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In 2021, the Metaverse and NFTs are recognized as the hottest trends in the world of blockchain and cryptocurrencies. Obviously, they will continue to attract the attention of investors and developers this year as well. But there are also not so obvious moments – the growth of crime, the birth of NFT 2.0 technology, the expansion of the possibilities of non-fungible tokens in the metaverse, and the decline in interest in many projects and assets. They are also destined to become important trends and have a huge impact on the market.
1. Emergence of NFT 2.0 protocols
Trend. In 2022, we will witness the birth of NFT 2.0. Projects of a new type will finally begin to use one of the main features of non-fungible blockchain-based tokens – programmability, which allows NFTs to contain many other tokens, have extended functionality and change it depending on various factors.
Explanation. Almost all NFTs issued to date are simply unique digital identifiers that make it possible to confirm the identity and ownership of a particular digital asset – for example, an image or an item in a game – to a specific user. That is, NFT 1.0 can only be an advanced passport. That’s enough for the digital art market. But this is just the tip of the iceberg. NFTs are capable of more – much more.
Here are a few features that will be implemented in NFT 2.0 protocols:
The attachment. It is understood that one NFT can own other NFTs, and those, in turn, own another set of NFTs. This feature will allow non-fungible tokens to find new uses.For example, in virtual exhibitions (an exhibition is one NFT that owns all the NFTs on display), in video games (an avatar is the main NFT that owns all the NFT items owned by the avatar), and in many other areas – from collecting to real estate management.
Condominium. NFT 1.0 has only one owner, while NFT 2.0 can be owned by multiple users at the same time. This feature allows you to attract additional liquidity, increase security and confidence in this kind of property. In addition, NFT co-ownership will help implement new business models and game mechanics in projects such as Decentraland or Roblox.
Control. This function gives NFTs the authority to issue commands to other NFTs and/or carry out their instructions. For example, change the appearance of the NFT in the game depending on the weather or time of day, open or close access to view the contents of the token, or stop trading transactions and other activities.
Personalization. NFT 1.0 associates a token with only one resource. This means that regardless of where NFT is viewed, it will be the same for everyone – and limited to one format (photo, video, animation, audio, etc.). Whereas NFT 2.0 will allow you to associate a token with several resources at once. For example, if you buy an NFT book, it may be available in multiple formats: PDF, Word file, audio, or image. NFT 2.0 identifies the device from which you are accessing an NFT book and displays the appropriate format.
rental model. NFT 2.0 will allow the underlying asset to be rented through smart contracts to other people.Renting an asset brings passive income to the owner, therefore, liquidity in this market improves (NFT owners usually store tokens for a long time, believing that their value will increase over time, and this limits cash flow – liquidity).
Market impact. The emergence of the first NFT 2.0 solutions can be compared to the arrival of second generation networks in the blockchain world (Bitcoin is the first generation, Ethereum is the second). Many projects will fail, but some will become new unicorns and bring huge profits to owners and investors. Moreover, NFT 2.0 projects, which will be launched first, have the most chances – this has already happened with Ethereum.
Potential unicorns include startups such as Warena (RENA), RMRK (RMRK), DareNFT (DNFT), CXIP and PhotoChromic. All of these projects aim to create their own vision of NFT 2.0 and benefit the community in one way or another. For example, the RMRK protocol allows NFT 2.0 to run with the ability to nest, co-ownership, manage other NFTs, and upgrade the functionality (improvements) of the original NFT.
Another startup, DareNFT, launched the DarePlay platform to launch games with NFT 2.0 (multi-chain, rent, programmability). In addition, DareNFT offers NFT as a Service, which can also attract users and investors to the project.
2. Blockchain and Metaverse Synergy
Trend. Another trend in the world of blockchain and cryptocurrency that we will see in 2022 is the increase in the number of metaverses based on blockchain and NFTs. Moreover, these will be both projects from unknown studios and AAA-class games from eminent developers. In addition, existing popular gaming titles will increasingly use NFTs.
Explanation. The digital goods market is already valued at more than $10 billion. In Fortnite alone, users have spent over $1 billion on weapon skins and in-game avatars. But today, all digital Fortnite items only work in this game. If Epic Games decides to close the project’s servers, all these digital items will become useless. A multi-billion dollar market will disappear in the blink of an eye.
For such items to have real, lasting value, they must exist independently of the object (game, service, server), which can be deleted or disconnected from the Internet at any time. That is, it is necessary to be able to move such digital items from one game to another. This property is called “continuity of identity and objects”. That is what NFTs can bring to games and metaverses.
