NIFTSY NFT Digest #13

As ENVELOP is developing the Protocol, the Oracle and the Index for NFT markets and related industries, we decided that it was foolish to simply hoard the material collected and partly analyzed: much better to share it. So here is Digest #13, as it should be in the IT systems report, where you will find everything about the prospects for NFTs, and much more. Enjoy reading!

Content

Main study |News & Updates | Regulation | Special Review | Security | Analysis | Market Keys

Main study

Analyzing NFT Fundamentals Across 6 Main Categories. There are a multitude of NFT formats: art, PFPs, Collectibles, metaverse assets, Games, historical artifacts, utility, music, digital land. When analyzing a particular NFT, it’s important to note its category. For example, the way you approach and value a PFP is different than how you’d purchase digital land in a metaverse. Each category has unique questions you’ll have to answer to find success.

This Bankless tactic will show you the main questions to ask when analyzing NFTs across all the top NFT categories.

Goal: Learn how to analyze NFTs on a category-by-category basis
Skill: Beginner
Effort: few minutes
ROI: Bolstering your NFT analysis skills

Art. To analyze an art NFT, start by digging into these six fundamental questions:

  • Who is the artist? Research the artist some by exploring their other works, website, presence on social media, and background.
  • What is the genre? Conceptual art, generative art, pixel art, music, and photography are examples media that have gained major traction in the NFT ecosystem recently. Accordingly, noting a piece’s genre will help you better understand its context and placement in the NFT art scene.
  • What are the technical characteristics of the artwork? Note the design of the NFT. Did the artist mint it as an ERC721 on Ethereum? An ERC1155 on Polygon? Is the piece’s metadata stored via decentralized storage solutions like Arweave, or is the metadata maintained entirely on-chain? Answering these questions will help you understand an art NFT’s technical infrastructure.
  • What are the aesthetic characteristics of the artwork? The aesthetic value of an artwork boils down to how that work instills pleasure (e.g. from beauty) or displeasure (e.g. from horror) in its audience. So when we look for the aesthetic characteristics of a piece, we consider things like its content, its form, its sense of visual harmony or the lack thereof. How successfully does the NFT approach these factors in your view? And in the views of others?
  • What is the scope of the piece? Did the artist mint the artwork as a one-off, 1/1 NFT? An edition of 1,000? Or is the work instead part of a larger interconnected series of works that are being created on an ongoing basis? Make sure to understand how the scope of the piece fits into the artist’s personal canon and in terms of supply.
  • What does the piece’s market look like? Consider the piece’s initial primary sale stats (ETH price and USD value at the time, etc.) and any ensuing secondary sales data. A useful resource for searching out this info cryptoart.io by Richard Chen.

Collectibles / PFPs. Fundamental questions you can use to analyze digital collectibles or profile picture (PFP) projects are as follows:

  • Who are the creators? Consider the team’s talents and track record in the ecosystem, like if they have any previous projects you can check out. For the sake of accountability, also consider whether the team is public, semi-public (i.e. some members are pseudonymous or anonymous), or totally anonymous. It’s not that anonymous teams are bad per se, it’s just easier for anons to sail off into the distance after promising the world — only to do a whole lot of nothing after that.
  • What are the technical characteristics of the collection? See description above.
  • How is the art? A collection that has memorable, visually striking, charming or memetically irresistible art is always a good sign!. This is the most subjective element of the process.
  • How’s the supply set up? Take stock of the collection’s total supply. It’s also good to look into whether the team has retained a large chunk of the overall supply.
  • How’s the community? Consider the reputation of a project’s community, and observe some of its members yourself. Like what you see? That’s a big plus.
  • What does the collection’s market look like? You’ll want to review things like floor prices, trading volume, market caps, number of holders, and more.
  • What’s the roadmap? Take note of the project’s publicly-stated plans. Does the collection intentionally have no roadmap, or does it have an expansive one filled with all sorts of transmedia projects?
  • What are the use cases? Note whether the collectibles or PFPs in question confer any additional utilities, like being able to stake them to earn ERC20 tokens, automatic consideration for future allowlists, DAO governance, meatspace access, and so forth.

