NFTs: A Multifaceted Ecosystem - Thematic Insights: January 2021
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NFTs: A Multifaceted Ecosystem Thematic Insights: January 2021
Table of Contents
Preface 3 Category: Collectibles 11
NFT Refresher 4 NFT Scaling Solutions 12
Investable Universe 5 The DeFi-NFT Symbiosis 13
Exchange Landscape 6
Overview of Polkadot's DeFi 7
Category: Crypto Art 8
Category: Virtual Worlds 9
Category: Video Games 10
Analyst
Piers Kicks
piers@delphidigital.io
Market Overview 2020 was a monumental year for NFTs and the stage is set for another record-setting year in 2021. Over the course of last year, we saw a net increase of buyers (+114%) over sellers (+8%) of NFTs as the variety of experiences and applications available continues to increase. Whilst data remains relatively fragmented in the NFT ecosystem, the numbers of active marketplace users is clearly growing. It's worth drawing attention to the average revenue per user (ARPUs) in the NFT space, which so far appear to be significantly higher than their non-crypto equivalents. This is likely attributable to 1) a higher willingness to invest when users know that value can later be extracted and 2) deeper loyalty through actual ownership in these projects. Most NFT activity remains speculative despite a steady increase in active users across individual projects; the charts below focus on active marketplace participants rather than users across these projects. Note: more activity has already begun to shift to layer 2 solutions, sidechains, or off-chain sales altogether with examples like such as Nifty Gateway, which is not reflected here. At the start of 2020, there were just over 12,000 NFT buyers and sellers; that number grew to 20,000 by year-end led by a substantial increase in activity in 2H 2020. Almost $100M changed hands across NFT markets not including record-setting Crypto Art sales like the Beeple drop. The dip in marketplace activity due to high gas fees during the "DeFi Summer" is notable as both unique active wallets and total number of sales declined. Interestingly, the chart to the right shows us that throughout the year the amount of NFTs sold per month declined whilst average sale price went up. This is likely indicative of gas fees forcing users to focus on buying quality over quantity, whilst smaller transactions on mainnet were prohibitively expensive forcing them to shift to layer 2s such as Matic, or not to transact at all. Source: Nonfungible.com
NFT Refresher
Non-fungible assets are exactly as they sound: unlike fungible tokens (e.g. ERC-20), each NFT is unique and cannot be freely
interchanged. An NFT is a type of cryptographic token that is used to represent ownership as well as uniqueness of natively
digital things. For example, swapping one house for another house is not the same as swapping one dollar for another dollar;
the latter is fungible whereas the former is not. As such, NFTs are not mutually interchangeable with other tokens in the way
an asset like bitcoin might be. Examples include crypto art, game assets, digital collectibles, domain names, and even
tokenized representations of real-world assets. Due to their standardization, we are beginning to see the emergence of a
universal digital representation layer which could turn out to be a core primitive for the future web. As global internet
penetration rises and more content than ever is being produced, a decentralized mechanism for the issuance and
management of scarce digital things, including intellectual property, could prove to be a critical tool in unlocking the creator
economy and novel business models.
Key Benefits of NFTS
Standarization Interoperability Programmability
In the same way there exists standards for These emerging NFT standards allow tokens to Like most digital assets, NFTs are
things like content (e.g. file formats such as .jpg), freely move between different ecosystems. programmable. In the realm of virtual items, this
and the protocols that make up the internet (e.g. Developers can easily build on top of previous unlocks several new dimensions of design space.
TCP/IP), there are emerging NFT standards (e.g. NFT sets, enabling new forms of community Importantly, NFTs can behave just like
ERC-721). We can now think about storing cross-pollination. This is enabled by open traditional assets and can be leased and
digital things ranging from game assets to event standards that provide well-defined, consistent collateralized to generate cash flows. Their usage
tickets, all in the same ‘language’. formats for both reading and writing data. in DeFi is only just beginning.
Scarcity & Immutability Liquidity Digital Property Rights
Smart contract functionality surrounding NFTs NFTs enable the ability to trade items on For a long time now, users have willingly
allows developers to etch certain properties into completely open marketplaces. Today, it is often transacted value for virtual goods that sit in
the tokens such that owners can be assured that difficult to find liquidity for items online. Be it a heterogeneous centralized servers that are
not only are their NFTs scarce, but that no others game item, or an event ticket, existing markets owned by a single company, provide no way to
with the same attributes can be created in the are fragmented and carry varying degrees of generate cash flows, and offer no real ownership
future. Their detailed provenance is also an risk. Global liquidity pools for virtual assets are or control prospects for the user. That is all
attractive feature for many applications. gradually forming with reduced transaction risk. changing as NFTs redefine digital ownership.
