Exploring the Future Development of NFT Subfields: Social Attributes, Gaming Attributes, Composability, and Fragmentation Attributes

Author: Element Research

Since the NFT boom in 2021, Ethereum has proven to the world that it is not only a paradise for decentralized finance (DeFi) but also a hub for decentralized cultural values represented by CryptoPunks.

Perhaps during the previous NFT boom, you focused on the close relationship between large companies and NFTs, such as Visa's purchase of a Cryptopunk, Alipay launching two limited edition Dunhuang-themed NFT skins, Time magazine launching an NFT series, Sotheby's and Christie's auction houses repeatedly including NFTs in their auctions, and LV launching the NFT treasure hunt game Louis the Game, etc. However, this is just one of the many landscapes on the road to NFT development.

As the NFT market overall returns to rationality, perhaps more possibilities are worth exploring, including the social attributes of NFTs (SocialFi), gaming attributes (GameFi), the composability of NFTs, and the fragmentation of NFTs, among others.

NFTs Are Returning to Rationality

It is evident from numerous data that the NFT market is returning to rationality.

Although the market capitalization and number of holders of NFTs are continuously growing, the most important data determining the activity level of the NFT market, "daily transaction volume" (24H Volume), is continuously declining. According to the latest data from Nftgo, this figure reached a historical high of $350 million at the end of August this year and entered a downward trend after hitting a historical peak of $560 million on October 29. Currently, this figure is only $31 million, a decline of over 90% compared to the former and over 95% compared to the latter.

Data Source: Nftgo

Moreover, the overall performance of the NFT ecosystem is not so bright. The latest data from NftGO shows that the number of traders in the entire NFT ecosystem peaked at 18,700 on August 25 this year and has since declined. Currently, the 24H active trading number is less than 9,000, a decline of over 50%.

Data Source: Nftgo

In the realm of crypto art, the once-leading CryptoPunks NFTs are also not performing well. Data from dappradar shows that the number of active users for this application in the past 30 days is 990, a decrease of 24.3%, and the number of contract interactions is 4,380, a decrease of 34%. The downward trend is almost fatal for the NFT market, which requires high liquidity, and this is the fundamental reason why many newly issued NFT artworks have recently broken their prices.

Data Source: dappradar.com

The rational development of NFTs is a fact, prompting us to think about which directions NFTs will develop in the future. In the author's view, in the upcoming development of NFTs, their social attributes (SocialFi), gaming attributes (GameFi), composability, and fragmentation will see significant development.

Social Attributes of NFTs (SocialFi)

SocialFi refers to Social + NFT + DeFi, where people establish social and financial links around several common goals.

In "Sapiens: A Brief History of Humankind," author Yuval Noah Harari argues that "the reason humans became the rulers of the Earth is that humans can create and believe in fictional stories." The driving force behind this is social interaction.

Although NFT images also possess certain social attributes, such as collectors who purchase Beeple's works establishing connections with each other and with the author, investors who hold the once most expensive CryptoPunk #7804 and CryptoPunk #4156 inevitably have the impulse to connect.

Thus, NFT avatars have become labels of identity. Just like when you ask some bored ape holders why they chose to buy, they will respond that owning an ape avatar allows them to enter the ape holders' community group and communicate privately with other ape avatar users. Although there is a deep element of boasting in this, NFT holders indeed organize online social interactions.

On the social level, Loot has done even more thoroughly by bringing community creativity into the project, greatly opening up participants' enthusiasm.

Loot's founder, Hofmann, allows the community to use Loot NFTs in any way they want. This includes social aspects. Creators in the Loot community even create exquisite game characters based on Loot's attributes, truly igniting the community's immense creativity. Of course, this is not the endpoint. In the future, more RPG games, text-based games, idle games, nurturing games, and even Metaverse integrations based on Loot may emerge.

Of course, the social attributes of NFTs are also reflected in community identity.

Since early 2021, the movement of retail investors on Wall Street, which used GameStop to strike back against financial institutions, spread into the crypto space, leading to the explosion of the Dogecoin family. This hurricane that swept into the crypto space made the crypto community realize that the consensus around crypto assets can be shaped in an instant. Millions of retail investors, led by Tesla founder Elon Musk (with over 60 million Twitter followers), successfully shaped Dogecoin.

This can be seen as one of the earliest forms of SocialFi. Although NFTs were not involved, this model is precisely the current organizational form of DAOs—community leaders organize fans through social software like Discord/Twitter/Telegram to support a particular artist or a certain type of art form, which is the purest form of SocialFi.

Gaming Attributes of NFTs (GameFi)

With the boost of Axie Infinity, we recognize that blockchain + gaming introduces a new economic model that allows gamers to directly participate in the underlying construction of games and gain long-term development dividends. This new model paints a beautiful picture where everyone can participate in "play-to-earn."

Although the realization of this beautiful picture is not entirely satisfactory, Axie Infinity, with a market value of nearly $9 billion, still shows growth recently. In the past month, the most popular crypto game, Axie Infinity, has maintained a continuous increase in user numbers for 30 consecutive days, with a 30-day increase of 27%, and a total contract transfer quantity of 107,500, with a 30-day increase of 22.2%.

