1confirmation: 2021 NFT Industry Review and Summary

Author: 1confirmation

Original Title: 《[https://www.1confirmation.com/2021-nft-annual-review](2021 NFT Year in Review)》

Compiled by: Evelyn, W3.Hitchhiker

1. Introduction

Non-fungible tokens (NFTs) empower creators with a new business model and provide consumers around the world with a new way to support, own, and share creativity online.

When the Bitcoin blockchain was launched in 2009, cryptocurrency was the first application at that time. BTC showed us what happens when an open, permissionless ledger can prove the authenticity of digital information and true ownership without a third-party intermediary. In the more than a decade since the world was introduced to BTC, it has not stopped at BTC; NFTs have also demonstrated various other uses of blockchain beyond cryptocurrency.

This year, the NFT craze has spanned a wide range of areas, including visual art, gaming, photography, music, fashion, and consumer brands, among others. In 2017, a quirky idea on Ethereum (a game to trade and breed virtual cats on-chain) has evolved into a global asset class worth billions of dollars, helping thousands of creators and millions of consumers. However, we are still in the early stages of this movement.

2. Overview

2.1 What?

NFTs are tokens that represent true ownership of scarce, independent assets on an open, permissionless ledger (also known as a blockchain). The importance of an open, permissionless ledger cannot be overstated. For decades, companies have been creating digital goods online, but in 2021, NFTs began to explode in growth because anyone in the world could participate without permission, and no one could control the database where digital goods reside.

NFTs give users true ownership. Tokens are owned on-chain by controlling locally stored private keys (without the need for centralized servers). When you own an NFT, you can sign transactions using the private key you control, thereby verifying it to anyone in the world, and no third party can take it away from you.

The public ERC 721 standard created on the Ethereum blockchain in 2017 was a major catalyst for the growth of NFTs. ERC 721 is a standard that allows anyone to mint and transfer NFTs. Before Ethereum and ERC 721, NFTs had been attempted in various forms on the blockchain. However, the user experience, interoperability, and ease of use provided by Ethereum and ERC 721 changed the game. Since 2017, there has been an enthusiastic builder community experimenting with this protocol, and in 2021, all these experiments paid off with massive growth in this category.

NFTs now represent the bleeding edge of the cryptocurrency industry, bringing users into this space at a faster rate than any other category within cryptocurrency. Today, not only is ERC 721 thriving on Ethereum, but many other NFT protocols on ERC-1155 and other blockchains are also flourishing, such as Ronin, Polygon, Tezos, Flow, and Solana.

2.2 Why?

NFTs have many use cases—any creative activity on the internet can be tokenized as an NFT and sold to supporters.

So far, there are four main categories of NFTs that represent the majority of activity: visual art, profile-pic-projects, cultural collectibles, and gaming. These four categories have each grown into global asset classes worth billions of dollars and are worth exploring in depth.

Visual Art

For digital artists, creating sustainable income has historically been difficult. Visual artists reach consumers through centralized social networks like Facebook, Instagram, and Twitter, but these platforms do not provide much freedom, and making real money through web2 business models (advertising) is also challenging. Top artists can build their reputations in web2 and generate freelance work, commissions, and brand deals, but these are generally constraints on creativity (rather than being very profitable). NFTs provide visual artists with a fundamentally better business model by giving them more freedom, allowing them to mint real, provably scarce works and sell directly to consumers.

The traditional art market is worth over $50 billion globally. Before the advent of NFTs, digital artists could not participate in this market because they lacked an easy way to authenticate the scarcity and originality of their work. Traditional artworks are difficult to replicate and authenticate; in contrast, the emergence of NFTs has made the replication and authentication of digital artworks very simple.

The ease of authenticating original works has allowed digital artists to sell over $2 billion worth of art on Ethereum this year (source: Cryptoart.io). These big names include Pak, Beeple, Xcopy, and Dmitri Cherniak, who have all made headlines, but thousands of visual artists are now thriving. So far, artworks from over 1,200 artists have sold for over $100,000.

