How NFTs Have Become a Gateway Into the Metaverse

Only a few months ago, the term NFT was exploding all over the internet. Now to the latest trend, the skyrocketing prices for digital arts sold as NFTs- The Christie's auction for digital artist, Beeple, coming to a close a few moments ago, the final bid, $69 million. $69 million. I think it probably means digital artists here to stay. Anybody in this sector has to admit that they were shocked by the size and the ferocity and speed that the industry evolved so quickly.

The number of wallets that were purchasing NFTs skyrocketed the number of transactions of NFTs, across the board skyrocketed. And the prices for many NFT artists also went up, but that came down very, very fast. Once red hot NFTs are now cooling off a bit. The secondary market for the majority of Beeple's paintings today is down 90-95% from the peak, as is most NFT art.

But even more recently, NFTs had been on the rise once again.

And even with significant value volatility in NFT artwork, NFT collectibles like NBA top shot and NFT-based video games like "Axie infinity" have surged in popularity. The correction that kinda happened with the NFT art side is healthy. And what we're gonna see come out of that now are projects that actually have utility, that will be able to affect a much wider amount of people. I think that's where the excitement is. And many companies are betting that NFTs will enter the video game world in a big way, which if successful, could open NFTs to a massive new audience, and forever change the way we value digital objects.

We are in the process of an exodus from the physical world to these digital worlds that have been created over the last 20 years. And that continue to be created and where people are spending an increasing amount of their conscious time. You may have heard by now that NFTs stands for non-fungible token. But explaining exactly what that means can get complicated. So for our purposes, what you need to know is that through blockchain technology, digital objects, like a JPEG file or a virtual sneaker, or even a meme that you'd normally think about as being infinitely reproducible can now be made scarce.

So for example, if you're resourceful, the video you're watching right now could be downloaded from YouTube, and you could copy and paste it as much as you'd like. In theory, it is infinitely reproducible. Tokenizing or minting is the process you can go through via blockchain, where you can create a record of scarcity. In the blockchain, you can enter into a ledger that there are only 1,000 versions of this video or 100, or even just one. Taking something that was infinitely replicatable and giving it artificial scarcity.

And if you're rushing out to try and download this video now, thinking you'll make a quick buck, that's not exactly how it works. Only the holder of the NFT and what are known as digital wallets can actually own the item. And they can choose to resell them in exchange for cryptocurrencies. But while we have seen some high sale prices, are buying these NFTs actually a good investment? I would hesitate to call NFTs an asset class, they are an asset.

In the same way that I would hesitate to call art an asset class, art is an asset. But for it to achieve an asset class, it really needs to be something that you can buy and sell, and buy and sell. This is Bloomberg's art reporter, James Tarmy. So all you have to do when you think about the art market, and you think about the prices that are paid for these $10 million paintings, $20 million paintings, $30 million paintings, is thinking about what kind of liquidity you need to have to spend $30 million on something that you cannot resell anytime soon.

Sold!

There is not a line of people waiting to spend $30 million on the painting that you just bought. There might be one other person or maybe two other people, but that's no guarantee that those two other people wanna buy that painting when you wanna sell that painting. And this is similar in the NFT space. The number of people able to spend large sums of cryptocurrency on NFTs is relatively small. And a lot of people became very interested in jumping on the bandwagon.

There was a world that was opened up to a general public that they didn't know about. And that seems like a world of infinite possibilities. And so corporations suddenly started releasing NFTs. Charmin toilet paper released an NFT. I just got an email about Campbell's soups first NFT.

And this isn't just about artworks. This is also about the various NFTs that are connected to games and virtual worlds, and so forth. People are connecting houses to NFTs, they're connecting physical artworks to NFTs, they're connecting portions of an entire soccer team in a Mexican soccer league to NFTs. And then something weird started to happen, right? More people were making NFTs than buying NFTs.

So you had a lot of people trying to jump on a bandwagon that might not really have existed in the first place. And while the initial boom of interest did drive more people to participate in the NFT marketplace than before, those numbers are still relatively small. According to a 2021 report by nonfungible.com, weekly active wallets, in theory, the number of people who bought and sold NFTs in a given week peaked at only 40,000. And if NFTs are going to become the asset class of the digital future, the number of buyers and sellers in the market must increase by a lot.

There's still a tremendous amount of friction. To get a Metamask wallet, to understand the idea of holding private keys, to engage with this world, it's a process. This is Sam Englebardt. He's the general partner at a venture business called Galaxy Interactive. They currently manage a $500 million fund investing in technology and content aimed towards the future of digital worlds.

I spend a lot of time these days, first, trying to just define what the metaverse is. And then make sure we're all talking about the same thing, because I think we're still quite a ways away from an immersive world like "Ready Player One," being something that we all inhabit. Except for eating, sleeping, and bathroom breaks, whatever people wanna do, they do it in the Oasis. I think we are very, very close, and witnessing every day though, the exodus from a purely physical world to an increasingly immersive synthetic digital world that doesn't look like one place we all go to, but it's actually just the amalgamation of the different digital worlds that we experience on our various devices. And a lot of players are investing in this future digital world.

