38. With the overall industry downturn, can NFTs stand out on their own? Analyzing and envisioning the future development trends of NFTs from both macro and micro perspectives.

Author's Note

Yesterday's article unexpectedly went viral, being crazily shared by many friends in the circle. I would like to express my gratitude to both new and old readers for their recognition. However, after communicating with several friends, I also discovered my own shortcomings in the lack of rigor in describing the content of the article. Therefore, I will continue to improve, which may also lead to more unnecessary words in my articles.

Regarding yesterday's article, due to the lack of rigor in the content, there were some misunderstandings. I have also pinned the latest corrections on Twitter, and I hope everyone can check out my explanations there.

Additionally, some friends have given me feedback that someone on Weibo copied my article and published it without changing a single word. So I want to clarify here that the only channels I distribute my content through are WeChat official accounts, Twitter, Mirror, and Discord. I have not published anything on Weibo. Of course, I might do so in the future, and I will inform everyone when I do.

WeChat Official Account: Weisiman Notes

Twitter: @liuyejinghong_

Mirror: https://mirror.xyz/liuyejinghong.eth

Discord: https://discord.gg/6tu2hpwvUh

Reposting and sharing my articles is fine, but I hope the original author can be credited. Furthermore, copying articles for publication and then using the article's name to guide others into secondary market trading or to induce others to trade is absolutely not my intention. The articles from Weisiman Notes are based on my personal subjective views, as well as my summaries of project analysis and investment analysis. They may contain erroneous views, and I welcome everyone to communicate and correct me, as I will benefit and grow from these exchanges.

However, please do not use my articles to induce others to engage in trading activities. You may find that my articles contain erroneous views or incorrect operations. For example, I previously wrote about how to operate circular loans, which led to my UST crashing to zero. You can approach my articles with a spectator's mindset, but please do not treat them as investment advice. DYOR.

Main Text

Today, I briefly looked at the market, and it was a grim sight, especially since Ethereum has already dropped to last year's high point, which means that the gains of the entire year have been wiped out.

The overall industry is in a downward trend, which is evident to everyone. However, in the entire NFT field, due to the relatively scattered analysis tools and far less attention compared to mainstream coins, there may be a lack of analysis. So here, I will embarrass myself and provide a brief analysis of the macro trends of NFTs and possible future developments.

NFT Macro Data: Continuous Decline

First, I will post a chart regarding market value, trading volume, holders, and traders over a three-month time frame. The data in the image comes from NFTGO.

Here are some key data points in text format for easier reading:

The total market value of NFTs peaked on April 4, 2022, at approximately $37 billion. The current total market value of NFTs is $23 billion. The relative decline in total market value is 37%. (The calculation method is (370-230)/370=0.37)
The highest daily trading volume of NFTs occurred on May 1, 2022, at approximately $570 million. The current daily trading volume of NFTs (as of yesterday) is $40 million. The relative decline in daily trading volume is 92%. (The calculation method is the same as above)
The number of NFT traders peaked on April 8, 2022, at approximately 56,000 people. The current number of NFT traders (as of yesterday) is 23,000 people. The relative decline in the number of NFT traders is 58%. (The calculation method is the same as above)

The above are objective data, and next, I will present some of my personal subjective analyses.

First, NFTs have clearly shown a trend of retreat, but whether they have bottomed out, I cannot know. However, it can be seen that the daily trading volume of NFTs has shrunk by 92%. Here, I did not analyze the total market value of NFTs because the issues with the NFT trading mechanism have led to some NFTs that have not been liquidated still having high valuations. Therefore, I personally place more importance on the trading volume of NFTs.

Looking at the number of NFT traders, it has also been halved. This data represents the number of people who are genuinely participating in NFT trading in the open market, and in the last three months, even at the peak of NFT traders, there were only a little over 50,000 people. Compared to the trading base of tokens, this means that the NFT field is still a niche area, without explosive growth, and even experiencing significant shrinkage during the market downturn. (Because in token trading, whether the price goes up or down, the number of traders will increase. Only during sideways markets will the number of traders decrease.)

In summary, the entire NFT field is undoubtedly in a downward trend, but due to the inherent characteristics of NFTs, it is not easy to see a stampede. Of course, this is actually caused by liquidity exhaustion, and there are no steps for you to stampede. Next, I will analyze this reason.

NFT Micro Analysis: Flawed Trading Mechanism

Now, I will elaborate on the issues with the NFT trading mechanism. Because when NFTs are traded, their mechanism is more similar to an auction mechanism, or a one-way listing mechanism. When you open OpenSea, you will find that there are no exceptions; all are sell orders, and even the offer orders are very few, with significant price discrepancies.