Investable Universe
Individual NFTs
DIGITAL ARTS FUNCTIONAL NFTS COLLECTIBLES
Traditional Digital Art Game-Specific NFTs Crypto Collectibles
*includes TCGs
Virtual Real Estate Sport Collectibles
Music & Video NFTs
*often combined Access Keys & Tickets Branded Collectibles
Fashion & Culture Domains Proof of Attendance
*NFTs redeemable *not always xferable
for physical goods
NFT-Related Governance Financial Infrastructure Social Tokens Other
Axie Infinity - $AXS NIFTEX WHALE - $WHALE yInsure
*fractionalization *smart contract
insurance as NFTs
Rarible - $RARI NFTfi Coin Artist - $COIN Flow - $FLOW
*lend & borrow *NFT-focused
blockchain
Flamingo - $FLAG NFTX Rac - $RAC Enjin - $ENJ
*NFT index funds *crypto game
product ecosystem
Note: Categories are non-exhaustive.
Source: Delphi Digital
Exchange Landscape
As it stands, the vast majority of NFT exchange activity takes place on the universal markets that underpin the ecosystem. The OpenSea
API is actually referenced by the majority of projects and marketplaces in the space. As individual categories or projects achieve escape
velocity, exchange venues appear to splinter into increasingly specialized niches. We expect this trend to continue as crypto provides the
tools to form robust microeconomies around small communities. In the long run, gamers are unlikely to want to mix or be governed by
artists (and vice versa). At the other end of the spectrum, we are beginning to see aggregation platforms such as NFTBank emerge that
provide a single interface through which users can access a range of marketplaces and financial products (links for each below).
Other
Video Games Crypto Art
NFTBank - Aggregator
Ties multiple exchanges & financial
products together under a single UI.
Universal NFT Marketplaces
OpenSea
Rarible
Functional NFTs Collectibles
Not yet specialized.
Future Specialized Niches
Watch for custom marketplaces
in areas like domain space, ?
insurance products, event
tickets, etc. ? ?
?
Source: Delphi Digital
Category: Art
Crypto Art was arguably the breakout NFT sector of last year and continues to grow, topping over $20M in transaction volume in 2020.
It's clear that this category has found product-market fit earlier than others. This is perhaps attributable to the clear value propositions to
both collectors and creators, whilst scalability constraints are less of a concern as art isn’t transacted on-chain as much; we touched upon
some some emerging artists and market dynamics in an earlier report. Nifty Gateway exploded onto the scene last year and what really
sets them apart is their focus on attracting recognizable talent from outside the ecosystem for limited-edition drop models. Not only
does this boost demand, it also turns their existing audience’s attention to crypto. Playing devil's advocate, one might suggest some of
these eyewatering sales aren't entirely legitimate. There could, in theory, be collusion between large whales and even platform operators
to boost sale prices and improve the optics of this space. In time, as price history is developed on the ultra-rare pieces, we will be able to
use on-chain analysis to track patterns of activity across top collectors and generate insights into this theory.
Artist
Beeple
Price (USD)
$777,777.77
Price (ETH)
Ξ667.019
Artist
Trevor Jones
Price (USD)
$352,730.13
Price (ETH)
Ξ302.5
*Includes both primary and secondary sales
Source: Cryptoart.io
Category: Crypto Sandboxes/Virtual Worlds
The rise of crypto sandboxes in which users are free to create whatever they like has resulted in several interesting emergent behaviours.
For example, it has become popular for crypto art collectors to display their pieces in virtual art galleries built in blockchain-based virtual
worlds. We have even seen the "gentrification" of different virtual neighbourhoods as artists have spontaneously coalesced in certain
parts. These are places as much as they are games. These should be distinct from other crypto games in that these are very much
platforms for future experiences too. Increasingly, we are seeing projects such as Kraken Exchange build hubs in these worlds. Having a
"place" to meet and centralize activity around appears to resonate with global, distributed teams operating asynchronously. It is, however,
perhaps too early to back a winner, which the market seems to reflect. There isn't any real differentiation between the projects as far as
sales are concerned, and the major projects are largely distinguished by community and aesthetics rather than stand out feature sets.
DCL TSB CV SS
Token MANA SAND CUBE
FEATURES
VOIP
VR
Web
Despite Decentraland's early dominance, the chart above highlights the
Mobile traction other projects appear to be gaining relative to DCL.
*DCL February sale spike was due to their launch treasure hunt.
Source: Nonfungible
Category: Video Games
DISCLAIMER: DELPHI DIGITAL BUILT AND INVESTED IN AXIE INFINITY'S GOVERNANCE TOKEN AS WELL AS INDIVIDUAL AXIES.