A recent Bloomberg intelligence report believes that the market opportunity for the metaverse could be $800 billion by 2024. And for Galaxy Interactive, one of their biggest investments has been in gaming. I don't believe long-term that just by making something an NFT, it's gonna be interesting enough to be all that meaningful unless you build some sort of a game or metagame into the process of collecting itself.

Merging NFTs with games has already seen some great success. One of the earliest breakout NFTs was "CryptoKitties," cartoon cats that users can buy, sell, and even breed.

The NFT became so popular at one point that it clogged the entire Ethereum network back in 2017. And it continues to have an active community today. And one of the drivers of increased digital wallets post the NFT boom in early 2021 has been a game called "Axie Infinity." These pokemon-like creatures are all unique NFTs that a user can buy into and level up by playing in a new business model known as play-to-earn. What could be better than a free game?

Well, how about a game that pays you to play it. So far, it's allowed people in developing economies like the Philippines and Vietnam to earn real money through playing.

And now a team of veteran video game developers at Mythical Games are working on their first NFT based game, "Blankos Block Party." With real toys in real life, the way to keep their value is you put them in a box, you put them on a shelf, you leave them there, but with "Blankos," as you play with them, they get better. Most games, if you bought Spider-Man character or you bought a "League of Legends" skin, they're virtual items.

They stay within that ecosystem. Once you buy them, you bought them, right? There's nothing else you could really do with them at that point. And what we're doing in a kind of experimentation with Blankos is players own them. They can sell these assets, they can level them up, and mash them up to create new ones and all that.

So it really gives the players a lot of freedom to build, play, and earn. This is Mythical Games CEO, John Linden. He sees games as a great means to introduce more people into the NFT and crypto world.

So one of the goals in Mythical was we really wanted to bring this concept of blockchain and NFT assets to the mainstream gamer, right? So maybe someone that doesn't fully understand crypto and is not an investor in Ethereum, we really wanted to make sure that they could partake in this economy.

And his success in this space isn't necessarily about having big headline grabbing single asset sales, but rather having a much larger volume of sales overall. We're not thinking about it in terms of a $10 item is worth $1 million the next day. We're thinking about it terms of a $10 item that becomes worth $25. And a $25 item that becomes worth $40. And a $40 item that becomes worth $75.

And those are still, if you think about it, those are amazing. They don't sound sexy, but they're amazing returns on investments, right? So we're definitely thinking about it in terms of something that's attainable. Something that the average consumer can actually partake in. Latest trades, $55, $20.

Not kind of a new fine art to were only a very few select people can actually see that appreciation because the numbers are just so ridiculous that you can't can't participate.

But growing the market for NFTs currently can come at some pretty large costs. Each transaction requires a ton of energy from computers all around the world, potentially resulting in increased carbon emissions. And although the Ethereum network is hard at work to reduce this overall energy consumption, it does remain to this day, too high to support a scaled version of this model. What we're starting to see technologically now is the need to advance the underlying tech so that you can have a business around the purchase, and sale, and trading of objects that are $1, $5, $20, $50.

That's partly why Mythical Games is using their own blockchain technology within their Mythical economic engine. But it's also because they believe that creating and selling an NFT game engine will help create more NFT games in the future. What we set out to do at the very beginning was to build this economic engine to where we could ultimately have a lot of the top games in the world be able to access this type of technology, have the regulatory side covered, have access to marketplace tech. Things that normal game studios wouldn't be building themselves.

We think that this type of economy will really permeate through every game type.

And honestly, I can see almost every game out there could have some version of this. But building the technology is only the first step to building value. Gaming also offers another important step in this process, community. Blockchain doesn't make a game better. We kinda joke here that if your game sucks without blockchain, it's gonna suck with blockchain, right?

What makes this technology powerful and interesting is the ability to ignite a community. And if you build the right community, then the things you own, digital objects in a lot of cases, will be valuable within that community and people are gonna wanna own them, and they're gonna wanna trade them amongst each other.

We seen an amazing community formed around Blankos. And even before the game came out, we've had about $1 million of Blankos sold because players saw that value, and they collaborated with each other. And were excited by the outcome of where that can go.

For someone outside of the Blankos community, It might seem outrageous to spend $5,000 on a virtual doll. Just like for many, it's outrageous to spend $69 million on this Beeple's piece. Or for spending $120,000 on a banana duct taped to a wall. Value for things that have no use value is entirely the result of perception. A Picasso is just oil paint on canvas.

It's worth nothing, it does nothing. It is valuable because we as a society have decided that it's valuable. Could NFTs become a brief, weird piece of history? Absolutely.

Could they become an integral part of the way that we engage with each other and companies online?

Absolutely..

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