Deep Dive: Why NFTs Are the Keys to the Inevitable Metaverse

Jul 22, 2021By Subspace Team

TL;DR

Non-fungible tokens (NFTs) are often associated with odd artwork and high auction prices. Critics call NFTs a bubble. But the fundamental technology behind NFTs and its exploding use cases point to a booming economy, transformed gaming landscape, radical new fashions and collectibles, and an evolved path to personal expression that just might help entice a billion users into the metaverse.

Estimated read time: 16 minutes


In Search of a Killer App to Accelerate NFT Adoption

Non fungible tokens (NFTs) are absolutely a bubble. People have poured hundreds of millions of dollars into NFTs. Most of those “investments” will plummet to zero. Be very afraid.

At the same time, NFTs are going to change the world. They will spur vast new economic growth, including within virtual “metaverses,” and become the new norm for ownership.

These two assertions are not contradictory.

A mainstream metaverse (à la the OASIS in Ready Player One) has been anticipated for many years. However, we still seem to be waiting for some “killer app” for broad adoption that will propel it into a billion homes. The Internet had email. Social media had Facebook. The many competing metaverses that exist today seem to be fishing for that one viral edge that propels them to dominance. Could NFTs be that edge?

What Are NFTs?

An answer requires some background. Think of non-fungible tokens (NFTs) as digital deeds of asset ownership, or tickets to a show. Fungible means effectively identical and interchangeable, like dollar bills or eight-foot 2x4 cedar boards. It doesn’t matter which of the dollars or 2x4s you have, they work the same.

Non-fungibility indicates that an NFT is, at least in some ways, unique, and thus conveys scarcity of the associated asset. As a digital token, an NFT encodes and cryptographically secures information related to the asset, potentially including data around identity, ownership, asset history, resale royalties, and much more.

Owners can “mint” NFTs on platforms such as Mintable and OpenSea, which also serve as NFT marketplaces. The tokens are written onto a blockchain, usually Ethereum, although smaller NFT-friendly blockchain technologies abound. The blockchain provides a secure, globally distributed ledger for these tokens so that transactions can be traced through the user’s blockchain address rather than by name, maintaining privacy if the owner wishes. Note that such anonymity or pseudonymity is often valued in metaverses.

Ethereum-based NFTs use Ethereum’s ERC-721 open standard. These tokens are truly unique; there will ever only be one of the assets associated with each. In contrast, ERC-20 tokens are fungible, albeit often with a limited supply. (Think of concert tickets, although ERC-20 tokens could also be for redeemable vouchers, a governance share, or social community-building, like music artist RAC's $RAC token.) In both cases, scarcity is a key value driver, but this is especially true for NFTs.

Games like Overwatch and World of Warcraft have grown massive economies based on in-game transactions for skins, dances, weapons, etc., but purchases remain locked within the applications. Now, games and other platforms are starting to make such purchases into NFTs. A public blockchain confers security, authenticity, and the promise of mobility across other applications using the same blockchain—provided the developer allows this.

The story of computing is often one of how new technologies help to break down barriers between people, resources, and data silos. NFTs will deliver a new wave of data portability and bridging between complementary applications.

Against this backdrop, let’s turn to some of today’s leading examples of what people can already do with NFTs, keeping in mind that the technology is just nine years old. This is only the beginning.

NFTs as visual art

“NFTs liberate art. Traditional art is confined to time and space. You have to be in the right city, go to a museum, be invited to someone's home, etc. Anyone, anywhere with an Internet connection can view NFTs and take them in. This is a huge breakthrough.” — Cameron Winklevoss, entrepreneur & Gemini exchange co-founder

Along with CryptoKitties (see above), visual arts brought NFTs into mainstream awareness, starting with the June 2017 launch of CryptoPunks, a collection of 10,000 unique 24x24 pixel art heads. The punks were initially given to the Ethereum community for free and helped to inspire ERC-721 token technology.

