By Rishi Daryanani
WEquil Group does not give investment advice. Nothing that we say or write should be interpreted as a recommendation to buy, sell or trade any security or any Blockchain project.
WEquil.Capital is creating an NFT collection to raise awareness for WEquil Group while helping members make some money in a fun and unique way! We are calling it "WEquilPunks" which is a play-off the name of CryptoPunks ... the most famous NFT collection in the world.
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Intro to the NFT Market and Thesis: NFT prices are inflated but in the long term they can provide a tremendous impact on the Arts and Entertainment space.
Concerns with the community: A frenzy of buyers and sellers looking to make money fast. Communities need to shed light on these issues.
The limitations of the technology: Investors need to understand what they are actually purchasing.
Benefits and utility of NFTs: The problems we are facing now are just hurdles.
NFT Art as an investment. The people that drive the value of NFT Art.
Intro to the NFT Market
The first NFTs were created in 2013 to trade digital assets within the blockchain. There wasn’t too much popularity within this space until 2017 when CryptoPunks and CryptoKitty gained traction for a brief moment. Even so, after 2017 the NFT art space died down once more as people believed it to be a passing trend. It wasn’t until early 2021 that NFTs really exploded when DapperLabs, the creator of CryptoKitties, partnered with the NBA and sold tokenized footage of player highlights within the league. Lebron James’ video clip selling for $208,000 was a potential catalyst for a sudden explosion in prices of NFTs alongside a 3LAU album that would be sold for $11.7 million USD and a piece by digital artist Beeple, that would also sell for $69.3 million USD.
Earlier on, we referenced NFTs within our article titled: About DAOs and mentioned that the asset class was in a bubble. We compared the speculative nature of NFTs to that of tulips in the 17th century amongst dutch investors. The prices of NFTs have in fact become exorbitantly high to the point where it is becoming harder to justify valuations. While there are NFT collections with dedicated communities that merit artistic and technical praise like MekaVerse, a collection of anime-inspired generative art there are also instances in which buyers have made more questionable purchases like one case in which a 2D image of a rock was sold for 80 ETH (worth $280,255.20 at the date of purchase).
With such inflated prices, many prudent investors would immediately dismiss NFTs as a shallow trend with a short lifespan and immature market, but after further research, the answer to whether or not NFTs hold weight is more nuanced than that. There will be pain in the near future for a significant chunk of the NFT space once the market corrects itself and less liquidity is pumped into the industry, but NFTs as a product is definitely here to stay. They can provide value for its community in new and unforeseeable ways that tie in perfectly with the newly developed, digital personalized economy, which we reviewed in-depth during the first demo day that we participated in with all of WEquil Group. Check out our last publication on the Personalized Economy.
In order to dive deeper into this topic we will explore the concerns that are voiced by community members about the NFT Space, assess the limitations that we see with this newly formed piece of technology and also analyze the utility and the potential value that this asset class can provide for the end-users and its creators.
Concerns with the Community
While the NFT space consists of projects with creators that have a genuine desire to provide value for its users, there are also malicious actors that are interested in pumping up the price of their digital project beyond any reasonable valuation and then selling it for a profit. These people engage in common practices like air-dropping NFTs onto wallets of popular members of the space like in the case of one well-established writer with over 80,000 followers on Twitter who goes by @Zeneca_33. On numerous occasions, NFT creators have minted their artwork directly into Zeneca’s wallet, which is displayed publicly to his followers thereby making it appear as though he bought those pieces. His experience has turned so sour that he needed to leave disclaimers at the beginning of his publications stating that people are airdropping NFTs onto his wallet without his consent and that he personally did not endorse those projects.
This kind of behavior gives us a glimpse into the prevailing psychology of a large portion of NFT creators and buyers within the community. Many people are also in this space to make money fast. According to the application tracking firm, DappRadar, in the month of May alone people were buying and selling 85,787 NFTs at a value of $5.8 million USD every day. Much like the Bitcoin Maximalists, which we have spoken about on Twitter Live, many people stimulating these markets are also influenced by dogmatic thinking. While these individuals' intentions do not appear to be malicious they are still guilty to some extent of brushing aside the concerns of the potential risk of buying and holding expensive NFTs.
