Status quo of NFTs - Part I

Oct 12, 2022 - 9 min read

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The current market landscape

After a wild boom in 2021, Bloomberg recently reported that monthly NFT volumes are down a whopping 97% compared to the 2022 high in January. However, volumes appear to be down less severe if we exclude wash trading on marketplaces like LooksRare, that incentivize trading with native platform tokens, and include new platforms like Sudoswap and X2Y2 that capture significant trading volume of well-established marketplaces like OpenSea. Therefore and more precisely, trading volumes are down around 85% in a sustained downtrend that is accompanied by heavy macro conditions with central banks fighting inflation and an overall wipeout in crypto market cap of almost $2t.

Non-fungible tokens (NFTs) are digital, immutable assets based on and secured by blockchain technology. Each NFT represents some unique digital object – an artifact in a game, a piece of digital art, or even a virtual property in a virtual world. Thanks to blockchain technology, it is also easy to verify the authenticity and provenance of an NFT, so that the owner can be absolutely sure to have an authentic and unique object. The key characteristic of a non-fungible token is its uniqueness. In contrast to cryptocurrencies, NFTs cannot be simply interchanged as they represent unique objects with different values. Currently, the most adopted categories are foremost art, collectibles, trading cards, photography, utility (redeemable rewards or membership NFTs), domain names (two key use cases: turning wallet addresses into human-readable names and enabling censorship-resistant websites), music, sports and virtual worlds (alternative realities where users can create and trade digital goods, play games, and display NFTs in galleries).

Historically, most NFTs have been created on Ethereum, yet other blockchains like Flow, Solana or BNB catch some volume as well, see Illustration 1. Overall NFTs worth of $39.68b were already bought on various chains from 6.2m unique buyers that facilitated 108.85m transactions. Ethereum saw already 8.31m ETH ($11b) in volume from 2.52m unique wallets YTD. Solana, ranking on second place YTD when it comes to traded volume in NFTs saw 25.9m SOL ($0.85b)  from 1.29m unique wallets. With an impressive unique wallet value, Solana is showing significant user adoption. Despite the overall trading volume taking a dive in 2022, it should not be the only metric deriving health evidence of the current NFT space. According to Nansen’s dashboard for NFT trends, transactions on Ethereum just hit a new ATH last week, while Solana hit a new ATH two weeks ago. Returning daily buyers range between 50-60k on Ethereum (20-24k on Solana) while first time daily buyers on Ethereum range between 6-10k (6-10k on Solana), down about 25% from the peak periods. Solana's market share of the whole NFT trading volume has grown from 7% to 27% since August 14th, reaching a peak market share of 36% in the week of September 4th. The market share of Ethereum decreased from 85% to 58% within the same time frame.

Illustration 1: YTD weekly NFT volume by chain
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SOURCE: (DATA) CRYPTOSLAM, (CHART) BITCOIN SUISSE RESEARCH *MAY SPIKE RESULTING FROM BAYC’S OTHERDEED MINT

Despite volumes down significantly this year, some numbers indicate a rather healthy underlying foundation. Ethereum is still catching the Lion’s share of volume and might get even more momentum after the Merge. Tezos’ NFT environment for example grew considerably large in the generative art sector as a lot of artists migrated to Tezos due to Ethereum’s electricity consumptions while running on PoW. With the transition to PoS, more artists might settle back to Ethereum, as it offers more security and overall, NFTs can potentially gain more value.

Another interesting development is happening on Ethereum’s L2 solutions. NFT volumes on Arbitrum and Optimism are picking up as their ecosystems mature. Just recently, OpenSea announced to integrate NFTs running on these rollups into their marketplace, one more indication for their importance. According to NFTScan, Arbitrum saw already 10’020 ETH traded in NFTs while Optimism is sitting at 14’031 ETH overall NFT trading volume. For comparison, Ethereum itself saw already 26’118’803 ETH in overall NFT trading volume. Aside from Arbitrum and Optimism, OpenSea currently offers NFTs minted on Ethereum, Polygon, Klaytn and Solana. As private deals are mostly considered dangerous despite OTC dApps like Sudoswap, marketplaces capture most of the secondary but also primary sales volumes. OpenSea remains almost uncontested king by volume across various chains, see Illustration 2.

Illustration 2: YTD weekly NFT volume by marketplace on Ethereum
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SOURCE: (DATA) THE BLOCK, (CHART) BITCOIN SUISSE RESEARCH

In 2021, OpenSea virtually had a monopoly among the NFT marketplaces. OpenSea's domination of NFT volumes over the past 90 days has averaged 48%. Its dominance however has been challenged by marketplaces that put a premium on user acquisition, offered incentives for trading, and reimbursed service fees. With the launch of LooksRare and X2Y2 however, serious competitors joined the leading marketplace. In July, X2Y2 hit 57% market dominance and is now still capturing 42%. By just charging gas fees through its marketplace, the independent CryptoPunk marketplace has fended off competition for its Punks.  