Soon after their release, the CryptoPunks collection spawned a secondary resale market. According to creator Larva Labs, “The total value of punks sold over the last year is 199,519.76 ETH ($404,723,844.09 USD).” The largest punk sale to date was #7804 in March 2021 for a staggering $7.57 million. Punks are often viewed as community and/or status symbols, which may explain rapper Jay-Z’s likely purchase of #6095 for roughly $119,000.

Not surprisingly, similar projects followed (including Larva Labs’ 3D Meebits), and many work to tie certain abilities or benefits to ownership. For example, the Bored Ape Yacht Club gives owners access to a shared digital graffiti area. Initial BAYC token sales are all 0.08 ETH, but resale now averages ~1.6 ETH. Or consider Reddit CryptoSnoos, which resemble trading cards and offer a community-specific way to stand out, express group support, and show some individual flair. Such NFT art says, “I’m like you…but uniquely me.”

NFTs incorporate smart contracts, which is a technology that executes a set of operations under given conditions. In other words, if one thing happens, then another thing executes. Smart contract functionality is core to NFT use in visual art, because it offers a new revenue channel for artists, who typically lose massive portions of their revenue to intermediaries and resales. With NFT smart contracts, an artist can sell a piece directly to a buyer (and blockchain-confirmed non-fungibility assures the buyer of unique ownership) and also obtain a royalty percentage of all subsequent resales. If the NFT changes ownership, then X% of that transaction goes to the artist’s blockchain wallet. The smart contract handles these operations automatically, with no humans in the middle taking a slice or introducing delays. This dramatically lowers the risk of fraud and theft.

Artwork is often sold through marketplaces such as Foundation.app, although high-profile pieces may move through traditional auctioneers, as demonstrated by Beeple’s record-shattering $69.3 million NFT sale via Christie’s in March 2021. All told, CryptoArt data shows that over 700,000 pieces of NFT art have sold to date for over 300,000 ETH (currently over $600 million).

NFT sales volume exploded in Q1, then retreated following the $69M Beeple auction and subsequent cryptocurrency price correction. Negative press crowed that “new data shows the NFT hype is fading.” A July Reuters piece put such naysaying to rest, noting that the market for NFTs “surged to new highs in the second quarter, with $2.5 billion in sales so far this year, up from just $13.7 million in the first half of 2020.” OpenSea sold nearly $150 million of NFTs in June alone. Reports of NFTs’ death proved quite premature.

NFTs in gaming

The aforementioned CryptoKitties game debuted on the Ethereum blockchain in 2017. The game was essentially next-gen tamagotchis in the form of cartoon-cute NFT cats, and it caught on fast. In early December that year, the BBC reported that $4.5 million had been spent on the non-fungible felines and resulted in enough transaction traffic to slow the Ethereum blockchain. (Remember that need for Layer 2 solutions?) In 2019, the CryptoKitties team announced it had created a new blockchain called Flow, which has since attracted many NFT publishers.

One of today’s hottest NFT-driven games is Axie Infinity, which is like CryptoKitties meets Pokémon Go, complete with battling monsters. The game’s ERC-20-based Small Love Potion ($SLP) tokens function as currency for breeding Axies and trade outside the game on global exchanges, such as Binance (see 90-day price chart below). Axie Infinity now has over 40,000 daily active users, $15 million per month in NFT volume, a $2B market cap, and partners including Ubisoft, Binance, and Samsung. Axie Infinity players can earn several hundred U.S. dollars per month through $SLP farming, potentially earning more through gaming than the wages of college graduates in developing countries. This injection of NFTs and blockchain tech into gaming stands ready to open a new front in online entertainment and to make play-to-earn gaming into a global phenomenon. Some suspect it will even replace today’s incredibly popular free-to-play gaming model.

90-day SLP/USD price chart. Note the May price decline in line with the broad crypto market, then the rapid tripling in early July as the game went viral.

It’s only a small step from here to bringing play-to-earn games into metaverses. Beyond simply playing, we can easily imagine having cross-platform technologies enable the presence of NFT-based characters or items from games in metaverse users’ virtual properties. Want a next-gen bored ape as your metaverse butler? It could happen.

