Reflecting on the fundamental reasons for the current stagnation of the NFT market

Author: Elena L, Zixu H, Eocene Research

In the previous article "Data Reveals That the Growth of the NFT Market in 2023 Benefits from New Funds Entering or Old Funds Competing," we mentioned that thanks to Blur's successful airdrop incentive program, the NFT market experienced a brief boom at the beginning of 2023, especially between February and May, where the funds entering the NFT market increased by 60% month-on-month. However, the latest data shows that after reaching a peak in NFT trading volume in February and March 2023, it began to decline—NFTs have once again entered a bear market.

Some people point out that the growth of the NFT market usually lags behind cryptocurrency growth by one to two quarters, so with the recent growth in cryptocurrency, NFTs may soon thrive again. However, we believe that the recent bear market is not only due to cyclical industry lows but is more fundamentally rooted in some underlying issues that directly lead to the stagnation of the NFT market.

In this article, we will first present data showing the recent bear market status of the NFT market, and then analyze the main reasons hindering its growth.

Data from Various Dimensions Reveals the NFT Market is Shrinking

1. Trading Volume, Sales, and Active Wallets are All Declining

It is worth emphasizing that, aside from weekly trading volume being roughly on par with the 2022 bear market, both the number of transactions and active wallets have significantly decreased compared to 2022, which means that the trading activity and number of participants in the NFT market are at their lowest levels in the past year.

NFT Trading Volume

NFT Transaction Count and Active Address Count

2. The Value of Blue-Chip NFT Collections Continues to Plummet

The Blue-Chip-10 and NFT-500 indices provided by Nansen measure the total market capitalization of blue-chip/top NFT collections, reflecting the overall performance of the NFT market. Both indices have been significantly declining since April this year, with the combined market capitalization of blue-chip/top NFTs evaporating by 70-80% compared to the peak in February.

Blue-Chip-10 Index

NFT-500 Index

3. Funds Entering the NFT Market Decrease by 20%-40% Month by Month

Based on the method of calculating funds entering the NFT market mentioned in the previous article, we calculated the monthly funds entering the NFT market from February to June 2023. The data shows that the funds entering the NFT market have been significantly decreasing each month (except for a slight increase from May to June). The funding level in June was only 40% of that in February.

Monthly Investment

The above indicators reflect that the NFT market is experiencing a decrease in traders, a reduction in trading activity, a contraction in investment, and a decline in prices. All dimensions collectively indicate that the NFT market is facing stagnation, or even shrinking.

Three Main Reasons for the Stagnation of the NFT Market

1. The "Bid for Airdrop" Mechanism to Stimulate Demand Side Liquidity is Fundamentally Flawed

Blur launched the airdrop incentive mechanism at the end of 2022, primarily rewarding loyal users who list and bid on Blur. In the early stages of the mechanism, many veteran NFT players believed this would effectively drive NFT liquidity, and the market initially confirmed this view—during the transition from Blur Season 1 to Season 2, market liquidity and trading volume significantly increased.

However, shortly after the start of Airdrop Season 2, the situation took a sharp turn—trading volume in the entire NFT market peaked in February 2023 and has shown a continuous downward trend since then.

Additionally, several blue-chip NFTs also saw their prices plummet in the following months—BAYC's market value evaporated by 60%, Doodles dropped by 70%, and Moonbirds even fell by 80%! Many participants in the airdrop activities lost substantial amounts of money due to the decline in NFT value ("buy high, sell low"), and the points earned from the airdrop clearly could not compensate for these losses. Therefore, despite the ongoing airdrop activities, many players have chosen to exit.

In a liquid market, prices are usually more stable and do not fluctuate dramatically due to trading. Blur intended to increase NFT market liquidity by encouraging bidding, which was a good starting point, but the prices of most collections not only failed to stabilize but even experienced the aforementioned spiral decline.

Due to the potential Blur token airdrop rewards for placing bids in Blur's airdrop activities, most bidders did not genuinely want to purchase NFTs but merely hoped to receive airdrop rewards. When they "unfortunately" took over NFTs, most would quickly sell them, often at a lower price than they bought; this caused the floor price of NFTs to drop, leading to lower bid price levels, which in turn caused bidders to sell NFTs at even lower prices—this vicious cycle led to a spiral decline in the prices of many NFT collections, completely deviating from the "high liquidity stabilizing prices" concept.

The fundamental reason for this phenomenon is that bids on Blur do not represent real market demand, which indicates that participants in the airdrop activities do not have confidence in most NFTs, primarily because many NFTs lack long-term intrinsic value.

Although Blur's incentive mechanism did not create true liquidity, it has important implications for how to achieve genuine liquidity for NFTs in the future. Airdrop Season 2 of Blur is still ongoing, but the NFT market has already fallen into fatigue, as many players suffered significant losses in the early stages of Airdrop Season 2 and chose to exit the activities, or learned from the experiences of others and became more cautious in their participation. Regardless of the reasons, it indicates that the airdrop incentive mechanism cannot provide sustained, healthy liquidity for the NFT market.

