NFTs are clearly one of the hottest topics in crypto at the moment. CryptoPunks, Autoglyphs, Bored Apes, Pudgy Penguins – some of them selling for hundreds of thousands or even millions of dollars. 

So are NFTs just a hype or a paradigm change? What are some of the most interesting NFTs out there? And what are the biggest challenges of this new space? You’ll find answers to these questions in this article. 

NFTs 

Let’s start with a quick recap of what NFTs are in the first place. 

An NFT or a Non-Fungible Token is a way of representing ownership in the digital world.

Since the dawn of our civilization, humans have been collecting rare items. From seashells and gems to coins, post stamps and Pokemon cards. NFTs are just digital versions of that. 

Collectibles, pieces of art, game items, domain names and even complex bespoke financial instruments – all of these can be represented as NFTs. 

In contrast to cryptocurrencies like Bitcoin or Ether where each unit is interchangeable, NFTs are unique – at least in most cases. The creator of an NFT project can decide on the exact parameters of their NFTs. 

Some of the common examples are: 

-only 1 NFT per unique piece of art – artists that create individual pieces like Beeple follow this approach,

-a collection where each item has a unique combination of different traits – CryptoPunks, Bored Apes 

-a collection where there is a set number of the same item in the collection – usually used for card collectibles like My Curio Cards 

The scarcity of individual NFTs can be verified on the blockchain where the project was created. For example, we can tell with 100% certainty that there were only 10,000 original CryptoPunks created on Ethereum. The authenticity of NFTs can also be instantly verified by checking that the NFT we own was created using the original smart contract of a particular project. The blockchain also provides a quick way of checking the provenance of each individual NFT which is basically the history of its ownership.

If you’d like to dive a bit deeper into the technical aspects of NFTs and learn, for example, what fungibility is or what different NFT standards like ERC-721 and ERC-1155 are, you can check out my previous article about NFTs here. 

Now, let’s go through some of the most popular NFT projects out there. 

CryptoPunks

We couldn’t start this with anything other than CryptoPunks. 

CryptoPunks, very often called just “punks”, are one of the oldest and one of the most significant NFTs.

The project that was pretty much forgotten about during the depth of the 2018-2019 bear market resurfaced at the end of 2020 and took the world by storm. 

CryptoPunks, launched in June 2017 by LarvaLabs, a two-person team, was one of the first NFT projects presented as a collection of similar items where the uniqueness of each item was achieved by having a distinctive combination of different traits such as hats, sunglasses or hairstyles. Each punk is a unique, algorithmically generated, 24×24 pixel art image. 

In 2021, it’s crazy to think that CryptoPunks, now worth around $350k for the cheapest one, were once claimable for free and users were able to mint them by paying a few dollars for an Ethereum transaction. 

CryptoPunks initially started gaining popularity within the crypto community itself, but this quickly expanded to the outside world with famous artists and celebrities joining the bandwagon. Jay Z, Odell Beckham Jr., Steve Aoki to name just a few. 

In May 2021, a collection of 9 punks was sold at Christie’s, one of the most famous auction houses, for a whopping $16.9m. Another prominent auction house – Sotheby’s sold a rare alien punk for an astonishing $11.8m in June. 

In August 2021, Visa announced a purchase of a CryptoPunk as an addition to their collection focused on historically significant items in commerce. This basically skyrocketed the floor price for a punk, which is the lowest amount that someone is willing to sell a punk for, from around $100k to as much as $400k. 

CryptoPunks are clearly one of the most significant NFTs and are very often referred to as the holy grail for any NFT collector. 

The PFP Mania

Punks also initiated another phenomenon – the PFP mania.

PFP, which stands for … “profile picture”, is a type of NFT that is suitable for an online avatar. Punk owners, including the previously mentioned celebrities, started using punks as their profile pictures on Twitter. This quickly led to the creation of new PFP-focused NFT projects as people who were already priced out of punks started searching for something more affordable.