In a popular podcast on Youtube, Artur Sychov, the CEO of the NFT-based metaverse, Somnium Space, engaged in heated discussions with two other NFT project owners, Abby from Top Dog and Josh from Crypto Dads, who were adamant about the intrinsic value of their community and insisted on justifying the high valuations for their tokens. Sychov bluntly stated that the projects that his colleagues were offering provided no real utility for their users and that a lot of people buying those NFTs would feel pain after a true bear market. Both Abby and Josh maintained a defensive attitude throughout the discussion, but when asked about what they would do if the secondary market for NFTs dried up their answers were vague, ranging from talks about finding alternate sources of revenue to mentions of having a few investors as back up.
Limitations of the Technology
While there are concerns of overvaluation, as evidenced by the attitudes of many members of the community within the space, concerns about NFTs also stem from a look into the nature of the underlying asset that is being sold. When you purchase an NFT, you are technically not buying the art itself. The NFT is in simple terms like a digital receipt to the underlying piece of content. The owner of the NFT does not hold any intellectual property rights to the digital asset that it’s linked to unless there is a formal agreement to transfer such rights.
Many projects also do not use on-chain storage or in other words contain the metadata of the digital art included directly into the NFT’s code. This is a common occurrence because the transfer cost or the “gas price” as many people in the Blockchain space refer to it as for the Token goes up if a large file is also included in the transaction. As a result, many NFTs contain the smart contracts within the Blockchain while the actual content of the work is hosted within a centralized server. Thus rendering the benefits of immutability from a decentralized Blockchain null. There is no legal framework that obligates an NFT vendor to continue hosting the digital content for the buyer, which creates risks that all investors need to consider.
Furthermore, while having an NFTs metadata link directly to a person’s wallet address within the Blockchain serves the purpose of authenticating ownership to some extent it still has its limitations. There is no way to tie a wallet address to a physical person in the real world. This has made it easy for people to impersonate famous artists and create counterfeit pieces of work. One instance of this happening took place in February this year when an individual impersonating the famous graffiti artist, Banksy, sold over $1 million USD in NFTs, to unsuspecting buyers on OpenSea. The lack of ability to verify the true identity of the original vendor coupled with a frenzy from buyers to collect art as quickly as possible from who they believed to be Banksy at a cheap price led to overall pain in the market as lots of people lost money.
Benefits and Utility (Arguing in Favor of NFTs)
The issues outlined in this article do not spell a death sentence for NFTs. They are simply hurdles for what can potentially become one of the most powerful and disruptive spaces in the world of art and entertainment. Much like the students and members of WEquil Group, the builders of NFTs have also created their initial Minimum Viable Projects and iterated upon them to address the issues that they’re being confronted with. It’s doubtful that they are done iterating but the community has still demonstrated a strong spirit of growth and improvement.
The IPFS protocol, for example, was developed as a peer-to-peer version of HTTP, and more NFT creators are now using it to store the original digital artwork instead of hosting it within central servers. Furthermore, Inmutable X’s Layer 2 Protocol within the Ethereum Blockchain also provides a brand new solution for NFT creators to maintain all of the metadata within a decentralized server. Transfers within Inmutable X will incur zero gas fees. The protocol has already picked up steam as Tik Tok is launching its first creator-led NFT collection, which will be powered by Inmutable X. Measures to combat counterfeit NFTs have also been put into place as seen in SuperRare’s NFT trading platform, which requires an application with personal information before submitting digital art.
As we see improvements in the technology we can also notice that the value proposition for NFTs will become more impactful as mainstream culture is starting to jump into this new trend as well. Large publicly traded companies like Ebay, Cloudflare and Draftkings are increasing their involvement in the NFT space. NFTs are also penetrating the fashion industry; Louis Vuitton for example is partnering with Beeple to create a video game containing 30 embedded NFTs that players can obtain. Nike also patented Cryptokicks which allows buyers of NFTs to claim ownership of a particular Nike shoe. NFTs can also provide value in spaces beyond art & entertainment as people are now considering using Tokens as a solution to signal ownership for a potential market within 70% of the global population that doesn’t have any legal registration to land. This would be a wonderful topic to explore for another publication.