As shown in the image, the red Ethereum logo represents offer orders, as these quotes will be aggregated in the Offer section, so I refer to them as offer orders.

Since many PFP projects are computer-generated artworks, each NFT has different elements, so they can only be published using the ERC721 contract. Therefore, due to the constraints of the ERC721 protocol, these NFTs can only be traded on OpenSea with single quotes/listings.

The problem caused by this mechanism is that if no one quotes your NFT, you cannot complete the transaction quickly; you can only list it yourself and wait for a transaction. Therefore, the current trading mechanism of OpenSea (only for ERC721 NFTs) is slow.

The essence of slow trading is that it requires two-way listings, while most of OpenSea's listings are one-way sell orders. Moreover, the current offer orders only quote single NFTs, and the vast majority of NFTs do not have any quotes. In other words, due to the unique nature of the ERC721 elements, there is no deep aggregation in the existing trading mechanism. Once the market declines or a certain NFT project collapses, there will be no buy orders, and without buy orders, all NFTs will not be transacted. NFTs that do not transact are essentially equivalent to being worth zero, but OpenSea will provide a floor price reference based on past trading data, and the valuation algorithm of NFT tools is calculated based on the floor price, which can lead to a zero-transaction NFT being assigned an excessively high valuation. (This describes an extreme situation, not a necessary outcome.)

To give some examples, in some NFT projects (generally small NFT projects or "meme" NFT projects), the project team will use scripts for wash trading to inflate the displayed floor price.

Simply put, using scripts for floor price wash trading: the script controls dozens of addresses, each of which holds the project's NFTs and a lot of ETH. The addresses within the script are all whitelisted and will only trade listings within the whitelist. Then they continuously inflate the trading volume. These trades will be captured by OpenSea's algorithm and recorded as feedback for the floor price.

However, for NFTs outside of wash trading, the script will not purchase them at all. Therefore, inflating the floor price through wash trading to obtain a false valuation of NFTs is quite common.

NFT Micro Analysis: Liquidity Exhaustion

Continuing from the previous topic, another major headache in the NFT field is the issue of liquidity exhaustion.

Also constrained by the ERC721 protocol, these NFTs cannot be stacked for trading, which means they cannot form depth. In a downward market environment, it is easy to see that the trading volume of some ordinary NFT projects has stagnated. For NFT projects with stagnant trading, it is like tokens being delisted by exchanges; you cannot sell them even if you want to.

Of course, I would like to add that many projects are now issuing NFTs based on the ERC1155 protocol, which allows for stacked trading and thus has trading depth. However, due to the constraints of the ERC1155 protocol, these NFTs cannot have unique elements that make each NFT one-of-a-kind.

It can be said that ERC721 and ERC1155 are two different NFT token standards. However, most projects are currently keen on issuing ERC721 NFTs, so my discussion in this article is based on the ERC721 standard.

In terms of NFT liquidity issues, there is actually a subfield, namely the NFT liquidity solutions field, which includes NFT fragmentation, NFT lending pools, and so on.

For example, the NFT fragmentation solution Unicly allows you to lock and collateralize NFTs, generating fragmented tokens called uTokens. uTokens are regular tokens that can circulate freely on various DEXs (if there are pools). However, this solution has a fatal flaw: Unicly only solves NFT fragmentation and does not address liquidity.

In other words, even if you collateralize an NFT to generate fragmented tokens uToken, you still need to operate it yourself or provide liquidity. This is akin to going to a market to buy meat, and the market tells you that there is no pork today, but they provide you with a stall, and you can bring your own meat to sell. This sounds like a liquidity paradox; I need liquidity for NFTs, but you tell me I need to provide liquidity myself.

The above is from the perspective of C-end users; such liquidity solutions indeed seem impractical. However, let's change our perspective to B-end users, namely project teams.

Now, you are an NFT project team, and your NFT series is operating very well, with a large community base and high NFT prices. However, precisely because the NFT prices are too high, liquidity becomes poor, leading to very few people holding them within the community. At this point, you start to think about how to improve the liquidity of your NFTs, allowing more people to hold them and expand the community culture.

At this time, you see Unicly's NFT fragmentation solution, and you can select a few high-priced, well-known NFTs to collateralize, generating fragmented uTokens. Since the NFTs are broken down into tens of thousands or hundreds of thousands of low-priced uTokens, you can use these uTokens for operational activities to attract more users to join the community. (I should add that Unicly actually has low usage, but I find the product solution somewhat interesting.)

Such B-end scenarios may be the correct use case for NFT fragmentation solutions like Unicly. For individuals holding NFTs, it may be more suitable to participate in NFT lending projects to obtain liquidity, such as BendDAO.