Games. When analyzing NFTs from NFT games, these are the key questions to ask:

  • Who are the creators? Teams with accomplished game designers and gaming veterans on board are a good sign.
  • What’s the genre? MMOs, role-playing games, sports games, and trading games are some of the more common genres around the contemporary NFT gaming scene. Where does the project you’re analyzing fit into this scene? Some genres like MMOs will be much more complicated to pull off, whereas others will be considerably simpler.
  • What are the technical characteristics of the NFT? Note what chain the NFTs are minted on (Ethereum, Polygon, Ronin, Arbitrum, etc.), their token standard, implementation style, and so forth. These days, the vast majority of web3 gaming efforts are building on low-cost sidechains or layer two (L2) scaling solutions.
  • How do NFTs factor into the game’s overall design? You’ll want to consider how NFTs are used in the game itself and how the creators approach NFTs as a business model. Do they directly sell NFTs to users — if so how many, and at what pace? Do they instead rely on royalties and revenues from in-game economy fees? Does their NFT approach seem thoughtful and sustainable or clunky and short-sighted? One red flag is if a gaming project seems more focused on NFTs than building out an actual sensible game.
  • Is the game playable yet? Many NFT game projects release NFTs before their games are built or playable. Projects that already have playable games that people can use today are less risky.
  • What’s the roadmap? Always take note of the game’s publicly-stated plans. What’s coming next for the project? Have they come good on their roadmap thus far in a timely fashion?

Historical NFTs. Here I will list some fundamentals and metrics people seem to prioritize (while not necessarily corresponding to financial value):

  • Timestamp: The unchangeable, objective data on the blockchain.
  • Scarcity: The number of assets within a collection or an edition.
  • Creativity: Artistic and conceptual intentions.
  • Technical achievements: Technical efforts that push the boundaries of the NFT space.
  • Blockchain they’re minted on: For NFTs that require interoperability and composability (such as gaming NFTs), the chain an NFT is minted on can be critical. This is less relevant for historical NFTs but decentralization still matters, as long as maximalism does not blind us. It is important to note that we have seen several examples of significant NFTs making chains more mainstream and relevant, so perhaps the significance of the NFT itself may be much more important than the chain it’s minted on.

Metaverse / Digital Land. If you want to analyze a virtual land NFT from a metaverse project, you can start with answering these fundamental questions:

  • Who are the creators? Consider the project’s experience and track record in Web3, and presence in virtual worlds in general.
  • What are the technical characteristics of the NFT?
  • How’s the NFT supply dynamic handled? It’s key to research whether a project has a fixed supply — 5k plots, for example — or an uncapped supply of land. Also, at what pace is the land being released? Is there some sort of schedule published somewhere or is the release process ad hoc?
  • Is the virtual world easy to build in? You want to see projects that are very easy to use when it comes to creating land “builds.” There’s no point buying land if you can’t do anything to accrue value atop it.
  • Is the virtual world accessible? Is the virtual world open and freely usable, a roped off digital garden? Can people still create around and enjoy social spaces in the virtual world without having to hold the project land NFTs themselves? The more accessible the better.
  • How’s the in-world location? Research the contexts of in-world locations to better understand them and their desirability.
  • How many active users? Is the NFT from a project that’s a virtual ghost town right now, or does the world in question have many hundreds of hardcore users? Lots of activity is ideal.
  • What does the project’s market look like? Review elements like floor prices, trading volume, market caps, number of holders, and more.

Utility. Utility NFTs are NFTs that are useful for specific purposes beyond simply being art, collectibles, virtual land deeds, etc. Two popular classes of NFTs within this category are domain NFTs, e.g. .eth Ethereum Name Service domains, and membership NFTs, e.g. Kevin Rose’s PROOF Collective Passes. Some questions to explore when analyzing such utility NFTs include:

  • Who are the creators? Experience and reputability are great signs.
  • What utilities are conferred? Researching what the NFT in question actually does and how it works is key to understanding its value.
  • How long does the utility last? A utility NFT may offer its benefits indefinitely to whoever holds it, or it may have to be periodically renewed and re-registered upon expiring like ENS names. Understanding the maintenance and upkeep of a Utility NFT is key to harnessing its value.

