concept to grasp, and it does not require any financial education. Users see their entire interaction with the interface as a fun game and are incentivized by the emotional reward of unique object ownership.
Fabian Vogelsteller, the original creator of ERC-20 and ERC-725, has shared in his public interviews that these standards were initially created for fun community tokens — art, fashion and entertainment — rather than financial applications that have recently been successful with the DeFi movement.
Fulfilling the original idea of Ethereum architects, NFTs address the same pattern that makes people collect paintings and vases. Visual representation of an object with an immutable record of ownership is psychologically appealing to users.
Reason #2: Scarcity and investment attractiveness
Pricing of scarce items is a zero-sum game; people choose the objects they believe will be in demand by other people and thus will grow in price.
As physicist and network scientist Albert-Lázló Barabási writes in The Formula, when performance can’t be measured, network drives success. In the art community, recognized creators, who are growing in popularity and have good connections, produce a limited number of works that are highly sought after by many collectors. This promotes price growth.
If we take any industry without scarcity, say, when windows get more expensive, more windows flood the market. This is impossible in the NFT market where the value of an object is inseparable from the psychological attraction, so the economic cycles are way more distinct. The further in, the hotter it gets.
Reason #3: Adoption from Asia
The fact that a lot of crypto projects target Asian markets to be successful is old news. In the case of NFTs, this interest is even more natural because the concept of funny collectible objects and games have strong cultural origins in countries like South Korea and Japan.
Asians have an active interest in visual representations of objects, cute characters and images. For instance, mascots — cute animals representing a specific town or company — as well as world-famous emojis were born in Japan.
The value of an unbacked asset that is purely market-driven also seems to be a native concept for Asians. Games with in-house currencies that could be withdrawn existed in South Korea way before crypto.
Serving the demand, more gaming companies and other players have been entering the NFT space, attracting the attention of investors, who are searching for the best assets to invest in. That’s why it didn’t take long for the NFT market to reach $100 million in total sales — and it will only grow exponentially, given the factors mentioned above.
Unlike DeFi, where user interest and demand are driven by the practical applications and the promise of returns, the NFT market is driven by deep psychological patterns. As the world becomes more and more digital, many objects emerge as digital-native only, and the solution to the ownership question is already here in the form of NFTs.
There are several concerns yet to be solved to further facilitate adoption: interoperability and gas prices, among others. A unified Layer 2 solution is needed to have all NFTs visually represented on all platforms and wallets, as it’s a crucial psychological factor in terms of ownership.
Ethereum hasn’t been keeping up with the expectations to launch Ethereum 2.0 because of delayed sharding and congestion, so I expect the problem with gas prices to worsen.
The author of a curious article offers an interesting mental model: A sharded chain works like cities and suburbs connected by highways. In the long run, it would be a great goal to have an NFT “city” in one of the Layer 2 solutions or a shard. That’s another reason why I’m encouraging NFT projects to choose the same Layer 2 solutions.
To sum up, we have a great rally ahead of us that is bound to bring multifold growth — but also many obstacles along the way.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Alex Salnikov is a co-founder and the product manager at Rarible — a digital art-focused NFT marketplace. He holds a Master of Arts in data science, co-founded MarginCall exchange and also served as the chief technology officer of CoinOffering.