NFT Hype Cools as Market Enters Correction Phase, Potentially Building Momentum for Next Explosion

Entering 2021, NFTs developed rapidly, with trading volume, trading amount, and user numbers, including active addresses, all rising by more than an order of magnitude. Under the effect of frequently auctioned high-priced artworks and celebrity endorsements, NFTs successfully "broke into the mainstream," but at the same time, remarks such as "we are in an enormous NFT bubble" and "NFTs may be a bubble about to burst" were also rampant. Even Beeple, a crypto artist who made a fortune in the NFT space and whose work was auctioned for nearly $70 million, stated that "NFTs are a bubble," showing the extent of short-term speculation in NFTs.

Compared with the feverish atmosphere of the previous few months, the NFT hype seems to be gradually calming down, and this can be glimpsed from on-chain trading volume, average trading price, and even social media heat and exposure. However, this does not mean that NFTs are declining day by day. In fact, NFT expansion in art, sports, finance, gaming and other fields is still proceeding in full swing. The NFT cooldown may perhaps be the "correction phase" the market faces after overheating.

NFTs Cooling Down, Awaiting Next Explosion

OpenSea, as one of the leading trading platforms in the NFT space, saw its trading volume decline in April. According to Dune Analytics data, OpenSea's trading volume was $148 million in March, compared to $93.66 million in April, a month-on-month contraction of nearly 37%. Compared with February's $95.23 million, April's figure also fell by 2%. It is evident that after the overheating in March, the NFT market indeed experienced a cooldown.

However, it should be noted that this data may see a turnaround in May. As of May 7, OpenSea's May trading volume had already reached $75.03 million, with an average daily trading volume of over $10 million. If this growth momentum continues, the full-month trading volume for May is expected to exceed $200 million, refreshing the historical record set in March.

The Block Crypto data shows that weekly trading volume in April was generally lower than in February and March, but still significantly higher than levels before 2021.

Art, as the NFT field that has most successfully broken into the mainstream, also saw its trading volume in April cut in half compared to March. Crypto art trading volume was $205 million in March, but plummeted to $98.56 million in April.

Take Nifty Gateway, which previously had the most rapid development and successively invited well-known artists including Beeple, Pak, and Mad Dog Jones to join, as an example. Its April sales were $59.72 million, less than half of March's $144 million.

Besides the art sector, sports NFTs with strong brand backing and fan effects, such as NBA Top Shot, also showed a slowing trend in April after experiencing explosive growth in the first quarter. Reuters reported that although individual "moments" reached six-figure transaction prices, NBA Top Shot's average transaction price in April was not high, at only $65. In comparison, March's average transaction price was $157, and February reached $182. Despite this, sports NFTs still occupied the top spot in April with over 60,000 sales, followed by gaming and Metaverse.

Number of NFT sales by category

Google Trends shows that NFT hype peaked in March and began to decline, though there was a small rebound in late April and early May.

Although NFT hype has subsided in the short term, exploration of NFTs by various parties has not ceased. This is evident from infrastructure construction, enrichment of the upper-layer ecosystem, as well as investment and financing, and crossover integration between traditional industries and NFTs. Previously, Ethereum's exposure of high costs and low performance issues constrained the large-scale development of NFTs. In recent months, besides NFT-dedicated public chains such as Flow and Wax continuing to develop, public chains like Near and Solana are also actively expanding their applications in the NFT sector. Continuous optimization of sidechain and Layer 2 solutions, such as Polygon, Ronin, and xDai Chain, has also further improved NFT's underlying infrastructure.

Additionally, enthusiasm for NFT financing remains undiminished. Recently, virtual avatar technology company Genies completed a $65 million Series B financing round, NFT asset aggregation auction platform Element raised $11.5 million, NFT platform Bitski completed a $19 million Series A financing round, and crypto fashion brand RTFKT Studios completed $8 million in financing, among others. eBay CEO Jamie Iannone stated in an interview that they are considering adding cryptocurrency as a new payment option for users. Furthermore, he said eBay is also exploring methods to enter the NFT business.

NFTs Develop Rapidly in Art and Sports

On May 7, world-leading auction house Sotheby's announced it will hold an NFT art exhibition and auction event titled "Natively Digital" from June 3 to June 10. Currently announced participating and auctioned works include Crypto Punk #7523, Quantum, and The Shell Record.

From NFT art first landing at traditional auction houses, to now the three top auction houses of Christie's, Sotheby's, and Phillips competing to launch crypto art, NFTs' influence in the art and trend fields is growing day by day. The list of celebrities, fashion brands, and magazines that have recently announced or launched NFT works/products is long, including artist Takashi Murakami, Grammy winner The Weeknd, tennis champion Naomi Osaka, luxury brand Gucci, streetwear brand BAPE, entertainment magazine Playboy, American Time magazine, and more. It can be seen that art NFTs, as the vanguard, have successfully broken into the mainstream and are gradually gaining support from the mainstream entertainment and culture circles.

Crypto art platform Foundation released NFT creator data, stating that since the platform's launch, as of May 4, platform creators had earned 18,000 ETH in revenue, approximately equivalent to $60 million. Over 6,400 NFT collectors participated in platform bidding, with auction trading volume exceeding 74,000 ETH, approximately equivalent to $245 million. Currently, multiple collector autonomous organizations such as Flamingo DAO, Pleasr DAO, and Herstory DAO have emerged on the platform.