The launch of multiple PFP-focused projects ignited the PFP mania with people changing their profile pictures to NFTs on Twitter, Discord, Telegram or even … LinkedIn. 

One of the earliest projects that benefited from the PFP phenomenon was Bored Apes Yacht Club, often just called Bored Apes or BAYC. 

Bored Apes, created in April 2021 by YugaLabs, launched a 10,000-element NFT collection featuring high-resolution image art of apes with different traits. From common apes with normal fur and beanies to extremely rare ones with golden skin and crowns.

Yacht Club in the name wasn’t chosen by accident as each NFT from the collection acts like a membership card and grants access to member-only benefits, one of them being a merch shop. 

Bored Apes, initially sold by YugoLabs for 0.08 ETH, are now trading in the range of 40 ETH for the cheapest ones. BAYC is a good example of a project that created a strong community of NFT holders. 

Similarly to CryptoPunks, Bored Apes will be featured in one of the upcoming Christie’s and Sotheby’s auctions.

The PFP mania also resulted in the creation of multiple other PFP NFT projects. Most of them were just low-effort clones of one of the popular projects, but there were also exceptions. Some of them include. 

CoolCatNFTs, featuring a collection of blue cats with different features, was created by an artist drawing the same blue cat for over 10 years. 

Pudgy Penguins also gained a lot of traction and were even featured in The New York Times. Their main feature? They are super cute. 

World of Women, a collection featuring unique, cool and diverse women was created with the aim of bringing more diversity and representation into the NFT space. 

Besides completely new NFTs, the teams behind already successful projects can decide to launch new collections very often inspired by their original work.

The two most prominent examples are Meebits released by the creators of CryptoPunks and Mutant Apes released by the creators of Bored Apes. This approach allows for expanding the existing communities and including people who might have been priced out of the original collections. 

Although PFPs seem to be the main focus of the NFT community, let’s not forget about other super interesting niches within the NFT space, one of which is generative art. 

Generative Art 

Generative art lies at the intersection of art and code. 

Artists, instead of drawing pieces of art by themselves, write an algorithm that generates the art.

The art is always generated at the time of minting a new NFT and uses an input parameter such as a transaction hash, that will be forever associated with this particular token. This allows the users to feel like they are taking part in the art creation as two different users minting a piece of art from the same collection would end up with different results.

Autoglyphs are a prime example of generative art. The collection of 512 items, also created by LarvaLabs, was generated purely on-chain. This was possible as the art is created out of basic ASCII characters and can be displayed as a result of executing the Autoglyphs smart contract itself. At the time of creation, each Autoglyph had a different probability for drawing certain patterns, hence some pieces are more rare than others. At the time of writing this article, the cheapest Autoglyphs are listed for 475 ETH which is worth around $1.8m. 

Other extremely popular pieces of generative art come from Art Blocks. 

The art featured on the Art Blocks platform is created using a script written in a programming language called 5p.js. Each collection has its own script that is stored on the Ethereum blockchain. 

A program written in 5p.js can generate different shapes with different organizations, textures or colours depending on what the creator wants to achieve.

Art Blocks Curated is the most prestigious collection with the most sought after pieces of generative art such as Ringer by Dmitri Cherniak and Fidenza by Tyler Hobbs. The most expensive Fidenza sold for 1,000 ETH worth $3.3m at the time of purchase in August 2021.

Generative art explores an interesting concept of artists becoming coders. Or maybe coders becoming artists. 

What happens if a generative algorithm could be created without any human help. Sounds quite Sci-fi for now, but I wouldn’t be surprised if in the future the most expensive piece of art was an NFT created by some kind of an AI.

Other NFTs

Besides PFPs and generative art, there are plenty of other types of NFTs available. 

Artists can create NFTs for their individual pieces of art. A good example is Beeple who sold the most expensive NFT to date representing 5000 days of his work for $69M at Christie’s in March 2021. Fun fact, if Beeple kept the $69m in ETH it would be worth over $140m now.

