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NFTs: The Lay of The Land

Feb 19, 2021 · 6 min read

By Piers Kicks

The NFT market is undeniably hot right now, with the vast majority of record-breaking sales happening within the last 30 days. We have seen an Axie Estate sell for 888 ETH, Danny pickup a HashMask for 420 ETH, and an all-time high CryptoPunk sale for 605 ETH. Millions of dollars are changing hands daily across projects both old and new. There is currently record engagement from high-profile figures with large audiences outside of crypto such as Mark Cuban, Mesut Ozil, and even Lindsy Lohan (top indicator?). Following on from an explosive end to last year, Crypto Art pioneer Beeple is even back with the first ever purely digital artwork to be sold at the renowned auction house Christie’s. If I was a betting man I would suggest, without hesitation, that this piece will easily exceed the largest NFT sale to date. The (crypto) cat is very much out the bag. Whilst all this activity is hugely exciting, it’s certainly exacerbating many of the problems we could see coming.

At the base network level, we are seeing unprecedented dollar volumes changing hands. At the very peak of the CryptoKitties mania in late 2017, just over $2M changed hands in a 24 hour period. On Valentines Day this past weekend, more than $6M was traded as NFTs on layer one. Bear in mind that this data does not reflect significant off-chain activity such as Ozil’s $500K of sales in 10 minutes via Nifty Gateway yesterday, or growing layer 2 activity. 

Gas fees have risen in recent months as DeFi has continued to build momentum, forcing behavioural shifts in the NFT ecosystem. The right side of the first chart shows a dramatic spike in the average NFT transaction value happening on the Ethereum base layer. Due to increased fees, it has already become impossible to justify smaller transactions. To give some context, at the peak of the CryptoKitties network congestion when over 50,000 transactions happened in a single day gas reached 60 gwei. At the time, CryptoKitties accounted for almost 15% of the total transactions happening on Ethereum. Fast forward to February 2021 with significantly developed DeFi and NFT ecosystems and average gas costs have reached 250 gwei, a 4x increase over the December 2017 peak. Whilst this is a very good sign for the Ethereum network at large, it is severely hampering many NFT activities and forcing an urgent desire for solutions.

If only the solution was as simple as it once was… As touched upon in a recent NFT report shown below, there are a number of scaling solutions coming to market. The recent fee climate is accelerating the need for them. Since the report was published, Axie Infinity has successfully launched their custom Ronin sidechain allowing them to escape Ethereum gas fees which the project described as “a bit like training inside the hyperbolic time chamber”. The market appears to be fond of this development, with the $AXS token having appreciated 160% in the 20 days since.

Aside from custom scaling which is impractical for many, generalized solutions like Matic, Near, and Immutable X are Ethereum’s best bet at retaining NFT market share in this rapidly expanding ecosystem. I noted the tremendous early success of Flow in a recent note, which has only further cemented its position as a serious contender as shown below. Streamlined fiat gateways, seamless wallet experiences, a budding marketplace, and rumours of another large raise all support Flow’s continued growth. Already, the game category which typically demands high frequency, low value transactions has begun to crumble at the Ethereum base layer. Projects such as Aavegotchi, Decentral Games, and Neon District have moved to Matic (Polygon). Below is Matic’s equivalent of Uniswap where Aavegotchi’s $GHST token is already the second most liquid pair.

Others are flocking to Near, and Immutable X has already begun to attract several highly anticipated projects. As it stands, Immutable X seems to represent the most promising candidate for seamless NFT scaling on Ethereum. They are the only team building a generalized Ethereum-based solution who has faced first hand the challenges of building a blockchain game at scale.  It’s important to consider the very real possibility that if Ethereum layer 2s fail to deliver a comparable user experience this year then they could concede market share to Flow for multiple classes of NFT projects. That said, I’m reasonably confident that for low velocity, high price activities such as top-tier collectibles and artwork, the concerns raised are less relevant.

Ethereum has relegated WAX to having just a single project in the Top 10 Collectibles by secondary sale volume. Note the enormous increases in secondary market volumes for some of these projects in less than a month (2.3x for Top Shot, 2.7x for CryptoPunks), as well as the entrance of Hashmasks and Art Blocks to the podium spots.

This market is moving very fast. It’s important to look at prospective plays with a cautious eye in the current climate. There is a lot of money being thrown around with many NFTs fetching eye-watering prices, just like the CryptoKitties craze in 2017. When the music stops, a lot of these assets could be in for a long cool-off period before changing hands at similar price levels once more.

That said, this is an incredible time to be involved with the NFT sector as the interwebs wake up to their enormous potential. The application of these technologies across gaming, the creator economy, and entirely new forms of IP monetization certainly warrants excitement. However, we likely won’t deliver on that potential in just the second major hype cycle. Opportunities are definitely out there, but tempering enthusiasm won’t go amiss. It’s not just about us who have been here a while, but all those who are only now entering. Millions of newcomers will enter this space and familizarise with these concepts in the coming months and years. If we want to maximize the chance of converting new interest to supporting long-term consumer-facing blockchain applications at unprecedented scale, we need to act accordingly. To this day, there is bad blood from the 2017/18 hangover and the hot potato games that came with it. It is in everyone’s interest to ensure that we’ve learnt from what came before and don’t let ourselves get carried away. The worst-case scenario is that we burn a new generation of users right as real momentum is starting to build.