A&T Capital: NFT will define the ultimate shape of future cultural output

A&T Capital introduces the evolution of NFT applications and identifies key investment opportunities in the NFT space.

By Jasmine Zhang and Fiona He, Partner and Investment Manager, A&T Capital

In “Three Bodies”, Evans created the Three Bodies game, which uses the virtual world as a precursor to attract the elite of Earth civilization society to understand the advanced civilization of the Three Bodies with the help of iris links and a full set of somatic devices, using the journey of the Three Bodies civilization as a blueprint. If we move our eyes back to the real-life human society, with the continuous progress of technology in recent centuries, we have initially mastered the technology to realize space travel and build virtual reality, and are constantly moving towards the era of Web3, the decentralized connection of everything to everything. At the same time, we are also facing the continuous depletion of the Earth’s resources, the deterioration of the ecological environment, and step by step towards the extinction of the solar system —- interstellar travel and virtual reality meditation into a tool that allows humans to survive for a long time and become a higher civilization. And in the future where the real world and the digital world are bound to intertwine, in what way will we have things of our own?

NFT, perhaps, is the answer.

NFT is expected to be the fastest landing blockchain application
Whether it’s a game or an artwork, NFT can help it make the leap from reality to virtual. From the digital works of artists, to the highlights of professional athletes on the field, to rare cards in video games, more and more different eyes are beginning to focus on the play of NFT. The giants active in the art, entertainment, and even fast food markets have also begun to devote their attention to the NFT market, as Christie’s began auctioning off NFT art, the NBA partnered to launch Top Shot, and Disney and Taco Bell have been releasing peripheral electronic collectibles. But the distribution of NFTs is not limited to professional players with large fan bases; thanks to the extremely broad audience of the NFT market itself, people can also turn any asset they find uniquely valuable into a blockchain-programmable asset that does not require a license, and mint their own NFTs through the NFT platform to be discovered and then auctioned.

NFT is a track to be reckoned with since it exploded again in August 2020
With the public beta of NBA Top Shot last August, NFT has exploded rapidly with the powerful IP of NBA. According to Coingecko data, as of June 10, 2021, the overall market capitalization of NFT has exceeded $17 billion, accounting for about 1% of the entire cryptocurrency market, while before last August, the NFT market was almost negligible. In terms of historical NFT market trading volume, according to nonfungible data (which does not include NBA Top Shot and only tracks NFT data on Ether), the NFT market showed historically high activity in the first quarter of 2021, and recorded an all-time high weekly trading volume of $173 million in the first week of May. Although NFT trading volume is currently in a slight decline, it has become a track to be reckoned with.

The chart below presents a few notable artworks from the NFT market, the first two by Beeple, a well-known graphic designer in the American scene, being the first and fourth highest-traded artworks in NFT history. The third piece, Stay Free, was released by the NSA’s Prismatic Revealer Snowden himself, who subsequently donated all proceeds from the auction to the Freedom of the Press Foundation. The fourth piece, NYAN CAT, was created from a video that took the internet by storm a decade ago and has since spawned projects such as games and cryptocurrencies, symbolizing the vitality of streaming media in the digital world.

NFT strengthens the relevance of blockchain to traditional industries, where everything is possible and everything is desired NFT
New Crown Epidemic The outbreak of Covid-19 has forced traditional business models to shift from an offline focus to an online focus, with people shifting more of their behavior to the Internet. For example, art collections and auctions have been dominated by offline exhibitions, physical delivery, etc. The empowerment of blockchain may profoundly change this industry: a) chain traceability and transparency, authenticity, and solve the trust problem; b) non-physical delivery, the epidemic forced transformation. For example, ball player cards can be directly and conveniently collected in digital wallets; c) improve the liquidity of transactions such as artwork; d) for both users and creators, NFT’s on-chain trading platform provides a lower barrier to entry, making it easier for creators and the value of their works to be explored.