The concept of land in a non-traditional sense will also play a significant role in the development of the NFT space. One noteworthy example would be Somnium Space, which is a Metaverse accessible via VR Headset that is made up of tokenized digital assets. Within Somnium the land itself is tokenized and can be purchased by users to showcase to thousands of other members that are exploring the Metaverse at the same time. The owner can then create anything within the land that he/she bought using NFTs. Artists can also build a museum using NFTs which they can use to hold and display their tokenized works of art. According to the Somnium Space Economy Paper, the Metaverse is also designed to allow real businesses to create a digital storefront in order to showcase their products. The possibilities are limitless. We can even strive to one day build a campus for WEquil.School using NFTs within Somnium where lectures and classes can be held. Within the Metaverse, NFT transactions can even be conducted between avatars by simply bartering and physically handing over the digital asset, and thus eliminating any transaction costs that would come from using any regular platform.
The level of immersion that we can experience from a Metaverse driven by NFTs is possibly one of the most compelling value propositions within the arts and entertainment space. Although it’s a relatively new project, people are jumping on board Somnium as the cheapest plots of land are selling on the market for $4000. The previously referenced podcast from Youtube includes Artur Sychov conducting the entire interview in Somnium as his own custom-made, NFT-based avatar. Words cannot do justice to how amazing the metaverse is so I will link you to a timestamp of the interview where Sychov showcases his work.
Caption: Artur Sychov (CEO of Somnium Space) walking towards
an NFT Museum within Somnium Space.
Caption: Sychov showcases the art within his NFT Museum.
demonstrates the trading volume of the Top 10 NFTs in the platform. He is not
happy with the weekly levels of liquidity being pumped into the market.
Art as an Investment
The 2020 COVID pandemic lockdowns created hard times for many people as they were isolated within their homes. NFTs started resurging amongst Discord chat rooms at that time in order to solve that problem and fulfill a strong desire for community and entertainment amongst those large groups of people.
The value of art is a very abstract thing to measure because the standards and metrics are so different amongst all individuals. Earlier on, we mentioned that the NFT market and its prices are heavily influenced by dogma revolving around how members “overhype” (for lack of a better term) the attributes of their own NFT community. While it is true that this kind of trait within the NFT space may create pain amongst investors in the short run or whenever a bear market would take place, the community itself is still a key driver of value within the NFT Art Space.
Zeneca, a highly outspoken and successful member within the NFT Art space, claims that he first and foremost invests in the people behind the project. He looks for evidence of skill and ability that fit the goals of the project amongst the creators, but he also strives to find evidence of a culture in which people are genuinely determined to create something that brings value to others.
While Arthur Sychov was highly critical of the NFT Space and the recent sizable inflow of liquidity in the market he is still the brilliant mind behind Somnium Space. He still loves NFTs, and only engages in harsh criticism because he wants to prevent his community from being the cause of so much pain amongst investors in the market. Abby from Top Dog and Josh from Crypto Dads may be heavily influenced by the excitement of having their NFT projects blow up in price in the marketplace, but they’re still brave enough to face an interview with a harsh critic, acknowledge the potential realities of a bear market after having a discussion with that critic, and stand by their mission to produce value through art.
I am by no means recommending anyone to buy into any particular NFTs since there are still significant risks, and all decisions to buy an asset must be preceded by thorough research, but it's safe to say, however, that it’s always a good idea to study the people that work day to day in operations pertaining to a potential investment. That is one way to truly mature as an investor.
From 1980 - 2006, the average return on works of art was 7% a year. After comparing this figure to the enormous level of returns that came from NFTs in 2021, it would be a safe assumption to say that these insane price increases won’t last for too long. Dogma revolving around making a lot of money does not seem to sustain itself. The pain from a correction, while highly unfortunate, will hopefully lead to more maturity in the markets in the future. The NFT Art Space has the potential to grow into a body that will shape culture. Brighter days will come when we see history books showcasing an expressionist painting by Edward Munch alongside Beeple's NFTs.