Profile Picture Projects (PFPs)

A specific type of visual NFT that exploded this year is profile picture projects (PFPs). These are collections made up of a fixed number (most commonly 10,000) of digital characters that share a similar artistic style but have different traits. Larva Labs created CryptoPunks in 2017, which was the original PFP project that sparked it all. Since then, thousands of PFPs have emerged. Bored Ape Yacht Club and Nouns are a few of the more well-known projects, but there are countless others on this list. CrypToadz, World of Women, Long Neckie Ladies, Lost Poets, and Queens + Kings are other notable recent PFPs.

PFPs represent a new way to build brands from the bottom up rather than from the top down. For over a century, consumer brands have been built top-down by companies. We believe that in the next century, brands will be built from the bottom up through PFP projects and their variants. Why are PFPs fundamentally a better way to build consumer brands in modern society? The reason is the same as why pioneering cryptocurrency is a better way to establish currency: global user ownership.

PFPs are foundational, user-owned brands that people around the world can participate in from the start. By owning a PFP and using it as a representation of digital identity, anyone can belong to a community and spread that community worldwide. The combination of unified incentive mechanisms and shared beliefs creates an incredibly powerful force, and when compared to the old way of building brands top-down by companies, the benefits are obvious.

Cultural Collectibles

Every aspect of internet culture can be tokenized and sold as NFTs; in this report, we define sports, music, photography, video, and other NFT collectibles as "cultural collectibles." Music, photography, video, and sports are just a few subcategories within the cultural collectibles bucket that may develop into their own large-scale independent categories in the coming years. If you are a builder or collector in this space, these are worth further exploration and are growing fields.

Gaming

Online games and NFTs are a natural fit because NFTs give players true ownership of their in-game items. Historically, games have been controlled by large companies (Activision Blizzard, Electronic Arts, Epic Games, Tencent, etc.) in a closed-loop ecosystem, but NFTs are changing that, allowing game developers to create truly engaging and sustainable long-term ecosystems for players using open protocols and global liquidity. NFTs in games allow players to convert their achievements in-game into real-world cash, while developers can build upon the ecosystems they initially created.

So far, Axie Infinity is leading the play-to-earn gaming movement. Allowing players to earn NFTs in-game and then convert those NFTs into cash is a game changer and provides new earning opportunities for people around the world. We believe Axie Infinity is just the first generation of play-to-earn games, and we expect to see an explosion of compelling games and experiences in this space in the coming years.

Developers are attracted to NFTs because their open and interoperable nature allows for the creation of new gaming experiences built on top of original games. This has never truly happened in previous games—historically, all popular games have been owned by companies with closed ecosystems (for example, Fortnite is owned by Epic). When compelling experiences are built on top of existing games and assets within those games, online gaming leaps from a one-hit wonder to a long-term engaged community.

Others

NFTs have been used to represent land ownership in virtual worlds, as well as financial assets, such as customized liquidity terms on AMMs, granting access to experiences, and serving as tickets for redeemable physical goods, among other things. These early use cases have not yet been widely adopted, but they have obvious potential. We suspect there will be other use cases that emerge that may not currently exist at all. The prospects for creativity with NFTs are very bright.

2.3 How?

Each NFT collection has a smart contract that creates tokens, handles transactions, and tracks balances. Most modern NFT smart contracts are on Ethereum. Before the creation of the ERC721 standard, each NFT contract was fragmented. This made it difficult to build applications that could interact with all NFTs (for example, marketplaces like OpenSea), as custom code had to be written to interact with each contract.

The ERC721 standard is the most prevalent and is the main catalyst for the global liquidity we see today on markets like Opensea. However, some projects use the ERC1155 standard, which differs in that it can create both fungible and non-fungible tokens simultaneously. In ERC1155, the ID represents not just a single asset but a category of assets. ERC1155 contracts are more gas-efficient when transferring multiple projects of the same category, but they record less ownership information, making it harder to track the history of individual projects within a category.