The core of NFT as an asset representation tool in the blockchain is to Tokenize unique values. Previously, there was only FT, which represented undifferentiated value, while NFT further expands the types and scenarios of on-chain assets, making it possible to represent various assets that could not be represented on the chain before.

In the current era when the new crown epidemic is forcing traditional industries to further go online and digital, NFT is the fastest tool that can land and empower traditional industries.

We are experiencing a change from creating NFT to using NFT to social NFT
Looking back at the history of NFT, each bull market has had an NFT representative project leading the market. The first bull market became known as Colored Coin (BitcoinX), which could be tagged with a variety of unique assets, similar to a line on a $1 bill that read “exchangeable for 1 share of Tesla”. This attempt made more people aware of the possibilities of blockchain and bitcoin beyond trading. By the second bull market, the explosion of crypto-cats caused severe congestion in Ether and brought NFT into the public eye for the first time. At the time, CryptoCat had nearly 20,000 users and contributed $40 million worth of transactions. The most expensive kitten, Dragon, was sold for 600 ETH ($170,000 at the time). The third bull market is the stage we are experiencing, NBA Top Shot made the NFT come out of the “circle” rapidly, with more than 1 million users and total sales of more than $600 million, and the most expensive single item sold now is nearly $390,000, which is James’ tribute to Kobe’s dunking moment. As we can see from the successive bull and bear changes, NFT has gone from 0 to becoming a $17 billion market cap track, and the trend has changed from NFT creation (Colored Bitcoin) to NFT use (NBA Top Shot).

We predict that the next NFT explosion will be NFT Social.

First, NFT-based social platforms provide a platform for NFT holders to showcase and show off. Whether you are a speculator, or an investor, there is a demand for a platform that provides a showcase for collections and their price discovery. In the social environment of human society, Proof of Passion gives people an outlet to communicate their values and inspirational collisions. These proofs can be a piece of art, a pair of limited edition sneakers, or a record; in 1961, Keith Richards ran into Mick Jagger at a train station in Dartford, England, with a blues Chess record in his hand, and they struck up a conversation.

A few years later, the two co-founded the Rolling Stones, and together they became one of the most influential pairs of songwriters in the history of rock music. Today, people are used to listening to music on streaming platforms and keeping their art collections at home, and the arrival of NFT makes it easier for them to show proof of their hobby to others in digital form.

Secondly, NFT’s token incentives can further increase the originality of social media content by encouraging creators to provide more interesting, unique and valuable content, ultimately increasing the overall value of the platform. Let’s compare a few common forms of social networking in terms of the basic elements of social networks, which are as follows :

Reach: how many people and social circles can be reached

Speed and frequency of distribution: whether the reach is convenient and thus increases the speed and frequency

Uniqueness and originality: whether the reach content is unique, interesting and sincere

Third, social platforms give content creators a free channel to promote and share, lowering the threshold for creators to showcase, and allowing them to skip the middleman and establish more direct and transparent communication with their fans. For creators, they can post NFTs related to their works to raise funds for their creations anytime and anywhere through social platforms, and these “work tokens” in the form of NFTs will be appreciated along with their portfolios and can be displayed on social platforms as proof of their fans’ hobbies. Instagram and Twitter are currently centralized social platforms that encourage users to communicate and share information in short words and images, and use large sub-communities and accurate algorithms to recommend content related to their hobbies; for NFT’s social networking platforms, we believe the opportunity to break out of the ‘loop’ also lies in the ability for users to simply communicate and display NFT hobby proof, provide an accurate index of NFT content and value, and rationally design community/artwork tokens.

The current NFT use case is only one piece of the puzzle, and the value of NFT as a whole will be seen as the pieces of the puzzle come together. As of June 10, 2021, the Ether NFT ecosystem is the most active public chain, with 10 of the top 15 NFT projects on the Ether ecosystem ranked by total historical sales. In terms of integrated trading platform, OpenSea has the highest historical total transaction value, over $500 million. In terms of application projects, there are only two projects with a total transaction value of over $100 million: the star project NBA Top Shot on Flow, which ranks first in terms of historical transaction value, reaching $600 million; and CryptoPunks, which has a total transaction value of over $300 million with its unique pixel art avatar. As you can see, the NFTs that the market is currently buying the most represent two extremes: IP resources with unique and wide audiences (extremely strong connection to the real world) and crypto art unique to the online world (extremely weak connection to the real world).