GameStop has poured at least some of the cashed-out proceeds from its stunning, Reddit-fueled run-up to finance a new direction for the struggling company. With its Gamestop NFT site, GameStop may be signaling that it will give players the ability to create, buy, and trade NFTs of game sequences, perhaps much like NBA Top Shot (see below). Details remain under wraps, but GameStop’s move looks to be another indication of the growing value being placed on tokenizing entertainment.

Not least of all, Big Time Studios received $21 million in funding for a multiplayer action RPG called Big Time. In it, players will be able to find and purchase NFTs with real-world value. The minds behind Big Time come from many of the largest game publishers in the industry. The game is expected to launch in 2022 on the Ethereum blockchain, although NFT drops on Binance will start in July 2021. Big Time will offer a patented off-chain custody system for its NFTs, which will allow the export and import of NFTs from and to the game. This bodes well for our eventual game-NFTs-meet-the-metaverse thesis.

NFTs in music and writing

From 2010 to 2015, royalties on new music fell by over two-thirds as streaming services replaced radio and drove artist payments into the ground. Annual royalties paid have remained essentially flat ever since. Enter NFTs, which now offer a chance for artists to connect directly with users and offer novel value in ways not practical or possible with conventional crowdfunding.

The Kings of Leon were the first band to release an NFT album across three token types, one of which gives the owner front row seats at live shows for life. The band partnered with solution provider YellowHeart to manage the Ethereum-based wallet and front-end site for users. Maroon 5 and others have since hopped on YellowHeart. Still, it leaves the question of whether music enthusiasts will soon face a case of wallet sprawl as they try to organize and enjoy their NFT assets—and when someone will arrive with a sort of Layer 3 “wallet of wallets” solution.

In February, Grimes paired her music with visual art as NFTs on Nifty Gateway and netted over $5 million. Trance music pioneer Brian Transeau (“BT”) amplified this multimedia approach with his GENESIS.JSON project, which features over 15,000 audio/visual elements manually joined into a 24-hour art piece. Over 10 months, BT sought to blend music with coding and made the NFT programmable. It sold for 88.88 ETH (currently about $178,000) on SuperRare. One can imagine projects like this on constant display for public enjoyment or fractionalized owners (see below) in metaverses.

Naturally, NFTs can also apply to writing. Quartz sold the first news article NFT. Twitter CEO Jack Dorsey sold his first tweet as an NFT for over $2.9 million. (He subsequently converted the proceeds to bitcoin and donated the funds to African relief.) But these one-off sales are less attractive than efforts like Mirror and its $WRITE token, which uses its token for both voting/governance as well as writer compensation. Concurrently, each Mirror essay gets minted as an NFT tied to tradeable $ESSAY tokens. Readers purchase $ESSAY with Ethereum currency (ETH) and thus own a fractionalized part of the essay. Thanks to smart contracts, this allows any future revenue generated by the essay to be shared back with $ESSAY holders, something like a stock dividend. The Mirror project seems to be a tokenized form of Medium or Substack, which carries an intriguing promise to link authors and readers and remove the royalty-slicing middleman.

From essays, it’s a small jump to books. Just as Amazon popularized digital books with its Kindle platform, look for NFTs to be the next step in digital reading. Bookchain was one of the first services to help authors to make their books into NFTs. Publica now does the same, albeit without using the bubble-associated word “NFT.” Like musicians, authors find themselves getting squeezed by modern trends into lower revenue models. NFTs offer piracy resistance and a chance for new monetization opportunities, especially ongoing residual revenue via the resale market. And just imagine what libraries in the metaverse might be like.