Additionally, according to the 01 Blockchain's 2021 NFT Investment and Financing Report, since the beginning of 2021 (up to the end of October), there have been 201 financing events in the global NFT-related industry, with gaming and crypto assets taking the majority, with 50 and 42 events respectively, and 25 financing events in the NFT trading market and 16 in investment management. This shows that the capital market is also highly focused on the future development of crypto games.

Moreover, it is worth noting that people's understanding of GameFi is undergoing profound changes.

If we go back three years, when CryptoKitties was all the rage, people were still discussing how to issue an NFT token and make it more valuable, while whether the game was fun did not seem to be the key issue.

The emergence of Axie Infinity has set an example for crypto game developers, who began to realize that a not-so-complex functional crypto game could directly outperform Honor of Kings in terms of revenue and ascend to the throne of the industry. Thus, fun became the most important focus for such games.

People then discovered that before a game truly becomes fun, the in-game assets cannot be "valuable." The number of players attracted is the key factor determining whether game assets are genuinely valuable. If one only focuses on the assets, it would be a mistake of "climbing a tree to catch a fish," as unimportant things, no matter how well done, can only be considered "unimportant good things."

Currently, a large number of visually stunning and story-rich game projects have emerged in the industry. Although most of them are still in the early stages of development, they are absolutely worth looking forward to. This includes the interstellar adventure strategy game Star Atlas running on Solana, the role-playing, combat, and collection game Illuvium, which was specifically developed with a Layer 2 network Immutable X to enhance performance, and Alien Worlds running on the high-performance public chain WAXP, all of which are worth focusing on in 2022.

GameFi is likely the most promising project after SocialFi. According to Newzoo's "2021 Global Games Market Report," in 2021, the total number of gamers worldwide surpassed 3 billion, and it is expected to reach 3.32 billion by 2024, with global game revenue reaching $218.7 billion. If nothing unexpected happens, the traditional gaming market, worth hundreds of billions, will become the target for crypto games to conquer.

Composability and Fragmentation of NFTs

The term composability is more commonly seen in DeFi. We know that DeFi is also known as financial Lego, and composability is the most fundamental characteristic of DeFi. On the Ethereum network, the aggregation and interaction of different DeFi applications are very common, including aggregated trading, flash loans, liquidity mining, holding LP tokens (liquidity certificates) for mining, and even the gradual emergence of combining NFTs with DeFi platform gameplay, as everyone is based on the Ethereum underlying layer, allowing multiple smart contracts to be called simultaneously within a single transaction.

The combination of NFTs and DeFi, such as Uniswap V3, has become the first DEX to present liquidity provider (LP) positions in the form of non-fungible tokens (NFTs). This innovation is hailed as giving NFTs true financial wings, with limitless imaginative possibilities.

Of course, the composability of NFTs is not limited to this.

The previously mentioned Loot is a standard example of NFT Lego. The Loot project only provides the basic composable minimum unit—a blank sheet of paper, with subsequent imagination created and followed by the community—filling in various attributes like "Weapons, Chest Armor, Head Armor, Waist Armor, Foot Armor, Hand Armor, Necklaces, Rings." This decentralized model still has enormous imaginative space.

Additionally, the imitation of Loot, Rarity, developed by Yearn founder Andre Cronje (AC) on Fantom, has made bolder attempts in visual UI, attribute allocation, automatic adventure upgrades, batch upgrades, trading markets, etc. Rarity has set up 11 adventure characters (Loot has 8), and the subsequent gameplay is determined by developers. Rarity is collaboratively written by community members, and ultimately, these projects, under the combination of various attributes, will evolve into games created by the public, which is impossible in the traditional market.

However, as of now, due to the low liquidity issue of NFTs, the composability of NFTs cannot occur between different projects. For example, in the past three months, although NFT trading platforms like Opensea have laid a lot of complete infrastructure for NFT trading, the transaction volume of NFTs has still experienced a significant decline. Data shows that NFT transaction volume reached a historical high of $350 million at the end of August this year and entered a downward trend after hitting a historical peak of $560 million on October 29. Currently, this figure is only $31 million, a decline of over 90% compared to the former and over 95% compared to the latter. Low liquidity is the biggest roadblock to NFT development—after all, no one wants to participate in a market with very few transactions.

Therefore, improving NFT liquidity is crucial, and one strategy is for NFTs to develop towards fragmentation. NFT fragmentation refers to designing mechanisms that allow NFTs to become divisible from being indivisible, ultimately enabling NFTs to be traded like BTC. Of course, this is not fragmentation for the sake of fragmentation; the essence of fragmentation is to provide NFTs with a new price discovery mechanism. If effectively implemented, NFTs will be able to participate in collateral lending, CEX and DEX trading, and other financial activities, significantly improving capital utilization.

Taking Beeple's artwork "Everydays: The First 5000 Days," valued at $69 million, as an example, how many people in the world have the strength to participate in the trading of such high-value works? Moreover, this artwork was valuable at the beginning of the year; will it still be worth this much by the end of the year? If Beeple's works were fragmented and entered the trading market, then market traders would have the opportunity to participate in the pricing of that work—if you like it, spend $10 to buy a share; if you don't like it, sell your token.

Therefore, there is a certain connection between the composability of NFTs and the fragmentation of NFTs, and it is also one of the important directions for the future development of NFTs.