With the help of NFT, avatars and game items belonging to them can be tokenized and transferred to the blockchain, which exists independently of a particular game. Therefore, if it loses popularity and closes, the items, experience and content accumulated by the player will not disappear. They can be transferred to another game project.In addition, only with the help of the blockchain it is possible to ensure the proper level of security of money and personal data of users. This is where Epic Games, Meta (formerly Facebook), Microsoft, Google, and all the other big tech companies have serious problems — regardless of the size of the cybersecurity budget. Suffice it to recall the leak of personal data of more than 533 million Facebook users, which was noticed only in 2021.
Blockchain will make such data leaks almost impossible. Moreover, the more players in the metaverse, the more reliable its protection will be.
Market impact. There are already quite a few game worlds using blockchain or NFT. For example, Decentraland (MANA), Axie Infinity (AXS), Sandbox (SAND) or Dvision Network (DVI). However, they all function like Fortnite: their NFTs only work inside their worlds. ArcadeNetwork (ARC) will be a pioneer – a startup planning to go beyond this framework. According to its developers, this is the world’s first platform that provides the transfer of game resources between the metaverses.
Another interesting project is the Diem (formerly Libra) cryptocurrency from Meta. The launch of the token was supposed to take place in 2021, but the case stalled due to the relocation of the head office from Switzerland to the United States, the resistance of the American authorities and the departure of David Marcus, head of the company’s cryptocurrency department. Nevertheless, Diem may still become the first truly global financial system and replace the US dollar.
Also worth noting is Binance. In June 2021, the world’s largest cryptocurrency exchange opened its own platform for launching IGO (analogous to ICO for gaming projects) and trading gaming NFTs. Since then, more than 1 million playable NFTs have been sold on the marketplace. True, so far all these NFTs only work in the original game. But nothing is stopping Binance or other projects from adding the ability to move NFTs between different game worlds.
3. Expanding the use of NFTs
Trend. In 2022, the number of non-digital art and collectible NFT solutions will grow. Most likely, most projects will be launched in the field of video games, in the business of distributing music and text content, ticketing systems, patent business, tokenization of real assets and many other areas.
Explanation. Theoretically, any unique asset (real or digital) can be transferred to NFT and a non-fungible token can be used to verify the ownership of this asset. For example, with the help of NFT, you can tokenize real estate, and then use this token for a quick and easy purchase and sale of an object. Similarly, company shares, aircraft, car parts, diamonds and even raw materials are converted into NFTs, which must be traced in order to confirm the source of its origin and quality.
The most promising direction for NFT is video games. Since this is a very large market (the turnover exceeds $160 billion) and aggressive monetization is not surprising here (just look at the most popular mobile video games). How you can use NFT in games is described above – in the section on metaverses.
The music industry was one of the first areas where NFTs were used. Artists began to tokenize songs and sell them directly to fans. The pioneer was American DJ 3LAU, who sold the album as NFT and earned more than $11.6 million in less than 24 hours. Snoop Dogg, Eminem, LJ, Kings of Leon, Linkin Park’s Mike Shinoda, singer Grimes and many other popular musicians have followed 3LAU along this path.
And it wasn’t always just selling music tracks. For example, Canadian electronic musician Jacques Greene sold a token for 13 ETH, which entitles him to a certain share of the royalties that will be credited for this track. This deal netted Jacques $23,000. How much royalty did the token provide to its owner? Unknown.
Another example of the use of NFTs outside of art and collecting is the sale of textual content. For example, Hong Kong newspaper The South China Morning Post last year created ARTIFACT, a standardized metadata structure for recording pieces of history as non-fungible tokens that can be freely traded on the market. The editors of Vogue also began to experiment with NFT: the magazine released two digital covers in the form of tokens, thus marking its entry into the era of the metaverse.
In addition, 2022 will bring us an increase in the number of NFTs related to philanthropy and marketing, as well as a combination of both. Such projects already exist. For example, the Jack Butcher Foundation to help Afghan families affected by the recent conflict. However, this year it will become a real mainstream.
Market impact. The main beneficiaries of the expansion of the scope of non-fungible tokens will be the platforms that will be the first to begin aggregating transactions in their respective areas.The leaders may include such platforms as ROCKI – sale of music content, Gamestop NFT – tokens from video games, RTFKT – items from the metaverse, Mirror ($WRITE) – monetization of text content, Publica – tokenization of books, MOVE Network – movies, series and cartoons.