News & Updates

  1. Vincenzo Sospiri Racing (VSR), a GT racing team backed by Lamborghini’s motorsport department, has announced its partnership with nonfungible token (NFT) platform Go2NFT to launch a program that certifies racing car parts.
  2. Reddit is launching a new NFT-based avatar marketplace that allows you to purchase blockchain-based profile pictures for a fixed rate. Reddit has partnered with Polygon, an Ethereum-compatible blockchain, to mint these avatars on-chain. You can use Reddit’s own blockchain wallet called Vault — which is available on the firm’s native app — to store and manage these NFTs. Currently, Vault is used to earn blockchain-based community points and spend them on special features like badges and animated emoji.
  3. Sudoswap announcing the public release of sudoAMM! The sudoswap AMM is a minimal, gas-efficient AMM protocol for facilitating NFT (ERC721s) to token (ETH or ERC20) swaps using customizable bonding curves. Liquidity providers (LPs) can deposit into single-sided buy or sell pools, or provide both sides with a spread to capture fees.
  4. Vleppo and Tokel make NFT rights legally enforceable in the real world leveraging Komodo technology. A long-standing problem confronting the blockchain world and NFT owners is the distinct lack of contractual clarity and legal rights in the enforcement of digital asset transactions. Today, Vleppo and Tokel have successfully conducted a breakthrough digital procedure that will pave the way for the blockchain industry and NFT owners to establish and enable their legal rights embodied in the NFTs and digital transactions to be made legally enforceable in the courts of law around the world. In June 2022, Vleppo developed a Blockchain Contract Management System (“CMS”) that enables NFT owners to create a digital contract by embedding their NFT’s on-chain ID directly into the Blockchain record of the same digital contract. This seemingly simple digital procedure however has massive ground-breaking significance for the digital world. Through this process, the NFT can now act as an immutable evidentiary anchor for the digital contract, forever linking the two together. This link is readily observable because Vleppo’s Blockchain system, called Alysides, which is a customized fork of the Komodo Protocol, is both public and permissionless. This Vleppo Solution has for the first time finally addressed the longstanding concern of the blockchain industry and NFT owners about the lack of clarity on the legal enforceability of smart contracts as related to NFTs. For a contract to be legally enforceable it needs to fully satisfy the elements of (1) offer (2) acceptance (3) consideration (4) capacity of the parties to contract and (5) an intention between parties to create and be bound to legal relations. The first three elements are satisfied by any smart contract. Legal issues arise, however, when attempting to demonstrate that both parties intended to create legal relations and/or have the capacity to contract. This is because current smart contracts in isolation are incapable of definitively confirming that these qualitative elements of a legally enforceable contract have been met. Therefore, it is common practice for smart contracts to be accompanied by a separate natural contract. By comparison, a digital contract or smart contract executed in the Vleppo CMS, where the ID of the NFT is embedded into the Blockchain record of the contract, ensures that the link between the NFT and underlying contract cannot be broken. The Vleppo Solution is Blockchain agnostic as this unique solution delivers legal enforceability enhancement to NFT owners, regardless of whether the NFT is on Ethereum, Polygon, Solana, or any other Blockchain. Furthermore, because of the Komodo Protocol’s superior design and lack of reliance on ‘gas-style’ transaction fees, Vleppo’s CMS can accommodate even the highly complex contractual arrangements in an affordable and efficient way in comparison to other popular protocols, such as Ethereum. Being Blockchain-enabled, Vleppo can provide further additional value-added services to users such as payments, escrow, and Blockchain-governed dispute resolution — essentially everything needed to execute and settle contracts.
