Co-Author: Jasmine | Published on July 23, 2021
Foreword:
Late June, we published a research about the current NFT track and the investment opportunities in which we are focusing on. Since then, NFT is in the ascendant, and we have seen more industry leaders dabbling in NFTs. We hope to share our methodology in mapping out the current industry value chain through the following article.
On June 21, Alipay released two limited-edition “Dunhuang Feitian, Nine Color Deer” payment code NFT skins on the AntChain Fan application, and the 16,000 of them were instantly sold-out.
On June 24, Reddit, also known as the “Internet front page”, issued its first three NFTs from CryptoSnoo collection for a seven-day auction. Owners of these NFTs can link them to their Reddit accounts as their avatars and display special animations whenever they engage in the community. All three of the CryptoSnoos were sold over 100 ETH; and the ‘Original Block’ recorded the highest sale of 175 ETH, which was equivalent to more than 367 thousand USD.
On June 25th, Marvel announced its collaboration with VeVe Digital Collectibles APP to launch peripheral digital collections in NFTs. Marvel fans will be able to purchase and interact with official Marvel NFT digital collectibles, 3D statues, and digital comic books through mixed reality on VeVe’s platform.
On July 1, CNN launched two NFTs that allow to collect historical moments on CNN news, namely 1980: Ted Turner launches CNN, which marked the birth of the world’s first 24-hour television news network CNN and 1991: ‘The skies have been illuminated’, which is an exclusive report by CNN reporter Bernard Shaw on the outbreak of Iraq War”.
On July 6, blockchain game and NFT developer Animoca Brands announced that it has received funding from Bluepool Capital, the family office of Jack Ma and Joseph Tsai.
In the past month, although the market has remained sluggish, the exploration of NFT has continued outside the crypto space. The reason, of course, is that the value of NFT is gradually recognized in that it provides a way to mark the ownership of native digital assets (that is, assets that exist in the digital world or originate in the digital world), and this ownership can exist outside of centralized services. Further, NFTs expand the range of assets that can be represented on the blockchain. At the same time, the expanded asset classes are closely related to the masses and are easier to spread, which makes the logic and business model behind NFTs easier to understand and accept.
We believe that the NFT track still has huge potential, and the NFT puzzle has just begun to be pieced together. Following is the NFT value chain that we have mapped out in the order of token flow:
The Infrastructure Layer
Layer 1, Sidechains/Layer 2, Developer Tool, Token Standard, Storage, and Wallet. They capture value through gas fee generated from NFT minting,: the more NFTs minted, the more value captured.
The Protocol Layer:
NFT Minting Protocols & Primary Marketplaces (most projects contain both to capture value). They capture value through primary transactions of NFTs rather than secondary transactions since most secondary transactions are concentrated on few platforms such as OpenSea. This leads to projects like Mintable to introduce gasless minting to attract users to mint and trade on the same platform.
Liquidity Protocol (provide price discovery system). Instead of providing NFT minting tools, they construct different mechanisms for price discovery. Liquidity protocols would likely capture value in the same way as DEXs and oracles that generate liquidity for fundamental financial services.
DeFi+NFT Protocol. These protocols generate NFTs to boost DeFi activities within. They capture value from minting activities.
The Application Layer
It mainly focuses on applications derived from the tokens generated from the Protocol Layer. One example is OpenSea, the NFTs traded on such secondary marketplaces stem from different minting protocols from the Protocol Layer. The value capturing model on this layer mainly base on the realization of traffic and demand in areas such as social and curation.
Protocol Layer — NFT Minting protocol & Primary Marketplace — Multi-Asset
This category represents the multi-asset marketplaces in which various types of assets can be traded in NFTs. They directly connect creators and users. On one hand, the platform needs to improve user experience, and increase user stickiness and participation; On the other hand, platforms need to provide creators with an easy-to-use and cheaper minting experience to continue attracting diverse content providers who are not familiar with crypto-native concepts.
Protocol Layer — NFT Minting protocol & Primary Marketplace — Art/Collection
This category represents art/collection-based minting protocols and primary marketplace. Art projects value IP resources and artistic taste strongly, while collection projects value Belongingness and easter eggs. Among them, most of the art projects have a high threshold for creators. It requires creators with a certain artistic background or enough fans on social platforms to gain access to the platform, which actually contradicts the ideology of decentralized and equal access advocated by the crypto space.
Protocol Layer — NFT Minting protocol & Primary Marketplace — Game
This category of applications enumerates the current cases where blockchain game developers use NFT to empower in-game economics. In the past, the strategy of blockchain games to attract players was heavily focused the P2E (Play-to-earn) mode, using the unique and tradable characteristics of NFTs to create appealing game economy; However, the game design and the playability of most games were lacking. Due to the P2E/gold mining-intensive nature of these games, gameplays are oftentimes boring and repetitive, which makes them hard to attract videos game players outside the crypto space, let alone the regular day traders and yield farmers who are purely interested in profit-making within. After gradual development in recent years, developers have slowly realized that a successful blockchain game requires a solid gameplay, coupled with the blessing of P2E to fully unlock its full potential.