In recent years, new blockchains have launched that are more centralized but offer faster block times and lower fees than Ethereum. Many of these chains have since followed Ethereum in creating their own NFT standards. Some are "Layer 2s" built on Ethereum that still rely on Ethereum for consensus, such as Polygon and Ronin. Others are independent, competing "Layer 1s," such as Flow and Solana. There is a lot of competitive noise around L1s now, but Ethereum and its L2s still account for over 90% of NFT volume (see below). With more L2 innovations expected in 2022 and beyond, we anticipate that the Ethereum ecosystem will continue to maintain its dominance. However, adoption of other chains may also grow.

2.4 When?

Here is a quick timeline of NFT history.

2012-2013: Colored Coins

Colored coins were the first attempt to launch fungible and non-fungible tokens on Bitcoin before Ethereum. Yoni Assia published a Colored Coins white paper in 2012 and had an implementation in 2013. However, due to Bitcoin's limited scripting language, this approach never gained much traction, but it planted the seeds for future developments.

2014-2016: Counterparty

Counterparty was built on the idea of Colored Coins, adding metadata to transactions to represent new tokens. Historic projects like Rare Pepe and Spells of Genesis were launched during this period on Counterparty. The limited scripting language also hindered Counterparty's development, and the project never exceeded a small niche of cryptocurrency natives, but it was a significant advancement.

2017-2018: Punks, Kitties and OpenSea

In June 2017, John Watkinson and Matt Hall created CryptoPunks, a collection of 10,000 unique pixel characters stored as NFTs on the Ethereum blockchain. Anyone with an Ethereum wallet could claim a CryptoPunk for free, and once they were all claimed, a robust secondary market emerged. This also sparked the PFP movement.

ERC721 was also created in mid-2017, and in October, CryptoKitties was the first well-known project to launch using that standard. CryptoKitties quickly gained traction and media attention as some players made six-figure profits trading them.

While the CryptoKitties market charged a 5% fee, the main benefit of NFTs is that users have true ownership and can do anything they want with them. Shortly after Kitties gained some traction, a non-custodial marketplace for buying and selling ERC721 tokens emerged: OpenSea.

2019-2021: The Awakening

Starting in 2019, NFT experimentation reached a peak. Until the end of 2020, NFT trading volume was small compared to cryptocurrency trading volume, and experimentation was largely outside the mainstream. However, a small but passionate community of true believers was working to grow this ecosystem.

By the end of 2020, blue-chip artists like Pak and Beeple were releasing compelling works on SuperRare and NiftyGateway. In 2021, PFPs exploded (Bored Apes, Nouns, Toadz), and traditional auction houses like Sotheby's and Christie's, as well as mainstream consumer brands like Adidas and Nike, also got heavily involved.

3. Platforms

3.1 OpenSea

OpenSea is the largest NFT marketplace by trading volume. In 2017, co-founders Devin Finzer and Alex Atallah saw the early CryptoKitties movement and the demand for an easy-to-use marketplace that would allow people around the world to buy and sell NFTs. By December of that year, they launched the OpenSea beta, and today, they are one of the fastest-growing online marketplaces in history and the most widely used non-custodial cryptocurrency application.

In 2021, the platform had a trading volume of $16 billion and 1.26 million active users.

3.2 SuperRare

SuperRare is the leading marketplace for high-end visual art. The platform was launched in early 2018 by co-founders John Crain, Charles Crain, and Jonathan Perkins. Since then, SuperRare has curated a talented roster of artists and built a passionate community of collectors.

This year, SuperRare launched the first phase of a long-term decentralization plan, distributing RARE tokens to the community, investors, and core team. RARE is used to govern the new curated space on the platform.

Based on the sales of the top 1,000, the average sale price of SuperRare artworks is currently 10.6 ETH. This is the highest price among any marketplace in the industry.

In 2021, the platform had a trading volume of $207.5 million and 4,400 active users.

3.3 Foundation

Foundation is a marketplace that spans many cultural asset categories, from digital art to music to memes. The platform launched in February 2021 and has hosted a variety of auctions, from the original Nyan Cat meme to the NFT by Edward Snowden that captured the landmark decision declaring the NSA's mass surveillance illegal.