Total Market Value of NFTs Has Plummeted with the Progress of Blur Season 2

2. Most Project Teams Lack Experience in Market Capitalization Management

Blur's incentive mechanism not only attracted those looking to earn Blur tokens but also attracted a lot of malicious arbitrage funds.

A typical example of "malicious arbitrage" in Blur's airdrop activities: an arbitrageur first buys a large number of tokens from an NFT collection at a lower floor price, then lists these tokens at a higher price, thereby raising the floor price. At the same time, they place "fake" buy orders close to their listed prices on Blur, while other players (aka miners) looking to earn points will place orders in the second and third tiers to reduce the probability of "unfortunately" taking over NFTs. Since these miners do not know that the top bidders are also the ones listing for sale, and that those listing can choose to take over the bids of their NFTs, when the bid pool in the second and third tiers is deep enough, the arbitrageur will sell a large number of NFTs to these miners.

These malicious arbitrageurs typically repeat the same operation several times on a collection, but each time the height of the increase will be lower than the last to avoid having the tokens sold in the previous round being dumped back to them at high prices. These arbitrageurs achieve "buy low, sell high" in this way, thus profiting.

Arbitrageurs generally hold a certain amount of funds (from dozens to hundreds of ETH), allowing them to profit in this "game," but many NFT collections (especially those issued before Blur's reward mechanism was launched) did not anticipate this malicious arbitrage phenomenon, and therefore, in most cases, did not reserve enough NFTs and funds to cope with the large amounts of capital from the opposing side, ultimately being unable to control the market and save the project's market value.

3. Many NFT Projects Lack Long-Term Intrinsic Value, Making Prices Extremely Vulnerable in Market Panic

This may be the most fundamental reason for the NFT market's growth dilemma.

During the initial hype of NFTs in 2020 and 2021, project teams set ambitious roadmaps, promising to bring real value to holders of their NFT collections.

However, two years later, many NFT projects' roadmaps have turned into empty promises, with their commitments unfulfilled, failing to provide real value to holders. Some project teams are indeed doing work, but the value brought to holders through T-shirts, dolls, and other peripherals, as well as hosting some IRL meetups, does not match the high prices of the NFT collections, and they also lack innovation.

These reasons have led most NFT projects to lack genuine intrinsic value, resulting in fewer and fewer users investing in NFTs for value and holding them long-term, ultimately making the NFT market increasingly a "speculator's market."

How to Revitalize the NFT Market

Based on a deep exploration of the reasons for the NFT market's shrinkage, we propose some views on revitalizing the NFT market.

First, we should strive to create an NFT ecosystem with true value. This means that NFT project teams should continuously provide real value to holders to achieve sustainable development of NFTs. At the same time, the significant price drops of many NFT collections during this bear market may not necessarily be a bad thing, as "the big waves wash away the sand" can eliminate low-quality, inactive projects while encouraging other project teams to deliver results and enhance innovation; those that genuinely work hard to continuously create value for NFT holders and the entire NFT ecosystem, despite their prices being temporarily affected by Blur's mining mechanism, we believe they can still persevere. For example, despite Moonbirds being severely impacted by malicious shorting, I personally still have great hope for the PROOF team because they have consistently created value through high-quality content.

Secondly, project teams should recognize the importance of market capitalization management. After the events related to Blur's airdrop activities, the importance of market capitalization management for NFT project teams has become evident. To avoid repeating past mistakes, project teams should prepare enough tokens in advance and master the necessary funds and knowledge, so that when NFT prices are maliciously manipulated again, they can take timely action to control the market and save the project's market value.

Finally, the NFT market needs to seriously consider how to effectively bring healthy and sustainable liquidity to NFTs. We believe that the key to creating true liquidity lies in project creators no longer focusing on short-term profits at the expense of long-term value, but rather on genuine value creation to stimulate real demand. We currently have many good products and protocols (such as Blur's pro-trader trading platform, and other liquidity improvement products like NFT fragmentation protocols, NFT lending protocols, etc.) that can help achieve this.

Finally, regarding the liquidity issue. First, we currently do not lack products to improve liquidity: Blur's pro-trader trading platform and other liquidity improvement products like NFT fragmentation protocols, NFT lending protocols, etc., are all good products. However, the fundamental reason for the poor liquidity is still that most projects lack real value, leading to sluggish market demand. Therefore, we believe that the focus on creating true liquidity should be that project teams no longer focus on short-term profits at the expense of long-term value, but rather on genuine value creation to stimulate real market demand and attract value investment.

Although the recent stagnation of the NFT market is disappointing, there is still a long way to go before realizing the true value of NFTs, but we believe that with the joint efforts of all parties, the future will surely be bright. Once we identify the fundamental issues, we can focus on finding solutions to these problems.