The Evolution of NFTs: What’s Happened, and What’s Next?
This is the 2nd part of an ongoing NFT classification series.
In the second part of this NFT series, we dive a little deeper into the different NFT waves and classifications.
Editor’s Note: Here’s an attempt to help you gain a better sense of the NFT space. Of course, this is just a humble attempt to highlight what has happened, and ponder on what’s next. In the meantime, let’s carry on!
Imagine being able to buy a tweet. Well, you don’t have to because that actually happened. Twitter CEO Jack Dorsey sold the first tweet he posted as a non-fungible token (NFT) for USD$2.9 million.
That’s not all! Artist Beeple sold an NFT of a JPEG file containing a collage of his works over a period of 5,000 days for USD$69 million. Even a Nyan Cat gif got in on the action — retailing for USD$600,000. So what are NFTs, and why would anyone pay millions for a JPEG? How did we get here?
What are NFTs Anyway?
Well, to understand what NFTs are — let’s break it down.
Firstly, to say that something is fungible means that it can be replaced with a similar like copy.
For example, a postcard with the Mona Lisa printed on it is a fungible item; if you went to the gift shop at the Louvre, you would be able to buy as many as you would like and they would all have the same relative value.
Now, contrast this with the actual Mona Lisa and you get a different story. The actual painting is non-fungible, meaning even the closest replica of the Mona Lisa would not have the same value as that of the original.
A further concept to note: when a buyer buys an NFT he is not buying the digital item the NFT is represented by, but instead is paying for a “certificate” in the blockchain that validates his ownership of the digital item.
Exploring the evolution of NFTs
Now that we have come to understand what NFTs are, let’s now explore its evolution over the years — which can be roughly broken down into 3 parts. It is important to note that one wave does not necessarily signal the end of another but rather builds on the features of its predecessor, marking the next phase in the evolution.
Wave One: Rarity
Rarity was what marked the first NFT trend. To understand this wave, we’re going to use one of the favourite pastimes of any 90s kid: Pokemon cards.
Throwback to 2002: Pokemon cards were the trend and the one card everyone wanted was the “the shiny Charizard card.” One of these cards today retails for USD 8–13k. Many would argue that the card’s high value owes not to its power within the associated card game, but rather a combination of its status as part of the Legendary Collection, and the perceived value that the fanbase places on it.
The Beginning: NFT Collectables
Now take that concept into the world of online art and you have Wave One. One of the earliest known NFT Collectables was a collection of 8-bit avatars known as CryptoPunks launched in 2017. According to its creators Larva Labs, the CryptoPunks are 10,000 uniquely generated avatars who are owned by a single investor on the Ethereum blockchain.
But here’s the catch: not all CryptoPunks are valued the same.
Each CryptoPunk is a unique avatar and each of them possesses a unique combination of randomly-generated attributes. This comes down to their cosmetics, fashion, features and even the species. The last feature seems to be the largest portion of the price discrepancy as there are only 9 alien-type punks and 6,039 male human type punks.
Therefore, similar to the principle of trading cards, Wave One NFTs apply the same principles of rarity, collectability and groupthink* to digital collectibles and art pieces to not only determine an NFT’s value — but also inflate it.
Groupthink is a phenomenon that occurs when the desire for group consensus overrides people’s common sense desire to present alternatives, critique a position, or express an unpopular opinion. Here, the desire for group cohesion effectively drives out good decision-making and problem solving.
Wave Two: Utility
The Next Stage: Generative Art
The Second wave of NFTs began when rarity was not enough — it now included an element of utility. This is seen in the next evolution of the collectible: the AI-driven Generative Art. So, how does this display utility?
Well imagine that there’s only 10,000 shiny Charizard cards in circulation and you happen to own one (lucky you). And because you own a shiny Charizard card, you get access to digital clubhouses and exclusive merchandise that only you and other shiny Charizard card owners can go to and buy. Now, turn those Charizard cards into digital apes and you have the now-famous Bored Ape Yacht Club.