In 2021, the platform had a trading volume of $135 million and 26,000 active users.

3.4 Rarible

Since its launch at the end of 2019, the Rarible marketplace has been an active hub for trading collectibles and artworks. This year, Rarible launched a plan to expand from a single NFT marketplace to a project ecosystem based on the Rarible smart contract and utilizing the Rarible indexer. The Rarible protocol is governed by RaribleDAO and its $RARI token.

In 2021, the platform had a total trading volume of $249 million and 79,000 active users.

3.5 Fractional

Fractional is a protocol that allows for the easy fragmentation and sharing of ownership of one or a group of NFTs. Users can lock one or a group of NFTs in a vault, split the ownership of the NFTs in the vault into a fixed ERC20 token supply, and then list these tokens on decentralized exchanges.

Since its launch in July 2021, there has been strong early adoption of Fractional. Popular fractional tokens, such as $DOG, are fractional tokens of the original Doge meme NFT, with trading volume on DEXs exceeding hundreds of millions of dollars.

In 2021, the platform's fractional token trading volume was $1.78 billion, with 37,000 trading users.

3.6 Catalog

Launched in March 2021, Catalog has become the leading curated marketplace for music NFTs. Each Catalog record is a unique collectible issued by a musician.

Catalog has attracted a range of musicians from genres like dancehall to techno, and we expect to see blue-chip artists emerge on the Catalog platform in 2022. Some early candidates include Haleek Maul, Daniel Allan, Matthew Chaim, and Xcelencia.

In 2021, the platform had a trading volume of $1.65 million and 181 active users.

4. Key Projects

4.1 Pak

Pak is an anonymous creator known for pushing the boundaries of NFTs by exploring new mechanisms that could not exist in traditional art media. They currently hold the top position in crypto art, with artworks sold worth over $291 million to date. They also hold the record for the highest auction price for a living artist's work. Their drops are multidimensional, combining puzzles, game theory, mystery, and clean geometric visuals. In 2021, Pak's creations were bundled with the $ASH token, which can be obtained by burning Pak NFTs and unlocking access to new projects in advance.

4.2 CryptoPunks

CryptoPunks is the first programmatically generated NFT PFP project on Ethereum and holds the status of the "rookie card" of NFTs. When it launched in 2017, NFTs could be claimed for free by anyone with an Ethereum address. 2021 solidified the project's status as a blue-chip PFP. The highest sale record for a CryptoPunk is held by 'Covid Alien' Punk #7523, which sold for $11.75 million at a Sotheby's auction in June.

4.3 BAYC

Bored Ape Yacht Club is a collection of 10,000 unique ape PFP NFTs launched in April 2021. BAYC collectors are granted full commercial rights to the apes they purchase. The core team provides an interesting benefits roadmap, such as editing rights to a shared art board, airdrops of companion NFTs, and IRL events. This strategy contrasts sharply with previous PFP projects (like CryptoPunks and Hashmasks), which had little further input from creators once the initial drop was completed.

4.4 ArtBlocks

Art Blocks is a major marketplace for generative art and has seen astonishing growth this year. Each project is a collection of artworks generated randomly using algorithms designed by artists at the time of minting. Blue-chip art block series that emerged this year include Ringers by Dmitri Cherniak and Fidenza by Tyler Hobbs.

4.5 Everydays: The First 5000 Days

Beeple has created a piece of art every day for over 13 years, and in 2021, all of his efforts paid off. Beeple's Everydays: The First 5000 Days is a collage of 5,000 images created for his Everydays series. This piece is the first NFT artwork to be auctioned by a major traditional auction house and holds the seventh highest sale price among living artists.

After this auction, Beeple held another major auction at Christie's in 2021: $29M for Human ONE.

4.6 XCopy

XCopy is a London-based NFT artist who explores themes of death, dystopia, and apathy through distorted visual loops. He is the top artist on SuperRare by total sales and single sale. XCopy is one of the earliest pioneers of NFTs as an art medium, starting his journey as a crypto art creator and evangelist in 2017.

