It is impossible to have missed the rise of the NFT market during 2021. Billions of dollars’ worth of NFTs have been traded. OpenSea, the dominant NFT platform, has grown to a $13B valuation. Decentralized competitors are generating hundreds of millions of dollars of volume immediately upon launch. Communities (DAOs) are forming around NFTs to create unique ownership opportunities and experiences. Even celebrities are hot in the mix, spending hundreds of thousands of dollars on Bored Apes.
Beeple sold this NFT for $69M!
Huh? What is an NFT?
NFTs (non-fungible tokens) are digital, ownable assets. They are unique, 1-of-1 assets that cannot be replicated or replaced by identical units. A $1 bill is fungible because any $1 bill is the same value as any other $1 bill while the Mona Lisa is the only Mona Lisa. BTC is fungible, NFTs are non-fungible. Fungible tokens are money, non-fungible tokens are collectables.
When an NFT is minted (aka created), it contains data representing the asset, information about the owner, and more. The representation of the asset is often a link to some form of media, like an image, video, or PDF.
NFTs exist on decentralized infrastructure, enabling their owners to custody and transfer to others without facilitation by a central authority (you’ve probably heard of the blockchain by now). Most of these tokens are being minted and then traded with the help of a platform like OpenSea, which is a company and not a decentralized protocol. Because NFTs exist on decentralized technology they can be traded using a different platform or no platform at all, even if they were minted on OpenSea.
Why should I care about NFTs?
In 2021, NFTs reached an entirely new level of interest as the market grew by 100x. NFTs are popular and therefore valuable – or valuable and therefore popular - because of the media they claim ownership over. The 2021 class of NFTs, which have driven growth in the number of tokens, token value, and trading volume, have predominantly been associated with profile pictures (PFPs). The PFPs began as a personal declaration as a membership of a club and now those clubs are crossing the chasm between the metaverse and physical verse, with unique opportunities for members.
Cryptopunks are the original blue chip PFP, but the Bored Ape Yacht Club have now achieved a higher minimum price floor. There are also Ether Rocks worth, obviously, nearly $1M a piece and other NFT collections with 6-figure floors.
PFPs are not the only form of NFT to generate value. Nas, one of the best rappers - and investors – of all time, is now selling rights to his music as NFTs using Royal. The NBA has launched NFTs of league highlights and next gen player cards. And internet-based cats clogged the Ethereum network in 2018 when Dapper Labs launched their Cryptokitties.
In each of the examples above, the NFT is valuable because it is associated with distinct media that the token holders claim ownership over: the image, music file, or video file. The media that is referenced by the NFT and made viewable to the public is hosted somewhere and by someone. To understand this point further, think about any image on the internet. That image is hosted by a website and is viewable because a link points to that data, stored on a server somewhere. Images on Facebook are hosted by Facebook. Images hosted by sites built on AWS may show you an S3 link.
So who hosts the NFT media?
OpenSea and the other platforms make the minting process easy and let users host their media with decentralized infrastructure like the InterPlanetary File System (IPFS). Without decentralized hosting in place you can run into a few risks if the media is instead hosted by a different entity, as detailed on IPFS’ website:
“With an HTTP address like https://cloud-bucket.provider.com/my-nft.jpeg, anyone can fetch the contents of my-nft.jpeg, as long as the owner of the server pays their bills. However, there's no way to guarantee that the contents of my-nft.jpeg are the same as they were when the NFT was created. The server owner can easily replace my-nft.jpeg with something completely different at any time, causing the NFT to change its meaning.”
The NFT’s image could be removed, replaced, or the website hosting the image could be taken down. Decentralized hosting with self-custody is the only solution, but this presents another challenge: asking your average internet user and NFT enthusiast to host a website and manage their private crypto keys.
Decentralized crypto/Web3 UX is not consumer friendly and NFTs are even more difficult than run-of-the-mill cryptocurrencies. But if you are investing in assets that could be worth thousands or even millions of dollars, you must be prepared and able to self-custody. It is the only way to protect against malicious actors, like hackers and scammers, and non-malicious events, like an NFT platform simply going out of business:
This is why we need ClubNFT
Across crypto, we need better UX. We should expect UX to improve as the space grows and evolves, as happened with the early internet. Unlike the early internet, valuable assets are being created, owned, and traded using the current challenging UX, creating not just a barrier to adoption but significant user risk.
We invested in ClubNFT because they are solving this part of the NFT user experience. Jason Bailey experienced these challenges firsthand when facilitating some of the most valuable NFT sales with Christie’s and Sotheby’s. If institutions are at risk when managing their own digital assets, your average consumer faces even greater risks because 1) they don’t have visibility into and understanding of their risk exposure and 2) they don’t have the tools to match the great OpenSea UX to backup and self-custody their NFTs.
Why should banks care?
It’s not appropriate to discuss NFTs as an asset category, but instead a category of categories. NFTs of profile pictures, built on some combination of artistic value, clout, and speculation have been the primary topic of conversation for the last year. Music may be the next major NFT market. NFTs may also point to physical assets. Undoubtedly, NFTs will continue to represent large amounts of value.
We envision a future where the innovative banks will support their customers’ financial needs by providing custodial, multi-sig, and other financial activities stemming from NFT infrastructure. NFTs will be used as collateral for loans. NFTs will even represent an individual’s identity. Banks will be supporting, utilizing, or relying on NFTs in the very near future. Partnering with one of the best minds in this space puts Alloy Labs banks in position to remain at the forefront by solving their customers’ newest financial needs.