Investment opportunities in the NFT space
The NFT track is still in its early stages of development, and the projects are focused on verticals, mainly covering games and artworks. We focus on the following directions.

Underlying: focus on the NFT underlying protocol specification.

Platform: focus on comprehensive platform, such as whether it contains convenient NFT casting, comprehensive search engine, contagious social or has high-value IP resources.

Applications: focus on two aspects in combination with DeFi, the new DeFi ecosystem derived from NFT as an underlying asset, and the more complex combinability of NFT as a value representation tool demonstrated.

We have shortlisted a few key sub-tracks to focus on from this as follows.

Underlying Opportunity: Underlying Protocol Specification for NFT
The underlying protocol operates on top of the public chain, which to a certain extent determines the development space of upper layer NFT applications, for example, ERC721 is the strictest NFT standard, each smart contract only corresponds to one NFT, and cannot define the FT part of the game, which limits the scenario of the game, such as 1000 pieces of the same level of armor is actually FT. ERC1155 solves this problem by allowing smart contracts to represent a set of FTs in a collection of NFTs, but has the disadvantage of not being able to track information about individual assets in the collection.

The combinability of NFTs also depends greatly on the underlying protocol, with attempts including: ERC998 allowing any NFT to own other NFTs or FTs containing multiple ERC721 and ERC20 tokens; the Fractional project allowing ownership of NFTs to be split and converted into FTs to improve liquidity; and the RMRK project experimenting with cross-chain NFTs on Kusama.

There are also some protocols under discussion that are exploring the use of specific scenarios, such as EIP2615 that attempts to define mortgages and leases for NFT, EIP1523 that attempts to define NFT insurance policies, EIP2981 that attempts to define NFT royalties, etc.

In summary, there are advantages and disadvantages of each protocol specification, and ERC721 is widely used because it emerged earlier and became the protocol with the lowest cost of trial and error. In terms of requirements, the underlying protocol needs to be open (developer-friendly, less restrictive, more imaginative), composable (cross-chain, split and reshape, etc.), and define the integrity of the information, etc.

Platform Opportunity: NFT Casting
At present, the development of NFT casting is very early and elitist, and there is a lack of popular and mature on-chain process, and there is a problem of decoupling on-chain NFT and off-chain assets.

First, most NFT platforms’ casting is only open to a small number of artists, such as MakersPlace and SuperRare, and the selection criteria are not transparent, and the platform itself needs traffic, so it favors artists who are already famous. According to a recent analysis by NFT researcher Kimberly Parker, 65% of NFT sales are below $300, and considering that Gas Fee is not profitable at all, only a few famous artists, such as Beeple, can truly enjoy the technological change brought by NFT among all the artists who pass the screening process. The dividend can not empower the whole industry to a greater extent. You can think about NFT+DAO, how to make NFT more open and decentralized.

Secondly, in the process of casting NFT on the chain, artists only complete a series of questionnaires and check whether the information is original for the platform’s background. Lack of a complete database and verification of rights process.

Finally, most of the underlying assets and data for NFT are off-chain, and the extent to which NFT can anchor its representative assets depends on how the data is stored, for example, Aavegotchi can store all media and metadata entirely on-chain. While Mintbase uses a combination of Ether and Arweave to cast NFT; SuperRare uses IPFS to store files and metadata for files.

Application Opportunities: NFT Empowers DeFi, Complementing Each Other
DeFi’s current mainstream applications such as lending and trading only support FT, and the combination with NFT is still in a fragmented and independent state. Early attempts include grab.finance (DeFi) in the form of cryptowine (NFT): users get a certain number of tickets by providing Grab/ETH tokens for liquidity on Uniswap, and the obtained tickets can be exchanged for cryptowine representing a random score NFT, while the transaction fee is injected into the prize pool, and the prize pool is eventually divided equally according to the score. Here NFT is only an optional attempt in the middle.