4.7 Axie Infinity

Axie Infinity is an NFT-based game where players battle, breed, and trade fantasy creatures called Axies. Each Axie is an NFT. Axie Infinity is the largest NFT game by trading volume and active player base and has been leading the play-to-earn gaming movement to date.

5. Trends

We are excited about several trends for 2022:

5.1 Music

The music industry has collapsed. We all know this. Today, there are over 8 million musicians on Spotify. Only 0.09% of this group, or 7,500 people, earn over $100,000 a year.

Music on the internet is largely controlled by streaming platforms that charge consumers to listen. We believe NFTs can quickly turn music into something everyone can listen to for free, but owning a scarce, authentic version will come at a premium (just like traditional art). Catalog is a leader in this area, and Arpeggi Labs is another platform to watch. In 2021, collectors paid less attention to audio NFTs compared to visual NFTs, but this may begin to change in 2022.

With NFTs, artists can sell directly to fans, who can directly support musicians and share in the profits from the music they love in return. A strong case study for this use case is the Inner EP by Haleek Maul. Haleek sold four songs from his new EP for $235,000. He would need about 59 million Spotify streams to earn the same amount. Haleek now has a new way to grow his music without a traditional record label. His fans are his record label, and there is a strong incentive.

5.2 Photography

Photography is another creative category poised for a breakout in 2022. It began to rise in 2021, with photographers like Isaac "Drifters" Wright and Justin Aversano minting and selling popular collectibles (Where My Vans Go and Twin Flames). Previously, photographers had limited ways to make money online, but NFTs provide a new way for photographers to build direct relationships with fans and fund their art.

The #FreeHawaii project is an interesting case study on how national trust funds can empower photographers. Cath Simard is a well-known photographer from Canada who grew tired of chasing down people who infringed on the copyright of her most famous photo, which had been shared millions of times without crediting her name. Previously, she could not charge a dollar for her efforts, but when she decided to sell the photo as an NFT and then released the rights to use the photo to the world, her NFT sold at auction for $300,000.

5.3 NFT DAOs

A decentralized autonomous organization (DAO) is an organization formed by a group of people who are economically incentivized and share common beliefs to collectively provide products or services without a centralized entity or corporate management. Bitcoin is the original DAO, but in the years since, there has been an explosion of DAOs providing various products and services.

NounsDAO is a good case study of a DAO in the NFT context. Created by a group of Nounders, including Punk 4156 and Gremplin, Nouns is a PFP project that auctions one Noun every day. The sales revenue of Nouns goes to a treasury managed by Nouns holders. Each noun represents not just a piece of art but also a vote on how the treasury should use its funds. We expect to see many novel NFTs + DAO experiments emerge in 2022 and beyond.

6. Conclusion

2021 was a breakthrough year for NFTs, but relative to the broader cryptocurrency landscape, this asset class is still small. The total market cap of NFTs is approximately $31.4 billion, accounting for about 1.36% of the total cryptocurrency market cap ($2.3 trillion).

We believe that by the end of this decade, the scale of NFTs will ultimately surpass that of cryptocurrency, and steps will be taken toward this goal in 2022.

• Existing large cryptocurrency exchanges (Coinbase, FTX, Kraken, etc.) will recognize the importance of entering the NFT space for their business growth. On-ramps for fiat currency will improve, making it easier for those outside the cryptocurrency ecosystem to purchase their first NFT.
• More consumer brands and celebrities will launch NFT projects, gaining more mainstream attention for the category and further embedding NFTs into mainstream culture.
• The belief in the value of many types of NFTs beyond pure visual art—such as music, photography, and virtual real estate—will grow, with several categories themselves becoming multi-billion dollar asset classes.
• NFTs will see widespread adoption on Ethereum L2s, bringing cheaper, faster NFT experiences to more people. This will expand the total user base of NFTs, exceeding 10 million by the end of the year.

The NFT space was crazy in 2021, and 2022 is shaping up to be even crazier. Thank you for reading.