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Ryan Vaswani is an analyst on PitchBook’s Emerging Technology research team. His recent blockchain report is available to PitchBook clients, and non-clients can download a preview of the report.

The market exuberance that powered the NFT boom has given way to more cynical conditions, forcing the largely speculative NFT market to confront reality.

NFT data firm NonFungible reported that transaction volume was down 47% in Q1 2022 compared to the quarter previously. The data is even more stark when assessing daily average sales, which suffered a 92% decline between September 2021 and April 2022.

A washout was always inevitable for an NFT market that has been light on value proposition but heavy on hype.

Critics of NFTs will interpret this data as the beginning of the end for NFT projects, which have been characterized largely by over-promises, rug pull scams, and flash over substance. A more likely outcome is that a purge in speculation will refocus entrepreneurs on bringing clear value to digital assets.

Short-term problems

Before unpacking what a version of that next arc may look like, it’s helpful to understand the near-term needs of NFT projects.

Escape the crypto cult. Early NFT projects found success by catering to a small cadre of crypto-obsessed evangelists. But broader NFT adoption is only possible by expanding the pool of users to those less crypto-savvy. OpenSea, an NFT marketplace, is doing this with its acquisition of Dharma Labs in January, which will help new users more comfortably use traditional fiat currency rather than crypto to purchase NFTs.

Provide novel value. What can you do with an NFT? At present, not much. Utility will be the watchword of the second phase of NFT development. A maturing blockchain ecosystem should allow NFT holders a value proposition beyond the aesthetic. NFTs should integrate with existing applications in contexts such as messaging, payments, and gaming. NFTs could enable access to unique experiences or perks for ownership, among many potential applications.

Improve infrastructure. As laid out above, the promise of utility relies largely on more complete and capable infrastructure. Layer 1 blockchains such as Solana and Flow offer far better transaction speeds over Ethereum. The next major challenge is interoperability, which can be accomplished by the dominance of a single chain or expanded cross-chain solutions. As interoperability grows, so too must cybersecurity safeguards to ward off the growing number of bridge attacks on these solutions.

The end of the beginning for NFTs: A theoretical case study

Such obstacles are by no means intractable. What is needed to push innovation further is a more clearly defined use case with a highly motivated and well-capitalized stakeholder to help drive forward progress. To this end, the sporting world offers a lens into a potential future for NFTs.

Sports fans around the world are characterized by passion for their team, an eagerness to engage in the community, and a willingness to spend on merchandise. Sporting teams and leagues, in turn, are always looking for compelling ways to engage with and monetize their fan base.

Sporting leagues worldwide are working hard to update their digital strategies in a saturated media environment. Such efforts can have huge payoffs: Following the release of Drive to Survive, a Netflix docu-series on F1 racing, ESPN saw a 41% year-over-year increase in viewership.

Outside of ticket sales, merchandise is the fundamental way that teams extract value from fans in a way that gives fans a way to demonstrate their loyalty. NFTs can support more sophisticated digital engagement between teams and fans, reinforcing traditional channels of monetization such as merchandise and ticket sales, and opening up entirely novel use cases such as metaverse partnerships and collectible trading. Startups are already emerging to pursue the sports memorabilia opportunity, such as Autograph, which counts Tom Brady among founders and achieved a $3 billion valuation following a $170 million early stage round in January.

Beyond memorabilia, NFTs have the potential to open the door to a broad range of digital experiences. For instance, imagine a Chelsea fan who attended the 2021 Champions League Final against Manchester City. While the memory of victory may always be present, the importance of that event—both from a sentimental and a revenue-generating perspective—begins to fade after the final whistle blows.

However, an NFT-enabled ticket could provide ongoing opportunities across digital realms such as Fortnite or Roblox, where an avatar could utilize unique digital assets connected to the NFT, say a Chelsea jersey, to earn discounts on merchandise or other experiences. NFTs could also connect to unique digital trading cards that enable access to unique sports-related gaming opportunities.

Featured image by Andrei Askirka/Getty Images