NFTs for fun and collectability

Sometimes, NFTs embody key cultural moments, even if those moments are just silly and fun. The sale of the Nyan Cat meme NFT for 300 ETH (almost $600K) makes a case in point, as does the $761,000 sale of the Charlie Bit My Finger video NFT and the $473,000 paid for the original “Disaster Girl” photo, which shows a four-year-old girl smiling mischievously in front of a burning house. If this gives the idea that people will pay stupid amounts of money for stupid things with pop culture associations, well... Witness billionaire Shark Tank investor and crypto enthusiast Mark Cuban’s own dabblings on major NFT seller Rarible. An asking price of 9.2 ETH (~$18,000) for an NFT that unlocks a personalized video from Cuban? Pass.

On the other hand, collectability has always been about perceived value and collective assessment of social relevance and impact. Basketball plays a huge role in many people’s lives, so it’s not surprising that NBA Top Shot, also created by Dapper Labs (the firm behind CryptoKitties) has become one of the most recognizable brands in NFTs. Users buy and trade video highlights called “moments” as NFTs. By late May, the service had crossed the million-user mark and amassed over $700 million in sales in under one year, most of which was in NFT resales. Not wanting to miss the ride, Major League Baseball is now preparing to sell NFTs on the Candy.com marketplace.

Pop culture-based NFTs are everywhere now. Marvel Comics is launching an NFT comics and collectibles line and phone app with VeVe. Warner Brothers is selling a series of NFTs around the new Space Jam sequel, and no one should be surprised to see this become a regular part of film releases going forward. Not to be outdone, the new Anthony Hopkins movie, Zero Contact, is launching as an NFT on the direct-to-consumer Vuele platform. And lest anyone think that memorabilia is only about entertainment culture, don’t miss the Tim Berners-Lee NFT sale of the original World Wide Web source code for $5.4 million.

Veering closer to the metaverse, “Mars House” is a fantastical 3D rendering of a home, set on Mars, realized as an NFT and made available by artist Krista Kim for adaptation into the buyer’s own metaverse locale. The item is part collectable art and part architecture. The NFT sold for 288 ETH (over $500,000) on SuperRare. The sale clarifies that NFTs belong in the metaverse, and people will pay to outfit their virtual spaces with high-value items.

To explore this point further, study NFT clothing, which is rising quickly in popularity as people seek status and fashion for their metaverse personae, especially when that digital fashion crosses over with the physical world. Nike pioneered this concept with its 2019 patent for CryptoKicks, which links a digital asset to a unique physical pair of sneakers. Alternatively, RTFKT focuses on metaverse-compatible items such as its Atari-branded shoes. Note that RTFKT offers a line of sneakers available only to CryptoPunks owners. RTFKT calls the creation of physical clothes based on its digital designs “forging.” Clearly, how we present ourselves in the virtual world will matter every bit as much as it does in real life.

NFTs meet real estate

The idea of virtual land being valuable may strike some as counterintuitive. After all, unlike physical land, one can simply make more virtual land with a few mouse clicks, right?

Yes and no. Metaverses are created with rules, including how much “land” exists and how that land is situated within the world. In theory, one could alter the rules and create more land for sale. In practice, this would violate users’ perception of land scarcity, and thus value, and likely crash that metaverse’s real estate economy. Metaverse economies are booming in part because of that scarcity, and investors are beginning to notice.

In June, digital real estate investment firm Republic Realm paid over $913,000 for a key plot (sold as an NFT) in the Decentraland metaverse. This land can be subdivided, with each piece sold or perhaps leased as its own NFT. As with real estate investment trusts (REITs) in the physical world, Republic Realm is also preparing to offer a digital real estate fund for investors, so people who can’t afford to buy prime virtual real estate can still own a fractional, tradeable piece of those assets. Increasingly, look to video games to provide their own NFT-driven metaverses. The Winklevoss twins and other crypto heavyweights invested heavily in virtual land in an Ethereum-based game/metaverse called The Sandbox. In February, nine plots of land in the Axie Infinity game sold for $1.5 million. And Minecraft fans can buy NFT-based land on the Meta City server with in-game currency.