Gaming is another area where NFTs have become more and more important. 

Axis Infinity, CryptoKitties and Aavegotchi are just a few good examples here and they probably deserve a whole, separate article in the future. 

Metaverse is another big area with huge potential. For example, the land sold on Decentraland is represented as NFTs. I also wouldn’t be surprised to see more and more popular PFPs being used as avatars in the metaverse. 

There are also a lot of non-PFP collections that have become really popular. One of them is EtherRocks where NFTs of different rocks are being sold for millions of dollars. The main feature? They were one of the first NFTs and there are only 100 of them. They were even recently featured in one of the popular business TV programs. 

Besides pictures, NFTs can also represent short clips or music. 

NBA TopShots became extremely popular at the beginning of 2021 by selling clips of the most viral moments in NBA. 

EulerBeats is a set of algorithmically generated music stored on-chain on Ethereum.

Even tweets on Twitter could be sold as NFTs. The first tweet ever by Jack Dorsey was sold in March 2021 for $2.9m.

With new NFT projects launching pretty much every day, we also have to remember about a few challenges of this still extremely new space. 

Challenges

To start with, not all NFTs are stored in the same way. 

One of the main features of NFTs is their provable ownership, verifiability and provenance. As we know this is achieved by creating NFTs on decentralized blockchains such as Ethereum, but here comes a problem. 

Although the beautiful, high-resolution pictures of apes or penguins are cool, there is no way the image files representing them can be stored on the blockchain itself. This leads to a situation when most NFTs only include a link to the actual art and its metadata which is then stored off-chain. 

There is a whole range of options when it comes to storing data off-chain. Some projects use centralised servers, others try to improve the situation by uploading their metadata and art to IPFS. Other solutions like Arweave are also gaining traction.

Generative art and certain low-resolution NFTs are some of the exceptions here as they can be entirely stored on-chain. 

Intellectual property (IP) rights are also another big issue. This is mostly as there are a lot of inconsistencies between different projects. Some NFTs allow the owners to use them however they want, other projects limit the potential use of their NFTs and still assign the IP rights to the creators. 

Ethereum gas fees can also certainly be a problem. Most NFT drops are launched in a “first come, first served” model. This attracts a lot of bot activities and can spike up gas prices to crazy amounts resulting in normal users either not getting into the sale or massively overpaying for their mint. Other models such as dutch auctions, notably used by Art Blocks, are also being explored here.  

It will be interesting to see if NFTs get adopted on Layer 2 as this could certainly alleviate some of the gas pressures from Ethereum. 

Price discovery in an illiquid market such as the NFT market can also be a problem. Fortunately, there are a lot of projects focusing on tokenizing NFTs which helps with improving liquidity and can be used for things like discovering the floor price of certain collections. NFTx and Fractional Art are some of the popular solutions here. 

Another major challenge is the infrastructure for buying, selling and displaying NFTs. At the moment, most trading volume happens on OpenSea where the curation of projects is centralised. It’d be amazing to see OpenSea decentralizing in the future and other more decentralized solutions getting adopted over time. 

In the end, I believe that most of these challenges will be solved sooner or later and they are just normal pain points of a completely new and exciting industry. 

Summary

Besides Ethereum, which has become pretty much the standard for launching NFTs, there are other layer 1s that allow for minting NFTs. Solana, Tezos and Polygon are gaining some traction in this field.

Another interesting development was the creation of DAOs with the main purpose of buying NFTs. People who wouldn’t be able to afford certain NFTs by themselves can come together and form a DAO. Bought NFTs can be later tokenized and distributed to the members of the DAO. A good example here is PleasrDAO that bought the original Dogecoin NFT for $4m. 

It will also be interesting to see NFTs being used as marketing tools. Projects will be able to airdrop their own NFTs or invite certain NFT owners to an early release of their products. 

It’s also amazing to see new things being tried in the NFT space. One of which is the recent launch of Loot. Instead of creating an NFT with an image described by certain metadata, Loot flipped the whole process upside down. 

