A version of this article was first published in the Consensys Web3 Q3 2021 Report. Check out the full report to learn more about Web3 and the DeFi economy, NFTs, L2s, the Metaverse, and more.
2021 has without a doubt been the year of the non-fungible token, also known as NFTs. As we round out this year, let’s take a look at the state of Web3 in the previous quarter. From the advent of novel mechanisms for turning songs into financial assets like Royal, to Snoop Dogg claiming to be the renowned NFT collector Cozomo de' Medici, to EulerBeats’ mind-blowing Futura drop, you would be hard-pressed to have escaped the hype.
Whether it was profile picture collections (PFPs), artistic 1 of 1s, music clips, collectibles, or simply utility badges, Web3 wouldn’t be where it is today without NFT mainstream adoption.
The proof is in the pudding, with sales totaling $10.7 billion for Q3 2021 — up eightfold from the previous quarter — across 33,985,609 sales.
As the NFT ecosystem matures, we're starting to see secondary sales now outnumber primary sales ($17.5 million vs $16.4 million) across the quarter, highlighting that whilst new projects are still attracting attention, older projects have retained attention.
Yet sales remain strong, with over $16 billion in primary sales in Q3.
The platform largely facilitating this revolution is OpenSea, an NFT marketplace where users can buy and sell pieces from almost any NFT collection out there. And the transactions going through OpenSea speak volumes: in the record-breaking month of August, the platform accounted for $3.16 billion of a total of $3.25 billion in total NFT sales volume across all platforms. Interestingly, Nifty Gateway was the dominant NFT marketplace until April this year, with OpenSea cementing its place as the go-to platform in Q2 and Q3 2021.
SuperRare, Foundation, and Hic et Nunc are other leaders in the NFT marketplace space, but they hold a comparatively small minority with OpenSea accounting for 97% of marketplace volume over the past quarter. Another contender to be aware of, this time from the traditional art world, is Christie's, who surpassed $100 million in NFT sales in September 2021, with a recent NFT auction in Asia fetching $15.6 million in sales on 28 September.
Total Marketplace Trading Volume (as of December 08 2021):
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Profile Picture NFTs (PFPs)
Crypto communities are expressive places where users depict themselves in various avatars through their profile pictures. Chances are you’ve seen these pixelated punks, bored apes, and adorable felines floating in the Metaverse across platforms like Twitter, Discord, Telegram, and Github. They will soon start to be verified. This is no longer a fad for the crypto-natives. PFPs are going mainstream with celebrities like Jay-Z and Snoop Dogg buying and choosing Cryptopunks as their profile pictures on Twitter, payments company Visa adding a Punk to their collection, and society continuing to embrace this cultural bull market.
The surge in PFP NFTs also indicates a broader cultural movement. Trading JPEGs seem to be steered by the cultural and symbolic value inherent in these creative interactions instead of exchanges governed by pure utility. PFP NFTs allow people to signal status, build community, and encourage artistic expression. Larva Labs and Yuga Labs’ Hollywood deals suggest projects like CryptoPunks, BAYC, and Meebits will gain even more media exposure through film and television. Owning one of these NFTs doubles as your ticket to internet native social clubs, which continue to grow in size daily.
Financialization of NFTs
Because NFTs are inherently composable with other Ethereum smart contracts and protocols, they are suitable for financialization. We look at three main types: collective bidding, fractionalization, and using NFTs as collateral for loans.
First up is PartyBid, a product that allows you to team up with friends to collectively bid on NFTs. By pooling together funds consumers can acquire higher-value pieces that wouldn't otherwise be possible (like CryptoPunks). Not only does this act as a cool way to buy beyond your means and to build an NFT collection with friends, but it gives users access to some of the most exciting projects on the market, with potentially higher returns. This innovation is only made possible by the digital nature of NFTs, whereby people across the world can enjoy ownership of the same digital good without the difficulty of physically sharing something like a piece of art. In one special case, that has even meant partial owners of one CryptoPunk were airdropped part of another rare CryptoPunk, for free.
A variation of this is the fractionalization of NFTs, where companies like Fractional allow you to bid for and buy fractions of an NFT. The total bids from all users amount to the total sell price, with fractions of the NFT dolled out depending on the amount you invested. Fractional plays on the same premise as PartyBid, with the exception of getting strangers involved for increased purchasing power. Not only does this democratize ownership on a greater and more global scale, but it improves the chances that artists and content creators can monetize their work in a capital-efficient manner.
Lastly, we have platforms like NFTfi that are offering NFT collateralized loans. By putting up any ERC-721 token up for collateralization, other users can begin offering you a loan. Once accepted, the ETH gets paid to you and the NFT is locked in the NFTfi smart contract, only to be returned once your loan is paid. If you can't pay back the loan then the NFT is then transferred to the lender. NFTfi’s total loan volume has already surpassed over 6 million DAI.
Whilst this is simple in theory, in practice, there are a few risks to be aware of. Firstly, smart contract risk is prevalent in the industry, whereby hackers identify a flaw in the code and are able to steal the funds or NFTs locked into the contract. A recent example of this is Poly Network, which had $600 million worth of assets stolen through smart contract flaws.
Another risk is loan to value ratio, where the value of the NFT may fluctuate greatly, potentially leaving the NFT used as collateral to be worth much less than the loan. This risk is particularly high for longer-term loans, especially given the nascent state of the industry. Lastly, many NFT projects have low liquidity, which may give them an artificially high floor price as sellers do not want to sell cheap, but buyers are not active. This can lead to lenders mispricing the NFT that is being used as collateral; if the loan defaults they may receive an NFT of lower value than they had bargained for. In summary, projects like NFTfi are yet to have had smart contract exploitations, but that’s not to say they won’t in the future, and if you’re looking to borrow, always be wary of the NFTs used as collateral.
NFTs have made themselves a household name in 2021. Whether you purchase JPEGs, trade collectibles, use them as collateral, or simply create digital art, NFTs cater to a wide array of Web3 users. Whether you believe NFTs are here to stay or not, they’re worth paying attention to. Not just because of the numbers, but because of the cultural movement and increasing use cases heralded across the world. If you have yet to dip your feet in the NFT waters, download a MetaMask account to safely and securely conduct your digital escapades.