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NFTs in the Modern World Explained

The rules of digital asset ownership have changed. The immutability of locking your digital assets behind walled gardens is now called into question by non-fungible tokens (NFTs), which are determined to breach these walls to allow for the free flow of assets across multiple platforms.

Although NFTs have been around since 2014, they have only really taken off from 2017 onwards. So what is the deal with NFTs? Over at GGV, we’re exploring this space as it aligns with our principle of investing in tech that has the potential to augment both economic and social good.

Our Vice President Dimitra Taslim spearheads our NFT exploration, and he recently chatted with us on the value of NFTs and what GGV is doing in this space. In this article, we will cover the following points:

  • What are NFTs?
  • How do NFTs work?
  • NFT use cases
  • Value of NFTs
  • NFTs and GGV

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What are NFTs?

Non-fungible tokens, more popularly known as NFTs, are digital assets that represent  real-world objects such as art, music, in-game items, music, and videos. NFTs exist on the same blockchains that secure and power cryptocurrency. These blockchains, called Layer 1 platforms (L1), serve as the critical ecosystems that cryptographically secure NFTs.

The primary L1 platform that NFTs operate on is Ethereum (ETH). ETH established the ERC-721 token standard, which is currently the most commonly used standard for NFT tokens. Although ETH is the most commonly used blockchain for NFTs, other L1 platforms also operate within this circle, such as Solana (SOL) and Flow (FLOW).

NFTs form a key branch of Web 3.0, the latest version of the World Wide Web (WWW) that seeks to operate on the principles of decentralization, where a central authority no longer governs data..

What makes NFTs different from fungible tokens?

It’s in the name: non-fungible tokens counteract fungible tokens. While fungible tokens like cash and fiat currency can be equivocally exchanged (for instance, US$1 can be exchanged for US$1), NFTs cannot. It all boils down to the unique serial number assigned to each NFT. This means that no two NFTs are the same – even if they are visually similar.

Picture this: you and your friend own an NFT each. These NFTs represent different objects: yours represents the Mona Lisa painting, while your friend’s NFT represents a Yayoi Kusama sculpture. Your NFTs thus carry different values, which means that you cannot simply swap them like you would fiat dollar coins.

With the foundations of NFTs in place, let’s now consider how they work.

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How do NFTs work?

As Dimitra explained,

“NFTs don’t ‘contain’ the asset, but are instead pointers to the asset location.”

To help you visualize, let’s say we have an asset that is a digitized image of SpongeBob Squarepants. When you buy an NFT of SpongeBob, you purchase a certificate of ownership that proves you’re the owner – this is condensed into the serial number assigned to your NFT. The actual image of SpongeBob is not contained within your NFT. In other words, NFTs work by unbundling ownership from the asset. Your ownership of the NFT is irrefutably underwritten in the blockchain, and all you need to prove it is to present the assigned serial number.

This is vastly different from “owning” a JPEG image. Apart from a watermark that is superficially applied to the image, there is no other way to prove that you created or own the image with certainty. The watermark can even be fabricated or removed, further muddying the certainty of your ownership.

Your NFT’s serial number is also the ticket that grants you access to exclusive communities, which commonly operate on existing social platforms like Discord and Twitter. Given the ability to encrypt your asset ownership onto the blockchain, NFTs have thus expanded to include other use cases apart from just art and collectables.

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NFT use cases

NFTs span a variety of applications, with some of the more recognisable ones listed below:

  • Art and collectables
  • Metaverse
  • Gaming
  • Sports

 

Art and collectables

Art and collectables are the most recognised use cases of NFTs. These most commonly manifest as limited sets of collectable JPEG images, such as Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), and Dark Zodiac.

represent art and collectables section
Beeple’s Everydays: The First 5000 Days.
Image credit: Christie’s

One of the best-known art NFTs is Beeple’s Everydays: The First 5000 Days, which sold for $69 million at online auction house Christie’s. The sale of this NFT artwork posited Beeple (real name: Mike Winkelmann) as one of the three most valuable living artists.

 

Metaverse

The metaverse is defined as an online, three-dimensional universe that pulls together virtual spaces and where users use avatars to interact with each other. Representing the future of the Internet, the metaverse is powered by NFTs and blockchain technology. Interoperability is a crucial feature of the NFT-powered metaverse. Users don’t just own assets like avatars, land, and digital apparel, but also enjoy the freedom of migrating them across platforms with their cryptocurrency wallets. 

representation of metaverse
Shawn Lin and Risa Feng’s avatars on the BUD metaverse.

Risa Feng and Shawn Lin’s BUD is an example of the metaverse in action, which serves as a global virtual platform for Gen Z and Gen Alpha to create and share 3D experiences. NFTs in the metaverse also double as memberships for exclusive communities, giving users access to new product drops and special perks.