  5. WZRDS Project Punishes Flippers By Burning Listed NFTs. Ritual sacrifices are being carried out on the blockchain. An NFT collection called WZRDS has implemented a novel burn mechanism that allows NFT holders to vote to burn WZRDS NFTs listed below a certain price. All NFT holders have to do to keep their NFTs safe is to stake them or just hold them in their wallets. The floor price of the collection has risen from 0.1 ETH on July 8 to 3.2 ETH on July 12. Launched on June 29, WZRDS is an NFT collection themed around the fictional world of the Kingdom of Tyrol. There were originally 10,000 NFTs, but over 50% are staked and are “exploring the forest.” At least 1,000 owners of burnt WZRD NFTs have received new Half-Skull of Wizard NFTs, which are trading for 0.17 ETH.
  6. Snap eyes adding NFTs as AR filters in Snapchat. The company is set to start this experiment with a limited set of creators in August. In this test, artists will be able to create and mint NFTs on another platform and then import them into Snapchat as Lenses. Snap doesn’t plan to take any money from creators to show off their digital collectibles — just like Twitter, Instagram and Facebook. Rather, it is thinking about ways those artists can monetize their work.
  7. Bueno is a suite of no-code tools for NFT creators, with the project’s first flagship product being its NFT Generator feature. This resource lets you upload art layers, e.g. from Photoshop, and then personally and simply customize the rules and rarities of your NFT collection. The project is also on the verge of releasing a no-code Smart Contract Deployer tool, so you can readily customize your art and deploy your NFT contract all from the Bueno hub.
  8. ClubNFT helps you check which of your NFTs face storage risks and back them up for posterity.
  9. Spores is a music NFT remixer app built atop the Zora protocol. The project lets users remix music NFTs and then store these remixes as “Spores” on the IPFS data storage network.
  10. A collection of metaverse platforms teamed up to launch the metaverse interoperability DAO, dubbed the Open Metaverse Alliance for web3 (OMA3). The majority of members have links to Hong Kong-based game software and venture capital firm Animoca Brands. OMA3 includes Animoca Brands itself, The Sandbox, which is one of its subsidiaries, and several brands the company has invested in — Alien Worlds, Dapper Labs, Splinterlands, Star Atlas and Upland. It also includes Decentraland, with which Animoca has collaborated on projects, Cryptovoxels, Meta Metaverse, SPACE, Superworld and Wivity. OMA3 has invited all blockchain-based metaverse companies to join the DAO.
  11. UniSwap is integrating the powers of decentralized NFT marketplace Sudoswap
  12. Spearheaded by former Sushi chief technical officer Joseph Delong, Astaria is an upcoming NFT lending protocol that will use a novel peer-to-pool approach and center around three types of stakeholders: appraisers, borrowers, and lenders. 3AM is a peer to pool model. An appraiser creates a term sheet that contains the collateral (NFT details) and what terms they are willing to lend such as rate, duration, amount, and position. The term sheet is then merkleized and the root is sent in a transaction that opens a 𝗕𝗿𝗼𝗸𝗲𝗿𝗩𝗮𝘂𝗹𝘁. The 𝗕𝗿𝗼𝗸𝗲𝗿𝗩𝗮𝘂𝗹𝘁 then acts a a pool for lenders and borrowers to access. A lender simply supplies ETH to the 𝗕𝗿𝗼𝗸𝗲𝗿𝗩𝗮𝘂𝗹𝘁 and in return they receive an 𝗘𝗥𝗖𝟰𝟲𝟮𝟲 token. Borrowers then can borrow from the 𝗕𝗿𝗼𝗸𝗲𝗿𝗩𝗮𝘂𝗹𝘁 by supplying a merkle proof. All loans are fixed rate, fixed term (because it is easy on gas). There are two instances when a liquidation occurs. The first is when a lien token has reached the end of a duration and the amount is positive. The next is a concept called schedule, this is a fixed value. For example a schedule might be 10% on a lien of 1 ETH. When the total accrued is 1.1 ETH the loan goes to liquidation. Since this is an optional field, not all loans will have a schedule.