In BendDAO, you can collateralize your NFT to obtain a lending limit in exchange for ETH. However, BendDAO only supports blue-chip NFT series recognized by them as collateral, and not all NFTs can be used for collateral.

At the same time, after participating in collateralized lending, you will also bear the liquidation risk brought about by the decline in NFT prices. In summary, DYOR.

Casual Discussion on NFT Development Trends

Next is my personal rambling time, which can serve as a springboard for ideas and bring some brainstorming to everyone. First, I will post a data chart from NFTGO.

It can be intuitively seen that the most mainstream areas are still PFP and collectibles. I will categorize game NFTs under gamefi and discuss them later.

The most direct expectation people have for NFTs is to bring higher investment returns. In other words, people do not buy NFTs purely for their aesthetics or community culture. The fundamental reason is still aimed at investment returns; only good community culture and exquisite NFTs can increase the likelihood of profitability.

Or to say, as long as it can make money, anything like poop or goblins can be accepted. The NFT field is driven by aesthetics following the profit effect. However, with the market downturn, I unilaterally believe that the NFT field may experience a deflation of bubbles. Because of the poor market environment, NFT profitability will also decline, leading to reduced trading willingness, further exacerbating NFT liquidity exhaustion.

So before such a bubble market appears, I subjectively list some possible directions for the future development of NFTs. Friends who are starting businesses, thinking about starting businesses, or researching NFTs can consider these possibilities.

Direction 1: NFTs may serve as marketing tools

Here, I will take Bored Apes as an example. Recently, Li Ning from China purchased a Bored Ape, which quickly went viral. It even made it to the hot search on Weibo.

In such a case, the function of NFTs is as a marketing tool. Compared to the costs of traditional advertising channels, the cost of purchasing a Bored Ape is significantly lower. At the same time, acquiring the IP rights of Bored Apes allows for the sale of many derivative NFT IP products.

Switching to another project, Sandbox is also a marketing tool. I casually searched, and beauty giant NYX Professional Makeup announced its entry into Sandbox, and HSBC also announced its entry into Sandbox. Various industry giants are using Sandbox as a marketing battlefield.

Thus, it can be seen that NFTs may combine with various industries in future developments to serve as marketing tools. This could include major brands releasing NFT collectibles or manufacturers co-branding products with NFT logos.

At the end of this paragraph, I need to clarify that the examples here are unrelated to any token prices and do not intend to guide the purchase of tokens. They are merely speculations on the direction of NFT development based on commercial news.

Direction 2: NFTs may serve as carriers for value-added paid services

This is a derivative idea I recently developed while researching PASS-type projects. Many PASS-type NFT projects have emerged in the market. So-called PASS-type NFTs are issued on a functional website to replace existing paid features.

For example, you have created a data analysis website where users pay $500/year. But now you change the payment method; users need to hold the NFT (i.e., PASS) you issue to use your product. When users hold the PASS, they can directly use the website's features without needing to pay with fiat or cryptocurrency.

Such PASS-type NFTs can bring many benefits.

Lower user usage costs. Many users who pay for services, especially those who pay quarterly or annually, do not use the service frequently, sometimes only a few times, but still have to pay for a whole year. By switching to PASS, users can purchase the PASS on the open market like Opensea to use the product and sell it on Opensea when they no longer want to use it. (If PASS is issued using ERC1155, it also has liquidity depth.)
Richer project profit channels. In addition to still being able to charge fees for minting PASS (the pricing strategy for PASS is another matter), the project team can earn royalties from PASS. In the above example, users can frequently trade PASS in the secondary market to enjoy product services, but after secondary market trading, the project team can also earn royalty income from the PASS. Although this seems to reduce users' expectations of minting more PASS, it also generates substantial royalty income.
Public pricing of product services. In fact, for many paid service websites, users who have not used the service cannot assess the quality of the services provided by the project. However, once users pay and find that the functionality is not as good or even incomplete, the pricing power of the service returns to the secondary market. If the services provided by the project are poor, the market price of the PASS will drop (users find it unsatisfactory and sell the PASS); if the services exceed expectations, the market price of the PASS will rise (users find it very useful, and the PASS is limited, so they hurry to buy it for use).

In summary, PASS-type NFTs are a significant trend I believe may develop in the future. The biggest difference in this direction is the complete shift from speculative attributes to value-added service consumption attributes. The motivation for users to purchase PASS is determined by service quality and demand, which will also encourage crypto data service providers to offer better services to gain a larger applicability of PASS.

Direction 3: NFTs may serve as carriers for virtual consumer goods

This direction is inspired by a conversation I had with a big shot, focusing more on the development direction that combines NFTs with real environments or Web2 environments.