 

Gaming

NFT gaming operates on the premise of returning power and ownership to gamers. Currently, the gaming world is siloed into walled gardens, where the digital assets you earn in one game is confined to this game’s world. Gamers cannot transfer digital assets to another game, and in most cases, the assets themselves have no real-world monetary value. This effectively means that your progress and assets are lost for good when the game shutters. And if the game in question operates on a pay-to-win model where you spend actual money to buy assets, you effectively lose everything you invested when it dies. 

representation of nft gaming
Axie Infinity’s homepage.
Image credit: Axie Infinity

NFTs aim to flip things around. True digital asset ownership is a core pillar of NFT gaming, where gamers can freely transfer items earned during gameplay to other games without losing their value. Jenny Lee explains how this works in her podcast episode on NFTs:

“[NFTs are] very similar to the physical world where you go buy a pair of Nike shoes, and you can wear them everywhere. [So with NFTs], you have a little avatar or a game pack that you can bring with you everywhere.”

Furthermore, NFT gaming counters the pay-to-win model with play-to-earn games, which promise to reward players with financial incentives the more they play. Axie Infinity is one such game where players battle, raise, and trade fantasy creatures called Axie. Players pit their Axies against each other to earn smooth love potions (SLP), which double as crypto coins. As Axies themselves are NFTs, they can also be bought and traded on NFT marketplaces with SLPs.

 

Sports

NFTs have also been applied to the world of sports as collectables that represent key sporting moments, community rights, and tickets. Sports NFTs are an up and coming form of NFTs targeted explicitly at fans  of major sports associations like the National Basketball Association (NBA). NBA Top Shot is one of the more well-known sports NFTs today. Created by Dapper Labs, this sports NFT project runs on the company’s proprietary blockchain FLOW, giving users the ability to “own” video clips of famous NBA sporting moments.

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Value of NFTs

Now that you have a clearer understanding of where NFTs can be applied, we arrive at our next question: How do we determine the value of NFTs? After all, NFTs are similar to cryptocurrency – they are ultimately intangible assets with no physical form.

Despite this, the total value of trade for NFTs was estimated to exceed $40 billion in 2021, with OpenSea, the world’s largest NFT marketplace, recently valued at over $13 billion

The NFT bubble?

Given how quickly the global NFT market grew in such a short period, some people have dubbed NFTs as a bubble, with The Conversation referring to it as “an overblown speculative bubble” fuelled by a cocktail of pop culture and cryptocurrency The caution may be warranted, with big-name influencers like rapper Eminem, YouTuber Logan Paul, and late-night television host Jimmy Fallon dropping enormous sums of money on NFTs. In December 2021, for instance, Eminem was reported to pay around $450,000 in ETH for Bored Ape Yacht Club (BAYC) No. 9055.

With these celebrity influencers actively participating in the NFT trade, The Conversation claimed that this is a “graphic example of the power of media culture to stoke ‘irrational exuberance’ in financial markets” at play. Instead of using traditional investment tools, people instead follow the example of these influencers to invest via alternative means. The Conversation argues that the danger in the NFT bubble ultimately lies in the fact that it has “absolutely no fundamental value.” While NFT creators might do well in the long term, the same cannot be said for NFT holders.

But is it necessarily fair to approach NFTs with such a dystopian view? Dimitra takes a more balanced view. 

A more (reasonable) outlook on the long-term value of NFTs

“It’s hard to analyze the true intrinsic value of NFTs,” Dimitra reasons. While he acknowledges that much of NFTs’ short-term value stems from the hype built around them, he believes that NFTs are backed by a strong value proposition: the immutability of asset ownership. Regarding OpenSea’s skyrocketing value, Dimitra explains that this is only to be expected given the first-mover advantage it enjoys. As the first real platform that streamlines the buying and selling process, OpenSea has astutely identified and taken advantage of an enormous market opportunity.

But looking towards the future, Dimitra believes that OpenSea will not retain its monopoly status forever. Other NFT marketplaces are set to enter the scene, with some names like Coinbase and Rarible identified by CoinTelegraph. Segmentation could occur, with divisions made on the lines of product categories, L1 blockchains, interest groups, or even geographies. 

Referencing the Web 2.0 development cycle, Dimitra projects that OpenSea will follow the trend of experiencing tremendous growth in the next few years and could perhaps become oligopolistic alongside a few other competitors. There could also be a long-tail of alternative marketplaces catering to specific NFT interest groups. However, these platforms do have a tendency to centralize and may see a consolidation in the form of M&A or smaller platforms getting outcompeted by larger ones.

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NFTs and GGV

Over at GGV, Dimitra is leading our exploration into the world of NFTs. While we can’t disclose any specifics, we are adopting a pick-and-shovel approach by investing in the underlying infrastructure of NFTs. This comprises many parts, including management, data analytics, storage, minting, and Layer 2 (L2). This is the segment of NFTs where we see huge potential for growth and scalability in the long run.

Our reason for investing in NFT infrastructure is simple: the NFT industry is currently in a state where there is an influx of applications requiring new and improved infrastructure. There will be perennial demand for infrastructure even beyond this phase as NFTs continue to develop and evolve. For example, a promising company we recently found built a Decentralised Autonomous Organization (DAO)-based liquidity protocol for NFTs, which aims to streamline the process for NFT owners to collateralise their assets.

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NFTs will reshape the world

Within the space of just one year, NFTs have already made significant headway in redefining the parameters of digital asset ownership. While we can say nothing concrete about how NFTs will continue to develop in the future, it’s clear that they are here to stay. With new projects springing up and communities rallying around NFTs, we look forward to seeing how this space continues to evolve in the future.

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