Protocol Layer — NFT Minting protocol & Primary Marketplace — Metaverse
This type of application represents how Metaverse applications are using NFT-backed digital assets in a virtual immersive experience. Compared with early applications such as NFT art and collectibles, the current metaverse applications in the space still has considerable room to grow. Some of the current issues that need to be resolved are as follows:
1. Hardware barriers are relatively high, and optimizations are far from perfect. Most of the real-time graphics rendering requires user’s device to reach a certain configuration to be able to run smoothly. In the future, project developments still need to make a trade-off between graphic performance and smooth play experience.
2. Compared with other blockchain sectors, Metaverse currently lacks the gameplay and economic incentives that fit its own advantages. At present, most of the content in the blockchain metaverse is still built around NFT collections. Collectors display their collections in every corner of the metaverse, as if they are running a 3D version of OpenSea. Looking back at popular metaverse projects off-chain like the Roblox and Minecraft, users are given tools to create experiences that aren’t limited galleries or casinos; We believe that it is important for metaverse projects to diversify the ways that users can create and interact with an open-world that is backed by blockchain values.
3. The player population is largely made of crypto participants, and has a hard time reaching people outside of this circle. It requires powerful IP, smooth user experience, and innovative NFT metaverse gameplay combined for a project to emerge as killers apps of the future.
Protocol Layer — NFT Minting protocol & Primary Marketplace — Fan Economy
Under the traditional fan economy, neither fans nor idols are the biggest beneficiaries of this ecology. Instead, the centralized social platform serves as a medium for creators and fans to establish connections and obtain most of the income by inserting advertisements and algorithm recommendations between creators and users. Moreover, the interaction between idols and fans is often monotonous and one-way. The advantage of NFT lies in connecting fans and idols more efficiently and encouraging two-way interactions between them. Social NFT platforms surrounding fan economy need to set up appropriate economic incentives and mechanisms for both fans and creators to facilitate everyday users to become idols and encourage more originality.
Application Layer — NFT-Fi — Liquidity Protocol
These protocols represent NFTs as underlying assets and provide pricing systems for NFTs. There are currently three solutions: one is buyer pricing, such as TopBidder’s radical market auction; the second is seller pricing, such as NiftEx/NFT20/NFTX where sellers stake NFTs to generate ERC-20 tokens, then provide initial liquidity to generate pricing; the third is third-party pricing, for example, Upshot generates pricing suggestions based on collective data from random users. These liquidity protocols are necessary financial infrastructures to provide NFT value discovery for upper-level and complex applications.
Application Layer — NFT-Fi — DeFi+NFT
This category represents protocols that use NFT as an asset representation tool. NFT can be seen as the evolution of FTs, from only representing indifferent assets to defining unique values. This category will produce “DeFi” NFTs, such as Uniswap LP token and yinsure’s insurance policies. Compared to NFTs from art and collectibles minting protocols, the difference lies in how they are created, which would be through DeFi activities.
Application Layer — NFT-Fi — Collateralized Loan
This category represents protocols that recognize NFTs as underlying assets in collateralized loans. As for now, due to the lack of NFT liquidity and pricing systems, collateralized lending can only be realized in the form of P2P. However, referring to how Defi has iterated in the past years, from ETHLend to Aave, P2Pool might be the next stop.
Application Layer — NFT-Fi — Asset Management Tool
This category shows asset management applications at the upper level of our NFT value chain. They have the same functions as Zapper or Debank in DeFi space.
Application Layer — Vertical Application — Secondary Marketplaces
These secondary marketplaces allow users browse and trade NFTs minted and auctioned from different primary marketplaces. They are the major liquidity contributor in secondary market of NFTs.
Application Layer — Vertical Application — Data Provider
There has not yet been a comprehensive data provider in the NFT field. The existing data is either not comprehensive enough in NFT coverage, or incomplete in data dimensions. In addition, there is also a lack of a full-featured search engine, which might be an important traffic entry in the future.
Application Layer — Vertical Application — Curator DAO
These curators or DAOs are generally composed of senior NFT participants, who can better explore the potential value and emerging directions of NFTs. In addition, for NFT creators, a major trigger is the inability to obtain initial traffic for their works. Therefore, curators are born. While helping NFT creators to self-market, they can also optimize the efficiency of the NFT market and discover more potential value.
Application Layer — Vertical Application — Social Network
In our latest article, we introduced our expectations on NFT social platform that could become a potential direction for NFT to break out and popularize among the public. Unlike NFT artworks, which has a certain threshold, those social platforms can provide users experience that is very similar in traditional apps. Therefore, we believe that social platforms are an important medium for NFT to expand its reach.
Conclusion
The reason why we have conducted frequent research on the NFT ecosystem recently is that, we have seen the potential of NFT from the increase in transactions, the increase in users, and in the exploration of NFT by various industries outside the crypto space.
In the future, everything except currency can be tokenized, and NFT can be regarded as an open API interface. Users can unleash their creativity using this API and create more meaningful applications.