Pleasr DAO was precisely the winner of the Snowden NFT work auction. This collector organization successfully bid with 2,224 ETH, and this bid also made Snowden's NFT work rank second among the most expensive crypto art auctions, second only to Beeple's "Everydays: The First 5000 Days."

Art is after all just one small segment of NFTs. Basketball, football, and other sports, as projects with higher popularity, coupled with massive fan bases, make their digital collectibles somewhat closer to the general public. For physical sports card players who were already familiar with player attributes and the market, they are more receptive to the transformation from reality to virtual.

As the sports league with the sharpest commercial instincts and highest degree of commercialization, the NBA led the 2021 sports NFT wave. The NBA partnered with Dapper Labs to launch its own NFT card collection game NBA Top Shot. The card content mainly consists of iconic moves from star players for NBA enthusiasts to purchase, sell, trade, and collect. As of the end of April, NBA Top Shot's total trading volume had exceeded $600 million.

Recently, the NBA's Golden State Warriors tested NFTs on OpenSea, releasing several championship ring NFTs and commemorative ticket stub NFTs. This test also made the Warriors the first NBA team to issue NFTs.

Topps, as the MLB (Major League Baseball, one of the four major professional sports leagues in the United States) card manufacturer and issuer with the largest global market share, also announced on April 12 that it would collaborate with MLB and players to release 2021 Topps Series 1 baseball NFT collectibles on April 20.

Against the backdrop of NBA and MLB entering the space, although the NFL (National Football League), as the highest-revenue sports league globally, has not yet launched NFT-related products in an official capacity, a March Sports Business Journal report quoted NFL Chief Media and Business Officer Brian Rolapp telling teams that the league is studying blockchain technology for ticketing and collectibles.

It is worth mentioning that NFL players and teams have already taken the lead in filling this gap. On May 7, sports brand Adidas announced a collaboration with 2021 NFL draft first overall pick Trevor Lawrence to launch NFTs, which were completed for sale on the Bitski platform. Total sales of three types of NFT works reached $174,100. Previously, Los Angeles Rams player Taylor Rapp launched NFTs to combat anti-Asian discrimination during the pandemic. Additionally, crypto asset management company Grayscale partnered with the NFL's New York Giants, becoming the first crypto sponsor of an NFL team.

New Exploration of NFT Financialization

Many people have likely heard of the digitalization trend. The blueprint of the "Metaverse (Metaverse)" is frequently mentioned in the post-pandemic era, and many are beginning to believe that the future world will be like that portrayed in "Ready Player One" — a virtual world parallel to reality, a virtual world that allows you to truly experience realistic sensory feedback through various high-tech devices.

Many NFT proponents believe that in the connection between the real world and the Metaverse, NFTs will exist as vessels of the new world, carrying a market for a wide variety of goods, and the proportion of art, sports, gaming, etc. will be similar to that in the real world. This also indicates a neglected blue ocean market — NFTs in financial applications.

On May 5, the Uniswap team officially deployed the Uniswap V3 version to the Ethereum mainnet. As of writing, Uniswap's total value locked (TVL) reached $535 million, with 24-hour trading volume of $400 million. Many industry veterans believe that Uniswap V3 has opened large-scale application of NFTs in DeFi.

A major highlight of Uniswap V3 is the ability to implement concentrated liquidity market making, and the key is precisely that V3's LP tokens use NFTs to replace the original ERC20. LP tokens are essentially contracts describing the agreement between users and the platform. The advantage of ERC20 is that it is freely divisible and highly liquid, but the disadvantage is that it cannot express complex contract conditions, which limits the platform in providing features to users. For example, previous DEXs could only provide market making for the entire curve.

Simply put, in the V2 era, contracts were all represented by ERC20, with only differences in share quantity between different LPs, while in the V3 era, due to the use of ERC721, different LPs can set different market making terms. NFT characteristics make them naturally suitable for expressing complex and variable financial contracts. This application of NFTs on Uniswap enables liquidity providers to provide liquidity within specific price ranges, which not only increases capital efficiency but also further concentrates depth.

Digital Asset Research Institute Vice President Meng Yan published a long article stating that Uniswap V3 is the starting point for NFTs entering financial applications and will open a new track of NFT x DeFi. ERC721 is just a starting point for Financial NFTs, while mainstream Financial NFTs need to possess both strengths: strong descriptiveness and divisibility. That is, current Uniswap V3 LP tokens cannot yet be called the optimal solution. If an asset protocol combining ERC721 descriptive capabilities and ERC20 quantity attributes could be adopted, it would achieve a balance between flexible positions and liquidity.

Meng Yan frankly stated that if cryptocurrency is programmable money, then Financial NFTs are automated money, a universal tool that helps various parties establish contracts and promote collaboration. In the future, a batch of DeFi-characteristic Financial NFT projects will emerge. Previously, NFT applications in DeFi were mostly concentrated in insurance and had not achieved large-scale application, such as the predecessor of the Cover protocol, yinsure. When V3 uses NFTs as LP tokens, large-scale application of NFTs in the financial field may rise.

In the past, when we mentioned NFTs, everyone would associate them with cards, art, gaming, etc. Indeed, NFTs broke into the mainstream through art and sports, but history proves that whether it's gaming, sports, art, or other fields, only by endowing their core with financial attributes and creating circulation conditions can they possess strong momentum. Under NFT financialization, users can create a rich variety of digital financial tools in a short time for resource allocation, risk management, etc. We may witness the birth of a new blue ocean.

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