You’ve likely noticed by now how many crossovers are evolving between NFT sectors. We mentioned the artist Beeple earlier, as well as the ideas of fractionalized ownership and putting NFT art on metaverse display. All of this came together in December 2020 when MetaKovan and his Metapurse organization purchased the Beeple 20 Collection for $2.2 million. To make the point that art should be seen, not hidden away, MetaKovan purchased land in three metaverses⁠—Decentraland, Cryptovoxels, and Somnium Space⁠—built museums on those spaces, and created showings for the Beeple collection in each museum. He then went even further by creating the B.20 token for the artwork/land bundle and selling 10 million of them. In this way, every B.20 token holder could have fractional ownership in the art and larger project. B.20 tokens can be traded on the open market like Ether and Bitcoin tokens.

NFT real estate crosses into the physical realm as well. A well-backed outfit called SuperWorld has digitized the real world and mapped it onto roughly 65 billion purchasable 100x100 meter plots, each (re)salable as an NFT. Owners can craft whatever they like on their plot and view it as augmented reality. Most ordinary blocks (like your childhood home, probably) sell for 0.1 ETH. A block on New York Avenue currently lists for 1000 ETH. Could another company come along and do the exact same thing? Of course. But SuperWorld is betting on early adoption and network effects to make it the market’s de facto choice in this application.

Even physical-world real estate can now become an NFT, too. The first such transaction happened this June in Kiev. The trick was to make the property hold the title as an LLC. The purchase transferred ownership of the LLC and the property, packaged as an NFT, went with it. This bypassed county records and other conventional means of transferring land.

Real estate is likely only the beginning for NFTs encroaching on traditional finance and investment worlds. Expect to see many ways in which NFTs bridge with decentralized finance (DeFi), such as NFTfi, wherein NFTs can be put up as collateral in lending/borrowing liquidity pools. Just as high-profile NFT auctions are likely a harbinger of NFT auctioning to come, so too with NFTfi. In both cases and countless others, real-time transaction performance will be increasingly important as global access to and competition around NFTs heats up. Increasing pressure will fall on networks to keep transactions low on latency and free of congestion.

Only the Beginning

And after all this, we are still only at the beginning with NFTs and their use cases. IBM is at work turning its patents into NFTs to “help position patents to be more easily sold, traded, commercialized or otherwise monetized.” Scientists anticipate selling certain individuals’ genomes as NFTs, if only for fundraising. NFTs increasingly play a role in decentralized finance (DeFi), assisting with the administration of borrowing and lending. NFTs can also help in real-world inventory tracking and logistics.

Early on, we said that NFTs are a bubble. They are, just like Internet companies were a bubble in the late '90s. The bubble popped. The companies that lacked fundamental value vanished. Those that survived thrived, and some of those went on to shape our current world. Will an NFT of Mark Cuban dancing impact the year 2040? Highly doubtful. But will many NFT use cases persist, evolve, and shape the future fabric of our digitized world? Absolutely.

To return to our original question about NFTs and the metaverse, we might first ask: Are NFTs here to stay, and are they going to be a big deal?

Yes, and for all the same reasons that cryptocurrencies and blockchain technology will gradually permeate our digital lives. They are more efficient and effective in many, many roles than their traditional predecessors. Just think about gaming NFTs. If users can have more value, more utility, more status, more portability, and more enjoyment from an in-game NFT than yesterday’s in-game token, why wouldn’t the NFT ultimately take over?

If nothing else, this article and its many examples should illustrate the rampant experimentation happening in NFTs, the value people find in them, and the fascinating ways in which NFT efforts are beginning to cross-pollinate.

If those NFTs' benefits can easily weave into consumers’ metaverse lives, why wouldn’t users embrace them? Once upon a time, it was very difficult to move communications between online services such as CompuServe and AOL. Today, standardized protocols fix that; we have universal SMTP/POP email. The same evolution will play out with NFTs and metaverses. It will get easier and easier to create, use, trade, and transfer NFTs.

Among a host of other applications, NFTs will increasingly offer a way for people to express their individualism, and that’s going to be essential in an online world of billions. Maybe in the infinite vastness of virtual universes, NFTs are part of what will help keep us distinctly, unmistakably human.

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