The Loot NFTs only contain the metadata that describes a set of items in a hypothetical RPG game. It’s up to the Loot community to decide how to use and even how to visualise these items. It’ll be super interesting to see how far Loot can go in the future. There are pretty much no boundaries on how far such an idea can be pushed but the main challenge is to coordinate the community over long term goals instead of focusing on quick wins like unlimited airdrops. 

With OpenSea volume hitting over $3b in July, we’re clearly in a very interesting time for NFTs. 

Celebrities using Bored Apes as their profile pictures, major business channels discussing EtherRocks, Visa buying CryptoPunks and new NFT funds popping up.

On the one hand, it feels like NFTs just got their mainstream attention. 

On the other hand, the market, with hundreds of projects launching every week, may look a bit overheated. 

In the end, it’s worth noting that this is very common in a completely new space and resembles a lot of periods of exponential growth in crypto. 

Personally, I think that whatever happens to the market in the short to medium term doesn’t really matter and NFTs are here to stay. 

The quality projects will most likely appreciate in value over time. The same cannot be said about thousands of copy-cat projects and low-quality cash grabs. 

I believe that NFTs will completely revolutionise the Internet. In the future, most things we own in the digital world will be NFTs. Game items, collectibles, cool pieces of art and even our metaverse gear. All of these have the potential to become NFTs. 

So what do you think about NFTs? What are some of your favourite projects in this space?

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So what are NFTs all about? And how can they be used in decentralized finance? You’ll find answers to these questions in this article.

NFTs

Okay, so let’s start with what NFTs actually are. 

NFTs stand for non-fungible tokens and they are one of the types of cryptographic tokens that can represent ownership of digitally scarce goods such as pieces of art or collectibles.  

“Non-fungible” is not a very popular word so let’s see what it really means. 

In economics, fungibility is the characteristic of goods or commodities where each individual unit is interchangeable and indistinguishable from each other. 

Like with most concepts, fungibility is best explained with an example. 

Fiat money such as the US dollar is a good example of something fungible. If Alice has a $5 banknote, she can replace her banknote with Bob’s $5 banknote without this affecting Alice or Bob. 

On the other hand, Alice’s favourite, limited edition basketball card is a good example of something non-fungible. Each card is treated as a collectible and has individual properties. A card with one player doesn’t usually have the same value as a card with another player. On top of that, even when considering 2 exactly the same cards, other factors such as the year of production or how the card is preserved can make a difference. 

An extreme example of something non-fungible is a piece of art. A painting, for example, is usually created as only one original copy. 

Now, as we know what non-fungible actually means let’s see what the most common properties of NFTs are.

Unique – each NFT has different properties that are usually stored in the token’s metadata.

Provably Scarce – there is usually a limited number of NFTs with an extreme example of having only 1 copy, the number of tokens can be verified on the blockchain, hence it’s provability. 

Indivisible – most NFTs cannot be split into smaller denominations, so you cannot buy or transfer a fraction of your NFT.

Similarly to standard tokens, NFTs also guarantee the ownership of the asset, are easily transferable and are fraud-proof.

NFTs on Ethereum – ERC-721 & ERC-1155

Although NFTs can be implemented on any blockchain that supports smart contract programming, the most noticeable examples are ERC-721 and ERC-1155 standards on Ethereum. 

Before we get into the NFT standards, let’s quickly recap what ERC-20 is, as it will be useful for comparison. 

ERC-20 is a well-known standard for creating tokens on the Ethereum blockchain. Some of the examples are stable coins, such as USDT or DAI and DeFi tokens such as LEND, YFI, SNX and UNI. ERC-20 allows for creating fungible tokens. So all of the tokens that were just mentioned are completely indistinguishable and it doesn’t matter if we receive USDT from our friend or from one of the exchanges – the value of each token is still the same (to simplify this explanation, we’re skipping the possibility of receiving tainted tokens that would actually make a difference between tokens making them “less fungible”).