This NFT collection started with 10,000 AI-generated Bored Ape NFTs that were initially sold for 0.08 ETH (around USD$168). These NFTs not only sold out, but have since seen prices skyrocketing to a peak of USD$24.4 million. However, these apes are more than a good investment in a valuable collectible.
Each Bored Ape NFT, serves as a key to member-exclusive areas such as the Bathroom, a members-only canvas where “each ape-holder will be able to paint a pixel on the bathroom wall every fifteen minutes.”
Gaming NFTs that allow you to make a living?
Another way in which Utility can be seen is in an unlikely crossover from another thriving community — Gaming NFTs.
Enter Axie Infinity, the number 1 ranked Ethereum game by daily, weekly, and monthly active users — generating over USD$16 million. While Axie infinity maintains the functionalities of a typical NFT, it has a unique “play-to-earn” model where players can earn by participating in PVP battles, breeding new Axies and earning in-game currencies that can be converted to fiat.
While Wave One formed the foundations of the principles of NFTs, Wave Two gave these NFTs functions beyond being mere tokens — evolving to having a purpose beyond collectibles.
Wave Three: Community
8 White Words on a Black Background?
What’s next? Virtual Reality? No, you’d be surprised to learn that the Third Wave had much humbler beginnings.
It started with a mere 8 words, in Times New Romans font, written on a black background — publicised via a tweet.
This is LOOT — a Community-Owned Gaming NFT. Think dungeons and dragons but with a twist — you get to decide the designs and the stats of your items based on the names given.
Loot was created by Vine’s co-founder Dom Hoffmann, where on 28 August 2021, he released 8,000 loot bags containing various items, such as weapons, armors and accessories, commonly seen in role-playing games (RPGs).
Communities from NFTs
As with the other NFTs in this story, the prices for these loot bags ballooned, but some other interesting phenomenons also occurred. For one, owners and other members on social media began creating their own art from the contents in the lootbags.
Some were hand-drawn, others were more sophisticated creating video game quality concept art for their loots. Then came the creation of guilds based on the items present in one’s loot bag, like the Divine Roles, a guild composed of those possessing divine robes in their loot bags of which there are only 396 in existence.
Along with this came fractionalisation, the process of splitting up an NFT into a number of pieces and sharing ownership of the NFT with the owners of each piece known as Fractionalised Non-Fungible Tokens (F-NFTs).
In this case, with 8 loot items, the Loot bags could be fractionalised into 8 different pieces, with each investor owning an item in the bag as opposed to an entire bag. This process not only enhances the overall NFTs value but also democratises NFT ownership.
What is most fascinating about Wave Three is that unlike the previous 2 waves, communities that would have otherwise never existed, are now forming around the possession and investment of these NFTs.
Overall, NFTs are a relatively new exotic investment opportunity so who knows what the future holds for NFTs?
Perhaps we could see a future of Dynamic NFTs such as those seen in Ether Cards and Dreams Quest, or the likes of Daniel Arsham’s digital statue NFT that is able to disintegrate and reform over the course of a year.
Could the next evolution be Asset-Backed NFTs where real assets like precious stones and commodities are used? Maybe NFTs that are able to further the cause of non-profit organisations focused on social justice and conservation.
The road ahead for these NFTs may not be certain but it would most definitely shift the way we see and interact with the blockchain and crypto markets for years to come!
THIS IS NOT FINANCIAL ADVICE
Cryptocurrencies like NFTs are nascent and in very early-stage startups. They are heavily subjected to speculation on the secondary markets and should never be treated as a form of investment.
Our write-up is a humble attempt to show the technological advancements and innovation that the blockchain technology possesses.
Readers are advised to engage their own financial advisors and do their own due diligence before making their first purchase.
All information expressed here are in the views of the writer based on the date of article.
We are looking for industry leaders to co-create this together. Please write to [firstname.lastname@example.org] for your interest to participate in this community-written project.
LESLIE DANIEL CHAN. Founder, DEFI Singapore
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