13. ENS introduced wrapped domains. The name wrapper grants the ability to turn any .eth name into a ERC1155 NFT. Wrapping a .eth domain enables the parent domain to restrict what can occur with subdomains. The owner of example.eth can allow the creation of sub1.example.eth and restrict further subdomaining. This prevents sub1 from creating sub2.sub1.example.eth

The name wrapper works by introducing the concept of fuses (rights), such as the right to:
- transfer
- subdomain further
- set text records
Each fuse can be enabled/disabled permanently & irrevocably

Let’s say i control example.eth and want to give my fren a subdomain of fren.example.eth I can do this today, but my fren would need to trust me that i would never pull that subdomain back. With the name wrapper i burn some fuses that make rugging any subdomain of example.eth impossible* A now my fren can truly own fren.example.eth

*CAVEAT: if the registration period lapses for example.eth, then the subdomains would also lapse

Regulation

  1. The top NFT marketplace removed several music-themed Ethereum Name Service (ENS) domain auctions after receiving a cease and desist letter from the Recording Industry Association of America (RIAA). The letter argued that a number of OpenSea-hosted ENS auctions were in violation of US trademark law, although not all of the domain names contain trademarked material. OpenSea complied with the letter, continuing the centralized NFT exchange’s precedent of honoring copyright complaints. In the RIAA’s letter, the trade association provides a list of .eth domains it believes violate the 1999 Anti Cyber-Squatting Consumer Protection Act. The law prevents the creation of web domains containing trademarks with “bad-faith intent to profit.” The RIAA flagged “universalmusic.eth” and “atlanticrecords.eth” as breaking the law alongside dozens more. Both ENS domains are owned by the same address, which paid $5 for each domain in 2020. They’ve also acquired a swath of domains tied to popular brands including Columbia Records, Sony Entertainment, Subpop and Capitol Records, among others. The trade group also objected to domains titled for individual music industry executives like mitchglazier.eth and robstringer.eth, CEOs of the RIAA and Sony Music, respectively. Both domains are owned by the same blockchain address, which paid $5 and $15, respectively. Neither name appears in the US Patent and Trademark Office database, although the owner has also registered named ENS domains for celebrity figures such as WWE billionaire Vince McMahon, Pink Floyd superstar Syd Barrett and Columbia Records CEO Ron Perry. Jeffrey Blockinger, general counsel at Web3 startup Quadrata, told Blockworks in an email that OpenSea’s initial reaction to the RIAA letter indicates Web3 companies are “becoming aware of traditional property rights and the value their protection can add to the development of NFTs as an asset class.”
  2. The U.S. Office of Government Ethics (OGE) is issuing this Legal Advisory to provide guidance on the public financial disclosure reporting requirements applicable to non-fungible tokens (“NFTs”) that represent collectible virtual items (“collectible NFTs”) and fractionalized non-fungible tokens (“F-NFTs”). Public financial disclosure filers must disclose ownership of collectible NFTs and F-NFTs when those assets are held for investment or production of income and are worth more than $1,000 at the end of the reporting period, or if they produce over $200 in income in the reporting period. Public financial disclosure filers must also disclose purchases, sales, and exchanges of collectible NFTs and F-NFTs that qualify as securities.
  3. GameStop Delists Controversial 9/11 NFT. GameStop’s new NFT marketplace has experienced its first piece of controversy after a distasteful and copyright infringing NFT was listed on the platform. The NFT in question is titled ‘Falling Man,’ the namesake of an infamous photo which features a man falling from one of the World Trade Centres on 9/11. The NFT quite literally mimics every single element of the photo apart from the person in focus, as instead, it includes an image of a falling astronaut. As pointed out by community members, the astronaut figure was found to be a rendering of an existing 3D model of a Russian flight suit created by an independent artist. It was found that the NFT creator had not asked for permission to use the image. In addition to the human indecency and lack of permission to use the astronaut image, the use of the Falling Man premise also infringed on the copyright which the original photographer, Richard Drew, possesses. For added context, the image remains one of the most famous photographs to be taken on that fateful day, and it has even had multiple documentaries made about it. With such concoction of problems in play, the GameStop NFT community called for the NFT to be taken down. The platform eventually abided by the demands, and even proceeded to ban its creator from minting on the platform. Despite such action from GameStop, industry leaders OpenSea has had a similar asset listed for two months (and counting). The discrepancy in approaches from the two platforms brings up an interesting question, as GameStop evidently chose to intervene as a result of the consensus render by its community, whilst OpenSea’s laissez faire approach has allowed decentralization to play out to its fullest.

Special Review

  1. July 6–8, ETHBarcelona is a community-led passion project about the Ethereum blockchain, cryptocurrency and decentralization that celebrates the community and its values. It focuses on education, innovation, art, and creating positive social impact.

