Non-fungible tokens (NFTs) were one of the hottest trends in the crypto world in 2022. They allowed artists, creators, and collectors to tokenize and trade unique digital assets on the blockchain, such as art, music, videos, games, and even tweets. NFTs promised to revolutionize the creative economy by giving creators more control, ownership, and monetization of their work, as well as providing new opportunities for fans to support and interact with their favorite artists.
However, the NFT craze was short-lived. After reaching a peak of $17 billion in trading volume in January 2022, the NFT market collapsed by 97% in September 2022, according to data from Dune Analytics. The hype faded, the prices dropped, and the interest dwindled. What caused this dramatic decline, and what does it mean for the future of NFTs?
Why Did NFTs Get So Much Hype at First?
NFT emerged as a novel and exciting use case of blockchain technology, which is the underlying infrastructure of cryptocurrencies like Bitcoin and Ethereum. Blockchain is a distributed ledger that records transactions in a secure, transparent, and immutable way. By using blockchain, NFT can provide verifiable proof of authenticity, scarcity, and ownership of digital assets, which are otherwise easy to copy and distribute online.
NFTs also appealed to the human desire for collecting, owning, and displaying rare and valuable items. Some of the most popular NFT platforms were marketplaces for digital art and collectibles, such as OpenSea, SuperRare, Rarible, and Foundation. These platforms enabled artists to create and sell their work as NFT, often using a smart contract that automatically pays them a royalty fee every time their NFT is resold on the secondary market. This created a new revenue stream for artists who otherwise struggle to make a living from their digital creations.
Moreover, NFT attracted a lot of attention from celebrities, influencers, and mainstream media outlets. Some of the notable examples of NFT sales in 2022 include:
– The first tweet by Twitter founder Jack Dorsey sold for $2.9 million.
– A collage of 5,000 digital images by the artist Beeple sold for $69 million at Christie’s Auction House.
– A digital video of a slam dunk by NBA star LeBron James sold for $208,000 on NBA Top Shot.
– A digital painting of a cat by the artist Nyan Cat sold for $590,000 on Foundation.
These record-breaking sales generated a lot of buzz and curiosity around NFT, as well as a fear of missing out (FOMO) among potential buyers and sellers. Many people saw NFTs as a way to make a quick profit, to support their favorite artists, or to own a piece of history.
Why Did NFTs Lose So Much Value and Popularity Lately?
The NFT market, like any other market, is subject to the forces of supply and demand. As the demand for soared in early 2022, so did the supply. More and more artists, celebrities, and brands jumped on the NFT bandwagon, creating and selling their own NFTs. However, not all NFTs were created equal. Some were original, innovative, and high-quality, while others were derivative, low-effort, and low-value.
The market soon became saturated with NFT of varying quality and rarity, making it harder for buyers to discern which ones were worth buying and which ones were not.
At the same time, the demand for NFT started to decline. Some of the factors that contributed to this decline include:
– The high cost and environmental impact of NFT transactions. Most NFTs were created and traded on the Ethereum blockchain, which uses a proof-of-work (PoW) consensus mechanism that consumes a lot of energy and generates a lot of carbon emissions. According to Digiconomist, a single Ethereum transaction consumes as much electricity as an average U.S. household in 2.8 days. Moreover, the high demand for NFt drove up the transaction fees (also known as gas fees) on the Ethereum network, making it expensive and impractical for many users to buy and sell NFT.
– The lack of regulation and consumer protection in the NFT market. The NFT market is largely unregulated and decentralized, which means that there is no central authority or intermediary to oversee the transactions, enforce the rules, or resolve the disputes. This exposes the users to various risks, such as fraud, theft, hacking, plagiarism, and censorship.
For instance, some NFTs were found to be stolen or copied from other artists without their permission or attribution. Some NFT were also vulnerable to hacking or deletion, as they relied on third-party platforms or servers to host the actual digital files. Some NFTs were also subject to censorship or removal by the platforms or the governments, as they violated the terms of service or the laws of certain jurisdictions.
