In 2021, non-fungible tokens (NFTs) exploded onto the scene, captivating artists, collectors, investors, and the general public. NFTs are digital assets with unique identification codes and metadata that distinguish them from other identical looking items. The ability to establish proof of ownership and scarcity for digital content generated huge hype and astronomical sales. NFTs were touted as the next big thing in art, collectibles, gaming, and an innovative way to invest. Then in 2022, the deafening buzz around NFTs quieted significantly. So what happened?
The Rise of NFTs
NFTs have been around since 2014 but they didn't hit the mainstream until 2021. High profile NFT sales like Beeple's $69 million digital collage brought intense media coverage. Major brands like Nike, Coca-Cola, Adidas, and Visa launched NFTs. Celebrities like Eminem, Tony Hawk, and Paris Hilton embraced them. The total NFT transaction volume in 2021 exceeded $17 billion, up from just $82 million in 2020 according to DappRadar. OpenSea, the largest NFT marketplace, hit $3.5 billion in August 2021 transaction volume alone.
This meteoric growth was driven by speculation and hype. Collectors hoped to buy and flip NFTs for profit amid frenzied demand. Crypto-rich buyers with excess disposable income blew outrageous sums on NFTs hoping to resell for more. Retail investors fearing missing out jumped in. Marketing stunts like YouTube star Logan Paul's $5 million NFTs and celebrity collaborations sucked in mainstream audiences.
The Irrational Exuberance Fades
In 2022, the NFT frenzy cooled substantially from its peak. According to Chainalysis, after hitting a high point in January 2022, NFT sale volumes declined 92 percent by September 2022. In 2021, the average sales price of an NFT on OpenSea was around $5,000 but this reduced to just $412 by September 2022. Several factors contributed to this decline in NFT value. These include:
- Speculative bubble burst - The hyperbolic increase in prices and trading volumes in 2021 were characteristic of an unsustainable bubble fueled by hype. Once speculation peaked, prices came crashing down.
- Class action lawsuit - Shaquille O' Neal, Madonna, Justin Bieber, and Jimmy Fallon are just some of the the celebrities who were named in a class action lawsuit that alleges they promoted the sale of Bored Ape Yacht Club NFTs without disclosing that they were being compensated.
- Crypto winter - NFTs are largely purchased using cryptocurrencies like Ethereum. The crypto market downturn in 2022 meant less disposable income for speculative NFT purchases.
- Backlash - As a disruptive new technology, NFTs garnered criticism for excessive energy use, art theft, and enabling financial scams. The backlash led more level-headed newcomers to reconsider.
- Loss of novelty - The initial wonder around NFTs as a novel idea wore off for many as more imitative projects flooded the space.
- Lack of utility - The ultimate value of NFTs is still being established. Beyond it being just a digital collection, more use cases need to be developed to improve its value proposition as a unique digital art.
The Next Phase of NFTs
While the peak NFT hysteria has certainly passed, NFTs aren't going away. The technology still holds promise to transform gaming, entertainment, finance, and other sectors. But sustainable, long-term growth will require more thoughtful progress in the following area:
- Establishing real utility and value - Whether it’s unlocking content, securing identities, representing shares of property, or other uses, NFTs need functionality.
- Moving beyond art - New NFT innovations in gaming, ticketing, patents, licenses, certificates, etc. can expand the possibilities.
- Targeting niche communities - Rather than trying to attract the mainstream market, focusing on delivering value to dedicated groups.
- Improving usability - Complexity around purchasing, transferring and securing NFTs deters many people. Better onboarding is key.
- Developing sustainable models - Environmentally friendly blockchains and effective curation of quality projects vs. low-value collectibles.
While the short-lived mass craze for NFTs has moved on, companies, creators and communities are still building real NFT value and use cases for the future. The next wave of NFTs may be smaller but also stronger and more substantial by providing utility, not just speculation. The technology’s disruptive potential persists with a foundation that may finally match the hype.