2. Dr Weijia Zhang describes a NFT crosschain transfer framework and discuss major categories such as workflow, smart contracts, finality, bridge nodes, and security.

Presentation

3. JULY 19–21, 2022 The Ethereum Community Conference (EthCC) is the largest annual European Ethereum event focused on technology and community. The notable speeches from EthCC 5

Security

  1. According to this Dune Analytics dashboardcreated by on-chain sleuth beetle, several token IDs and transactions of top NFT collections like Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), CloneX, Azuki, Moonbirds, and Bored Ape Kennel Clun (BAKC) were marked stolen or suspicious by OpenSea. Based on the data provided, the total number of NFTs blacklisted by the marketplace came to 24,000 ETH (worth $27 million). The figure is according to the floor prices of each aforementioned NFT collection. While other NFT platforms like x2y2 follow OpenSea’s blacklisting of an NFT, the same cannot be said for LooksRare.
  2. Omni, a non-fungible token (NFT) money market platform, was drained of about 1,300 ETH ($1.43 million) in a flash loan reentrancy attack on Sunday, according to PeckShield. Omni allows users to stake their NFTs, usually from popular collections, to receive tokens like ether (ETH). Today’s attack saw the hacker exploit a reentrancy vulnerability in the Omni protocol. Reentrancy is a known vulnerability in projects coded with Solidity that allows a rogue actor to force its smart contract to make an external call to an untrusted contract. This external call is executed before the original function and can thus be used to repeatedly re-enter the protocol to drain its liquidity. Yajin Zhou, CEO of blockchain security company BlockSec, explained the process of the exploit to The Block, saying that the attacker deposited NFTs from a collection called Doodles. These NFTs were used as collateral to borrow wrapped ETH (WETH). The attacker then exploited the reentrancy vulnerability by withdrawing all but one of the NFTs deposited as collateral. This action triggered a malicious callback function to the benefit of the attacker. This function allowed the hacker to use the borrowed funds to buy even more Doodles before liquidating the loan position. Once the position is liquidated, the remaining Doodle NFT from the original collateral is returned back to the attacker. The loan position is liquidated because the value of the NFT that was initially left as collateral before the callback function was invoked was not sufficient to cover the debt position. This is where the reentrancy comes in, as the attacker is able to force through using the borrowed WETH to buy more NFTs before the liquidation occurs. The attacker then used the Doodles acquired with the initial loan as collateral to borrow more WETH. Omni, however, did not recognize this new debt position, so the hacker could withdraw the NFTs without paying back the loan. The attack drained more than 1,300 WETH ($1.4 million) from the protocol. Omni said that the exploit did not affect any customer funds as only internal testing funds were impacted, since the platform is still in beta testing mode. Omni said that it has paused the protocol pending a complete investigation. Data from Etherscan shows the exploiter has already laundered the funds via Tornado Cash, a coin mixing service for private transactions on Ethereum.
  3. MetaMask update will help reduce NFT wallet drainer scams. MetaMask users will have an extra layer of security when using their crypto wallets. The 10.18.0 update includes a huge software change that will now ask for access permission rather than automatically granting it. The new release aims to disrupt the NFT scam industry. With the setApprovalForAll permission on MetaMask, users can avoid these types of wallet drainer scams. Users will no longer automatically connect. What’s more, if you don’t approve access, the other person can not access your NFTs or crypto funds.

Analysis

  1. Real Estate and Gaming Are on the Rise in the Metaverse. VR and NFT Integrations Could Boost Them Further.

From September 2019 through March 2022, blockchain-based virtual real estate prices grew by 879%. Real estate prices, meanwhile, grew by 39%. The Case-Shiller index tracks actual housing, while the Metaverse index tracks virtual parcels — but it’s nonetheless surprising that the growth of virtual real estate prices has outpaced that of physical real estate by 532%.

Blockchain-based virtual real estate (VRE) offers both present-day and prospective benefits to the people who own it.

Present-day utilities

  • Embedded videos, images, NFTs, and interactive objects
  • In-game single-player and multiplayer activities
  • Play-and-earn integrations
  • Screen-sharing and town hall functionalities
  • Access to private events and NFT-gated communities.

