The resurgence of NFTs

March 2021

In June 2018, we wrote about the emergence and promise of non-fungible tokens (abbreviated to NFTs). This was a new type of crypto token that could represent ownership of all kinds of asset from physical ones like houses and artwork, to digital ones like digital art, memes, music and intellectual property. Over the last few years, the popularity of NFTs has mirrored the general sentiment around crypto; they were extremely desirable in early 2018, then suffered two-years of subdued interest during the bear market and are now roaring back into the public psyche. Today, Formula 1, the NBA, Nike, Christies, international bands and renowned artists are all creating and releasing NFTs as a way to engage with their audiences and profit. This month we are going to dive back into the world of NFTs. We will assess how they have evolved over time, what the leading use cases are and where we can expect them to head.


As a refresher, NFTs are unique digital tokens that live on a blockchain. Currencies, like the USD or Bitcoin, are fungible meaning that one bitcoin has the same value as any other bitcoin - they are interchangeable. Fungibility is an important feature of currencies, allowing people to trade easily in agreed upon denominations. However, most real-world assets are not fungible. For example, my house is not interchangeable with your house and a Picasso is valued differently from a Mondrian. These items are non-fungible as they are unique. Blockchain technology can digitize both fungible and non-fungible tokens (NFTs).


From a technical perspective, NFTs can be deployed on any smart contract platforms. The most activity is currently happening on Ethereum, where there is a bespoke token standard for NFTs known as ERC-721. The most common form of Ethereum token is the ERC-20 token that can be written in 20 lines of code and creates a fungible token. ERC-721 is a more advanced specification of a token contract, whereby each token created can be unique and is non-interchangeable with other tokens. For example, we could create a collectable “FOOTBALLER” token with one token representing Messi and another representing Ronaldo. Both Messi and Ronaldo would be a type of FOOTBALLER token, but they would not be interchangeable.

The trading volume of NFTs rose significantly in 2020 to over USD250m, and in the last month alone NFTs have achieved a trading volume of over USD180m, resulting in an annualised run rate of USD 2.16 billion. This is the result of two complimentary forces. Firstly, we are seeing renewed interest in the digital asset industry in general. With Bitcoin reaching all-time highs, investors are re-engaging with the crypto industry and are looking at innovation beyond Bitcoin. The NFT is one of the most innovative parts of the digital asset space and so is garnering attention. In addition to this, NFTs themselves have been evolving. What started as a way for users to own, breed and sell digital cats (CryptoKitties), has evolved into tokens that represent art, collectibles, gaming assets, sports cards and IP. NFTs in these diverse categories trade at very different prices and even boast different functionality.

One of the key value propositions of NFTs is that they offer a way for brands to engage with their audience. Animoca Brands (one of our portfolio companies) is one of the leading companies globally in blockchain-based gaming and has been working with brands such as Formula 1, MotoGP and the Bayern Munich and Manchester City football clubs. Through a hybrid of gaming and collecting rare digital assets, users interact with these brands at a new level and become more deeply invested in their teams.


It is not just the brands that benefit from a more invested player. The gaming industry itself is being disrupted, with NFTs offering players the ability to actually own the gaming assets that they buy or earn. For the first time there exists in-game property rights secured by blockchain technology. Robby Yung, the CEO of Animoca Brands, explains the importance of this as:


For the first time, gamers can now take ownership of the digital assets they acquire in games - they're not merely renting them as a service. This is enormous, as it represents the final stage in the evolution of free-to-play gaming, where players spend money to acquire, enhance, and personalise their in-game items. Now that they can own them, as NFT's, they have the ability to trade them, sell them, and also a huge incentive to invest further into them, since they actually own them. 


The idea of NFTs as gaming assets has been around for a few years. In the last 2 weeks, the band Kings of Leon has added a novel twist on NFT functionality. They have released a new album as an NFT, with the tokens unlocking special perks like limited-edition vinyl and front row seats at future concerts. As we go to press, one of these NFTs has been bid up to USD160k, with the owner of the token being able to meet the band and gain backstage access to gigs for life. The success of this auction will likely form a blueprint for other musicians, celebrities and sports teams to sell experiences through NFTs.


We have entered an NFT experimentation phase. It is unclear what forms of NFT will work in the long run, but the technology is striking a chord. Jack Dorsey, the founder of Twitter, is selling the first ever tweet as an NFT; the current highest bidder is offering over USD2.5m. The musician Grimes has now sold over USD6m worth of digital art in the form of short videos set to original music. The Nyan Cat (an iconic GIF) was sold by its creator as a one-of-a-king for USD600,000. A blockchain company even bought a Banksy and then burnt it, aiming to transfer the value from the physical item to the digital NFT. Such events are arriving with increasing frequency and we seem to be on the cusp of a new market that bridges art, collectibles, crypto and the “metaverse” (virtual shared spaces).


At CMCC Global, we are excited about the promise of NFTs. We have direct exposure to the space through Animoca Brands whose founder, Yat Siu, we have been following for years. It has been interesting to watch the company integrate its products with a number of different blockchain platforms including Ethereum, Binance Smart Chain and Flow. While the majority of NFT related activity is taking place on Ethereum, its high gas fees are making other platforms attractive. This could play into the hands of Cosmos (another of our portfolio companies), which is aiming to connect disparate blockchains into a networked “Internet of Blockchains”. NFTs are coming of age and will bring new users, grow smart contract platforms and entice a mainstream audience to enter the crypto arena.

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