There are also projects that try to make NFT the underlying asset of DeFi to enrich the DeFi ecosystem and expand the asset class, but NFT poses a challenge to the upper layer DeFi applications due to its illiquidity. NonFungible audits its pool of pledged assets every month, basing its valuation mainly on the transaction prices of similar NFTs over time, which has serious delays and lags, making it difficult to build a meaningful DeFi ecosystem on top of this. The DeFi ecosystem is currently valued at just under $50 million for Whale’s asset pool. However, once a solution is found to the liquidity and pricing of NFTs, it will not only create a new generation of DeFi lending and trading (such as the new “MakerDAO”, “Compound”, and “Uniswap”), but also leverage the capital markets for illiquid assets such as art and collectibles in traditional sectors.

Some NFT attempts by DeFi projects are also worth watching. Aavegotchi NFT, for example, expands the use of NFT to the gaming scene by pledging interest-paying deposit certificates aToken obtained on the Aave lending platform (DeFi). Zapper, for example, obtains NFT through interaction with the platform, but the NFT usage scenario is not yet open. There are also some attempts to show the real need to use NFT, such as yinsure.finance, which tokenizes unique policies with NFT that can be liquidated in the secondary market, increasing the liquidity of policies; such as Uniswap V3, which represents LP Token with NFT, defining the value of liquidity under different market-making strategies, thus enabling Complex financial scenarios start to present themselves to us with the NFT representation: multi-positioning, automatic rebalancing, lending, hedging, etc.

In general, we are focused on digging deeper into scenarios in DeFi where it is necessary to incorporate NFT features, rather than simply overlaying NFT concepts on DeFi, looking for values that can be represented by NFT that can expand the underlying assets of DeFi or enhance the composability of DeFi.

Some other opportunities for NFT: Games and Culture
People hold artwork in their wallets, but they don’t currently have a more efficient use for it than collecting and displaying it, and games can provide the interactivity and engagement that artwork currently doesn’t. According to Forte, the annual revenue of the gaming industry since 2012 has been above that of the film and music industries combined. how NFT can empower the gaming industry, the old cliché is that in the past we have seen games mostly NFTing in-game props or blockchaining traditional games, but we have also seen another way of thinking in one of the inline markets. According to Statista, the League of Legends Global Finals reached a peak of 46 million viewers in 2020. The market potential is no less than that of NBA Top Shot if a collector’s item in the form of NFTs recording the exciting moments of e-sports athletes (Godlike, Legendary, etc.) can be launched, and the e-sports market has a greater overlap with the characteristics of cryptocurrency users, which is very young and easy to overcome the blockchain usage threshold, with low education costs.

The current large amount of NFT transactions are still limited to art transactions, backed by large IP and well-known creators, and the beneficiaries are still limited to a small circle of European and American aesthetics as the mainstream. This is similar to the real world (compare European and American dramas with Chinese dramas, NBA with CBA, Bundesliga with Chinese Super League), but also comparable to the current ideology of the DeFi map and regional fund huddle in the cryptocurrency world. As China’s influence is growing internationally, Asian blockchain funds are expecting more recognition from global funds and entrepreneurs. Since we have capital and a broad market, we should have enough cultural confidence to export our own oriental aesthetics and judging values to the world through NFT.

In the industry, if we look at the public chain, DeFi, second layer, cross-chain track, etc., most of the projects at the top of the pyramid are European and American projects; in the rising track of NFT, which is extremely easy to get out of the circle, we expect to see more Asian entrepreneurs to seize the opportunity. Culture and civilization have always been an evolutionary existence, and the carrier of this evolution is people. We expect that our generation of cryptocurrency cultivators can be more transparent and effective in discovering and supporting strong and confident exporters of our own culture to compete on an equal footing with global players.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/at-capital-nft-will-define-the-ultimate-shape-of-future-cultural-output/
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