ERC-721 is a common standard for creating non-fungible tokens. ERC-721 allows for creating contracts that can be used to create distinguishable tokens with different properties. A common example of this is the famous CryptoKitties – a game that allows for collecting and breeding virtual kittens. 

ERC-1155 is the next step in creating non-fungible tokens. The standard allows for creating contracts that support both fungible and non-fungible tokens and it was created by Enjin – a project focusing on blockchain-based gaming. In many games such as World of Warcraft, a player can hold both non-fungible items – swords, shields, armours and fungible items such as gold or arrows. This standard allows developers to define both fungible and non-fungible tokens and decide how many of these tokens should exist.

NFT Space

Besides the already mentioned CryptoKitties, there are a few other fairly popular games leveraging the power of NFTs such as Gods Unchained and Decentraland. 

Decentraland is an interesting example as the players are able to buy parcels of digital land that can be later resold or used as advertising space within the game. 

Other examples include marketplaces for digital art such as Rarible, SuperRare and even aggregators of marketplaces – OpenSea. 

Yet another example of something scarce that can be represented as NFTs, are domain names, for example Ethereum Naming Service with .eth extension, and Unstoppable Domains with .crypto extension. 

Some of the NFTs can be extremely costly. The most expensive Crypto Kitty, Dragon, was sold for 600 ETH at the end of 2017, worth around $170k. Scarce domain names such as exchange.eth can be worth upwards of $500k.

NFTs and DeFi

When it comes to DeFi, NFTs can unlock even more potential for decentralized finance. Currently in DeFi, the vast majority of DeFi lending protocols are collateralized. One of the most interesting ideas is to use NFTs as collateral. This means that now you’d be able to supply an NFT representing a piece of art, digital land or even a tokenised real estate, as collateral and borrow money against it. 

This sounds cool, but here is the problem. In our standard lending and borrowing DeFi platforms, such as Compound or Aave, the value of supplied collateral can be easily measured by integrating price oracles. These aggregate prices from multiple liquid sources such as centralized and decentralized exchanges. When it comes to NFTs, the markets for particular tokens are very often illiquid which makes the price discovery process tricky.  

To understand this problem better, imagine that someone buys a rare CryptoKitty for 10 ETH. This NFT is later used as collateral and the borrower draws 1,750 DAI, assuming that 10 ETH is worth $3,500 and this particular NFT has 50% LTV (loan-to-value). After this, if no one else is willing to buy this particular CryptoKitty, we can say that the market for this NFT is illiquid or even non-existent. The only thing we can assume is that the NFT is still worth the same amount as it was last sold for. This is of course not a safe assumption as the value of NFTs can change quite dramatically. 

This is also why some of the projects that offer NFT collateralized loans use a slightly different model of peer-to-peer loans. In this marketplace model, borrowers can offer up NFTs as collateral and lenders can choose which NFT they are willing to accept before initializing a loan. The NFT that is used as collateral is kept in an escrow contract and if the borrower defaults on their loan by not repaying the borrowed amount + interest on time, the NFT is transferred to the lender. This space is really new, but one of the companies that use this model is NFTfi. 

Besides being used as collateral, NFTs can also represent more complex financial products such as insurance, bonds or options. Yinsure from Yearn Finance is a good example of NFT usage in the insurance space. In Yinsure, each insurance contract is represented as an NFT that can be also traded on a secondary market such as Rarible. 

Speaking about Rarible, we have also recently started seeing DeFi-native concepts, such as liquidity mining, being used by the NFT projects. Rarible, for example, started rewarding its users with RARI governance tokens for creating, buying and selling NFTs on their platform.

Summary

With over $100M worth of NFT traded, and $6M just this month, the NFT space is one of the fastest-growing niches in crypto and has huge potential, ranging from digital kittens to complex financial products. 

So what do you think about the future potential of NFTs? Do you know any other good examples where NFTs can be used in DeFi?

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