In 2020, almost 700,000 crypto game assets were sold across leading games such as MyCryptoHeroes, League of Kingdoms, and Gods
Unchained for a total of $15M. Notably, developers in this space are beginning to take account of the new tools and economic realities in
game design. Within crypto games, there are new mechanisms for bootstrapping adoption, promoting loyalty via meaningful ownership,
and inviting participation from the playerbase in governance decisions. We are beginning to see the holy grail of customer acquisition,
driven largely by evangelism from the early user base. Not only that, the ARPUs observed in these new games are dramatically higher
than what we observe in the traditional game industry. Whereas a game like Pokémon GO might average $1-5 per user, Axie Infinity is
seeing over $100 per owner. Taking account of the disclaimer above, it's hard not to draw attention to Axie Infinity as a primary example
of these tools driving explosive growth. The project grew its holder base by 11.6x throughout the year, reaching over 3000 DAUs by
December. Alongside Crypto Art investing, the underlying "Play-to-Earn" game model appears to have found particular resonance in
emerging markets such as the Philippines.
Source: Nonfungible. ARPU estimates via Cryptoslam
Category: Collectibles
Aside from the "NFT Antiques" with strong historical significance such as CryptoKitties and CryptoPunks, one of the fastest growing
subcategories is sports collectibles. Sorare (soccer) has grown to just under $8M sales in its first year, $500K shy of the much older
CryptoPunks. NBA Top Shot, Dapper Labs' flagship product on Flow, has perfomed similarly with $5M in secondary market volume in the
back half of 2020. The chart to the bottom right shows the secondary market volumes of any title with >$100K in secondary market
volume across the three primary collectibles chains. It shows that Flow, with just a single title, has managed to eclipse the leading WAX
projects combined. Other branded collectibles such as UFC and Dr. Seuss are in the pipeline, making Flow one of the key projects to
watch in 2021. In addition, we expect more brands and IP to enter the NFT collectibles space in the coming years. Projects like Veve and
Terra Virtua are building partnerships with major IPs along with virtual environments in which users can explore their collections.
*Secondary market volumes of any project with >$100K.
Source: Nonfungible, CryptoslamNFT Scaling Solutions
It's no secret that gas fees continue to hinder the user experience on Ethereum across a variety of applications; games and NFTs are
often particularly hard hit. Well-capitalized purpose-built chains such as Flow (Dapper Labs) have recognized this an opportunity and
have already begun to roll out popular experiences on the new network. That being said, Ethereum's deep ecosystem support is not to
be underestimated. Scaling solutions appear to be making progress and the large-scale success of any of them could well undermine
the core value proposition of more "performant" chains. Interestingly, some projects such as Axie Infinity are recognizing this as such a
critical piece of infrastructure that they would rather engineer a custom solution in-house. If generalized solutions fail to deliver or are
deemed too costly, we could see more of this. If projects like Flow do take off, then we risk fracturing the still nascent space and
potentially undermining the concept of a "universal digital representation layer" from which NFTs may derive a portion of their value.
*For a deeper dive into Ethereum scaling see our report here.
Custom
Scaling
General
Scaling
Primary
ERC-721 ERC-1155 ERC-2615 NFTs SimpleAssets dGoods ?
Standards
Lower throughput yet more activity Higher throughput yet less activity
Chain Ethereum Flow Wax EOS Others
Source: Delphi DigitalThe DeFi-NFT Symbiosis
DeFi and NFTs stand to becoming increasingly mutually beneficial over time. On the one hand, DeFi can provide a dramatic expansion of
utility, functionality, and access to more complex financial infrastructure for the NFT ecosystem. On the other hand, NFTs provide DeFi
with a growing universe of measurable collateral, which may ultimately prove to be the primary mechanism through which real-world
assets enter the world of DeFi. As it stands, the inability for traditional assets to bridge this gap can be seen as a bottleneck. Whilst
description of real world assets via NFTs remain relatively undeveloped, there are projects such as Tinlake working to improve this area.
DeFi Usage of NFTs Projects Focused On Both NFTs Borrowing DeFi Concepts
yInsure Tinlake Charged Particles Aavegotchi Meme Mintable
(Financial product (Real-world asset (Fuse interest-bearing (DeFi-staked crypto (NFT Farming) (Voting NFTs used
representation) representation) assets with NFTs) collectibles) within a DAO)
NFTs posses much broader retail appeal that could draw new
entrants into the space through actual products and
experiences faster than DeFi and other sectors. Content is
much more intuitively understood whether it's a video game,
art, music, or writing. As such, these domains might be
perceived as a "trojan horse" for blockchain adoption.
Importantly, abstracting away the blockchain component is a
core focus for many of these experience-oriented applications.
Already, projects like OpenSea don't actually mint NFTs until
one is sold. Many games are making the blockchain aspect
invisible, so only the savvy users ever actually withdraw.
These factors could mean there is a lag between what we can
see and what is actually happening from an active users
perspective, whereas DeFi is totally transparent.85 Broad Street New York, NY, 10004 www.delphidigital.io
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