In fact, in the Web2 field, there are massive virtual consumer goods. For example, purchasing digital albums from NetEase Cloud, paid movies from iQIYI, Tencent Video, or game skins from Honor of Kings, and Dota2 game items, etc. If these virtual consumer goods in Web2 are issued in the form of NFTs, it would give these otherwise mundane virtual binding products new attributes.

Tradeable attributes. I believe many people play mobile games, such as Honor of Kings. The skins you purchase in the game are bound to your account, and you do not have complete control. Once these Web2 game items start becoming NFTs, they will be freely tradable. Web2 gamers will become Web3 users, thus feeding back into the entire Web3 or blockchain industry in terms of user base. (This does not involve gamefi, as I believe that the current gamefi focuses on investment returns rather than gameplay, so the user base is different from that of games like Honor of Kings.)
Maximized utilization. In some specific virtual consumer goods, such as paying for a movie on a website, generally, it unlocks the ability for users to watch for a certain period. I assume that users can watch freely within three days, but for users, watching a movie takes only about two hours. The remaining two or three days are completely wasted, and they have paid for that wasted time. Now, I observe that friends often respond to this phenomenon by logging into their accounts repeatedly to watch. Therefore, these time-limited virtual consumer goods cannot avoid users' reasonable circumvention of loopholes; why not simply utilize NFTs to remove the restrictions? After paying for the movie, users would receive an NFT ticket, with metadata indicating a validity period of three days (or recording a timestamp for server-side verification). The movie website would verify the user's possession of the NFT ticket and allow playback of the corresponding movie. This way, user information is protected, and there is no need for users to share their account information, while maximizing the utilization of paid products. (The pricing of NFT movie tickets is another matter.)
Virtual scene memorabilia. Recently, WeChat held some virtual live broadcasts, such as a live broadcast of Jay Chou's 2013 video. In this case, virtual commemorative badges can be issued for Jay Chou's fans or viewers. In this scenario, the badge can be a standard tradable NFT or a soul-bound NFT proposed by Vitalik (i.e., SBT). For the issuer, issuing commemorative badges can greatly enhance traffic, which is what they desire most. For fans, it is also a keepsake that can be preserved, serving as real evidence of the virtual scene. To humorously hypothesize, if you watch Shuyi Zhou's live broadcasts every day and she gives out commemorative badges to all viewers, you could accumulate thousands of Zhou Jie commemorative badges and share on social media that you are indeed a ten-year-old fan of Zhou Jie. (The commemorative badges I refer to in this paragraph theoretically should not have a price and should not be priced. However, they do possess virtual commemorative value.)

The Future Growth of NFTs Will Promote the Development of Layer 1 and Layer 2

In the future development scenarios I have rambled about, existing public chains or infrastructure cannot support them. This also leads me to deduce some demands for public chains based on these scenarios.

The cost of issuing NFTs needs to be further reduced. Currently, everyone knows the fees on Ethereum. If in the future, virtual goods are all issued in the form of NFTs, the cost of using Ethereum for issuance is simply too high, so it needs to be significantly reduced. I am also currently using Polygon, which, while cheaper and faster than Ethereum, still does not reach the verification speed of centralized servers. (Or we could explore a certain protocol standard, issuing NFTs through decentralized protocols while using centralized servers for NFT verification.)
The TPS of public chains needs to be significantly increased. The above scenarios are more application-oriented. As applications become more widespread, the demand for TPS for executing transaction verifications will also increase. Although there are high-performance public chains like Solana, Solana's recent downtime has significantly affected its usability. I will not elaborate on the blockchain trilemma here.
Lowering the barriers to issuance and use. The current NFT issuance process has indeed been simplified compared to earlier years, but to achieve broader applications, the barriers to issuance need to be lowered further. In fact, I have felt in the work of Web3 products that people are not very concerned about user barriers, assuming that all users understand the process, which can inadvertently lead to a loss of many users. Perhaps applying Web2 UI/UX experience to the Web3 world can expand the user base and attract more outsiders.

At the end of the article, I need to reiterate a statement regarding my article. My articles will cite some objective data, but they are all subjective personal views and do not represent that things will necessarily develop in the direction I describe.

So how should my article be correctly used? I suggest treating it as a form of mental training, brainstorming, or even as my personal fabrication. But please, please, do not treat it as investment advice.

When you try to ask me for investment advice, the best choice for you is to work hard and save money.

Author: Liu Ye Jing Hong

WeChat Official Account: Weisiman Notes

Personal WeChat ID: liuyejinghong_

RSS3 Personal Homepage: liuye.rss3.bio

ETH Donation Address: liuyejinghong.eth

Discord: https://discord.gg/6tu2hpwvUh\\

Reply "web3" in the WeChat official account backend to receive free web3 learning resources.

Reply "Industry Report" in the WeChat official account backend to receive the 2022 industry report for free.