– The loss of novelty and excitement around NFTs. As the NFT market became more crowded and competitive, the novelty and excitement that initially drove the demand for NFTs started to wear off. Many users realized that NFTs were not as unique, valuable, or useful as they thought.
Some users also experienced buyer’s remorse, as they saw the value of their NFTs plummet after the initial hype. Some users also faced social backlash, as they were criticized for wasting money and resources on NFTs that had no intrinsic value or social benefit.
Who Are the Celebrities Who Lost the Most from NFTs?
Some of the celebrities who invested heavily in NFTs and saw their value drop significantly include:
– Rapper Snoop Dogg, who spent over $17 million on NFTs, mostly on CryptoPunks, a collection of 10,000 pixelated characters that are considered one of the first and most valuable NFT projects. However, the average price of a CryptoPunk fell by 70% from its peak in May 2022, according to Larva Labs, the creators of CryptoPunks.
– Actor Ashton Kutcher, who sold his own NFT, a digital drawing of a starry-eyed cat, for $750,000 in August 2022. However, the NFT was later resold for only $100,000 in October 2022, a 87% loss in value.
– Singer Grimes, who sold a collection of NFTs, featuring digital art and music inspired by her son with Elon Musk, for $6 million in March 2022. However, the NFTs were later resold for only $2.5 million in September 2022, a 58% loss in value.
Will NFTs Be Able to Regain Their Former Popularity?
Despite the recent slump in the NFT market, many experts and enthusiasts believe that NFTs have a bright future and a lot of potential to grow and innovate. Some of the reasons why NFTs may be able to regain their former popularity include:
– The adoption of more efficient and eco-friendly blockchain technologies. Many NFT platforms and projects are moving away from the Ethereum blockchain and adopting alternative blockchains that use more efficient and eco-friendly consensus mechanisms, such as proof-of-stake (PoS) or proof-of-authority (PoA).
These blockchains can reduce the energy consumption and carbon emissions of NFT transactions, as well as lower the transaction fees and increase the transaction speed. Some examples of these blockchains include Solana, Polygon, Flow, and Tezos.
– The development of more diverse and innovative NFT use cases. NFTs are not limited to digital art and collectibles. They can also be used for a variety of other purposes, such as gaming, social media, music, sports, education, identity, and governance. These use cases can create more value and utility for NFTs, as well as attract more users and audiences. Some examples of these use cases include:
– Gaming: NFTs can be used to create and trade in-game items, characters, and assets, as well as to reward players and developers. Some examples of NFT-based games include Axie Infinity, CryptoKitties, and Decentraland.
– Social media: NFTs can be used to create and monetize social media content, such as posts, comments, likes, and followers. Some examples of NFT-based social media platforms include BitClout, Nifty’s, and Audius.
– Music: NFTs can be used to create and distribute music, as well as to reward artists and fans. Some examples of NFT-based music platforms include Catalog, Royal, and Opulous.
– Sports: NFTs can be used to create and trade sports memorabilia, such as cards, tickets, and highlights. Some examples of NFT-based sports platforms include NBA Top Shot, Sorare, and Dapper Labs.
– Education: NFTs can be used to create and verify educational credentials, such as diplomas, certificates, and badges. Some examples of NFT-based education platforms include Learning Economy, Degreed, and OpenSea.
– Identity: NFTs can be used to create and manage digital identities, such as usernames, avatars, and profiles. Some examples of NFT-based identity platforms include Unstoppable Domains, ENS, and Metamask.
Conclusion
NFTs are a fascinating and innovative phenomenon that have captured the imagination and attention of many people in the crypto world and beyond. However, they also face many challenges and uncertainties that have caused their market to decline significantly in recent months. Despite this, NFTs still have a lot of potential and promise to create new opportunities and value for artists, creators, and collectors, as well as for various industries and sectors.
To achieve this, NFTs need to overcome the technical, legal, and social barriers that hinder their adoption and development, as well as to diversify and improve their use cases and quality. NFTs may not be the ultimate solution for the digital art market, but they are certainly a powerful and exciting tool that can transform and enrich the creative economy.