4. Increasing NFT-related crime
Trend. Another non-obvious trend in the world of blockchain and cryptocurrencies is the increase in the number of criminal acts associated with NFTs. This is not only a banal theft of tokens, but also various fraudulent schemes for cheating the cost and selling fake NFTs.
Explanation. The novelty, the influx of big money, the lack of regulation, and the ignorance of users have attracted a huge number of attackers to the NFT market. They use malware and phishing scams to steal money and personal information. And although little is said about this yet, the problem is becoming rampant – as it was with the ICO market in 2016-2018, when 80% of all initial placements were pure fraud, and the quality of most honest projects decreased to a minimum.
So, in November 2021, a group of cybersecurity specialists from the University of California at Santa Barbara published the results of the first in-depth study of NFT security and quality issues. As it turned out, fraud is rampant in the industry, trading platforms are full of fake tokens and software vulnerabilities, and users themselves often neglect basic security rules. At the same time, the problem of cheating the value of assets with the help of such schemes as wash trade, shill bidding and bid shielding is especially acute. In fact, this is the main problem of all large NFT marketplaces.
Market impact. Over time, the topic of NFT security will be promoted by the media. And it will definitely happen. Then – given the scale of the problem – many NFT assets and marketplaces will lose value.Alas, it is still difficult to say which sites have the most security holes, since representatives of the University of California have hidden this data so as not to make life easier for hackers. However, they said that OpenSea, Rarible and Sorare have confirmed the existence of the vulnerabilities identified in the report and have begun to fix them.
As for specific NFT assets, almost all tokens that are seen in fraudulent schemes will lose value. At the same time, it can be assumed that platforms will appear that are ready to collect and distribute such data – for free or for money.
5. Falling demand for many NFTs
Trend. Despite the overall growth of the market, many NFTs in 2022 will drastically drop in value. We are mainly talking about gaming NFTs and collections from celebrities. At the same time, there is a possibility of a collapse of the entire market – the NFT bubble may burst.
Explanation. The NFT market in its current state is a financial bubble as investors pour millions of dollars into assets that are not regulated in any way. Moreover, in fact, they do not give any privileges to their owners, except for the ownership of the purchased NFT. That is, by buying an NFT of some picture, you do not become the owner of the copyright for this image. Even the fact that you are the owner of the original image is also an illusion, because a year later the artist can sell the NFT on another site and claim that it is the original. And no one will do anything to him, since the sale of non-fungible tokens does not impose any legal obligations on their creator.
The massive boom and growth of the NFT market is based not on the advantages that this technology gives to digital art, video games or the music industry, but on hype, money laundering and the desire to earn money – to buy a token for further resale at a higher price to another user (or a simpleton, according to the theory “greater fool”).
But here it is important to understand that NFT is not a pyramid scheme. This is a technology that is attracting increased attention from investors. This fact provokes the creation of financial bubbles. This happened with almost all new interesting technologies: railways, telegraph, Internet, cryptocurrencies.The same development of the situation can be expected in the market of NFT-assets.
Market impact. The greatest risk of price subsidence is in gaming NFTs. Almost all existing NFT game worlds are unremarkable projects. And their tokens have risen in value only because of the hype around NFTs and/or the metaverses. They do not have a large audience, often very primitive gameplay and uninteresting graphics.
For example, the game Axie Infinity (AXS) was created three years ago, but it shot only in the summer of 2021, when one of the users gave an interview to several media. He said that he bought several houses for earnings in the game, and then the people fell down. The AXS and NFT tokens of this game soared in price – everyone wanted to earn money for a new house in the same way.
But once the hype around NFTs (and the metaverses) subsides a bit, this kind of video game will stop growing in audience, which will lead to a drop in demand for tokens. And since the main interest in the game is the desire to make money, this situation will provoke a chain reaction: decrease in the price of gaming NFTs → decrease in audience size → decrease in demand → decrease in NFT price → decrease in audience size → decrease in demand → …
A similar situation is developing with the game worlds of Decentraland (MANA), Sandbox (SAND), Dvision Network (DVI) and other projects created according to the Play-to-Earn model.
Summing up
In 2022, the NFT market is likely to continue its rapid growth. We will witness the emergence of new interesting NFT 2.0 projects with additional features of tokens.The scope of NFT use will expand to other industries besides art and collecting, from the music industry to ticketing systems.
In addition, we will also see an increase in crime and a decrease in interest in assets associated with video games built on the basis of Play-to-Earn mechanics. In other words, 2022 will be a very interesting year for NFTs, both in terms of technology development and investment opportunities.