A serious amount of volume on LooksRare and X2Y2 is considered to emerge from wash trading (when the buyer and seller in a transaction are the same person or when two people collude). These kinds of transactions, which are carried out to obtain trading incentives or boost the volume or price of an NFT collection, result in exaggerated volume data. For instance, traders on LooksRare and X2Y2 are incentivized to trade as they reimburse trading fees in platform native tokens. Nansen offers wash trading filters to enable a less noisy view on the actual data. Since X2Y2 only charges 0.5% trading fees compared to 2.5% on OpenSea and 2% on LooksRare, they also capture a lot of organic volume. More importantly though, X2Y2 made royalties optional, allowing users to trade at lower cost and therefore attracted even more users. That optionality successfully lead to an increased market share within recent months. LooksRare has failed to gain traction with this strategy, recording diminishing market shares down to 3% from almost 15% while X2Y2 kept increasing its share with very similar tokenomics.

SudoSwap and X2Y2 were recently integrated with NFT aggregators that might increase volumes further as trades automatically route to the most efficient price, which often happens to be on Sudoswap or X2Y2 due to their low fees. Similar to DEX aggregators like 1inch, GEM and Genie, recently acquired by Uniswap, offer NFT marketplace aggregation not only serving the best price across marketplaces but also enabling functions like sweeping where a multitude of one collection either with a specific trait or at floor price can be bought with one single activity. Not only X2Y2’s royalty approach sparked discussions over the morality of royalty-free trading, but also SudoSwap that launched an AMM with artist royalties set to 0%. The royalty approach of X2Y2 lead to Tyler Hobbs, the artist behind Fidenza, blocking X2Y2 within its smart contract, effectively prohibiting transactions with the marketplace of his recent drop QQL that generated $17m.

Art and collectibles

The original use case for NFTs is art and digital collectibles. The entertainment industry and sporting world are already embracing NFTs heavily. For instance, the NBA is issuing NBA’s Top Shot Moments – officially licensed digital collectibles, which to date have accumulated over $1b in sales, see Table 1. The collection with the highest sales volume is Axie Infinity, that made headlines this year with their Ronin bridge suffering the biggest exploit in crypto history. Interestingly, Axie Infinity is the only top 5 collection not running on Ethereum, with 3 collections of the BAYC universum (BAYC, MAYC and Otherdeed) residing in the top 10.

Table 1: All time sales volume of the top 10 blockchains and collectibles
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SOURCE: (DATA AS OF OCTOBER 09, 2022) CRYPTOSLAM, BITCOIN SUISSE RESEARCH

Despite the current downtrend, NFT collectibles considered blue chip performed rather stable in ETH terms, see Illustration 3. BAYC and MAYC saw a huge spike induced by their ApeCoin launch and coinciding with their Otherdeed release that corrected since. CryptoPunks saw significant upside in ETH terms starting in June, 2022. Overall, most of the collections appear to found their bottom since they either range since several months or even indicate a slight uptrend.

Illustration 3: Floor price development of blue chip profile picture NFTS (PFPs)
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SOURCE: (DATA) NFT PRICE FLOOR, (CHART) BITCOIN SUISSE RESEARCH

Besides collectibles, another highly adopted use case for NFTs is digital art. In recent years, the interest in digital forms of creative arts has increased significantly. Some artists see it as a trend towards the democratization of art, making it more accessible to a wider audience. Nevertheless, the concept of ownership can characterize digital art objects similar to real-world art. Here, NFTs provide a convenient and reliable way to establish proprietary rights and authenticate a piece of digital art. Secondary markets do not only reside on Opensea, but also dedicated art marketplaces like Archipelago, SuperRare or fx(hash) and Objkt on Tezos. Illustration 4 showcases how much artwork value some of the NFT artists captured with Pak leading the charge at >$300m followed by renowned Beeple and Snowfro, founder of Artblocks.

Illustration 4: Top 20 NFT artists by total artwork value
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SOURCE: (DATA) CRYPTOART, (CHART) BITCOIN SUISSE RESEARCH

Total artwork value represents the artist's “market cap” at current prices, not the artist's total sales volume.

Conclusion and Outlook

Art and collectibles drove the last years of NFT adoption, yielded insane returns and resulted in several record sales on par with high caliber sales in the traditional art world. As volumes and floor prices calm down after the 2021 NFT mania, we found various metrics indicating a healthy foundation and sustained interest. The NFT world evolves continuously, lures in new collectors, offers new community mechanisms, introduces redesigned fee structures in marketplaces and brings up competition between a multitude of chains. Art and collectibles are just the tip of the iceberg however. In Part II of our NFT series, we dive into NFTs beyond art and collectibles, and we’ll focus more on underlying structures and technical quirks of NFTs. As such, we’ll have a look at the range of available NFT licenses and how they work, outline the various NFT token standards used to design and enable different mechanisms and dive into storage solutions, that are important for longevity and provenance.

Disclosure: at time of writing, the author holds ETH, AVAX, XTZ and MATIC.

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Dominic Weibel

Crypto Researcher