Prospective utilities

  • Renting and leasing
  • Free airdrops of future VRE NFTs
  • Future AR/VR integrations and functionalities

Not all metaverse projects have all of these utilities, but most have a combination of many.

Where’s the most affordable metaverse housing? The biggest differences in metaverse land pricing seems to be between blockchains, not within them. Relative to metaverse land on Ethereum, metaverse land on Solana has much lower entry-level pricing.

The average duration of users’ land holdings varies widely. Across the 11 Ethereum-based metaverses for which we have data about holdings, most signs point to speculative activity.

VRE purchases in most of the above projects would be best characterized as “flipping.” The biggest exception is OVR Land. OVR Land has the longest holders for three likely reasons: the land is abundant, cheap, and takes time to develop. There are more than 1.6 trillion OVR lands, each one costs just $10 to $50, and when you buy one, what you’re actually buying is the opportunity to overlay augmented reality (AR) experiences on top of real-world geography. Building an AR experience is neither fast nor easy — especially for a solo software developer. This may partially explain why most users are buying and holding, but not often selling. Another possible explanation is that AR feels closer to being realized than VR, which is what most VRE collections have pitched themselves as eventually supporting. In this way, the payoff of holding OVR land may seem to users like it will come sooner than holding land from other projects.

Because the metaverse is such a nascent space, the long-term value of blockchain-based VRE depends on a number of external factors. While most of these factors are hard to foresee, we believe that a couple of them may be:

  • Whether AR/VR systems are more interoperable or proprietary. Will these companies’ technologies be open-sourced and accessible to build upon? And will they allow other metaverse companies to connect their projects, or will they create a walled garden within which only they can develop? In June, big-name tech companies like Microsoft, Meta, Epic Games, Nvidia, Unity, Sony, and the World Wide Web Consortium (W3) formed the Metaverse Standards Forum (MSF). This group is meant to create open standards for all things metaverse, including AR, VR, and 3D technology.
  • The pace of adoption of new computing technology. The faster VR technology grows, the better it is likely to be for metaverse land offerings. Analysts suspect that the VR boom will get only bigger — thanks in part to blockchain technology. Citi estimated in a March 2022 report that by 2030, the metaverse economy could be an 8 to 13 trillion dollar total addressable market. In its report, Citi listed VR and blockchain technology as two of the five key metaverse building blocks:
  1. Operating systems connecting people and content
  2. Blockchains that decentralize economic systems and digital asset ownership
  3. Natural user interfaces e.g., voice control and gestures for greater user immersion
  4. Extended reality (XR) headsets
  5. Cloud networking infrastructure.

Blockchain games, while seldom linked to metaverse projects today, have many of the same ambitions:

  • To build more open-ended economies
  • To connect individuals and communities
  • To push the boundaries of digital ownership
  • To decentralize and share the value they create
  • To make the virtual world as immersive as reality

2. Navigating Crypto’s Peaks and Troughs: Can We Have A Sentiment Indicator for NFTs? While several micro and macro financial indicators are relied upon when pricing traditional financial assets, the nascent nature of NFTs and the broad crypto market means that there are few or limited reliable market indicators that help to determine the asset’s valuation and market sentiment. Given that traditional valuation models do not necessarily work for crypto assets, there has been a shift of focus to exploring investor sentiment to navigate this market. In addition, existing literature has demonstrated that crypto asset markets are inefficient and do not behave in accordance with the efficient market hypothesis (Anamika, Chakraborty, & Subramaniam, 2021). This working paper, therefore, is an early attempt to investigate the role of investor sentiment when determining the price action of NFTs.

This paper focuses on NFTs as an asset class (which will subsequently be referred to as the “NFT market”) rather than NFT collections of individual assets. Our main objective is to ascertain investor sentiment proxies that can account for NFTs’ price action. Investor sentiment proxies selected for this analysis include models such as regression of price on past realised volatility, and quantitative metrics to gauge volume, sales velocity, and even social media occurrences of “NFT” searches.

Using the 7-day USD price returns of our constructed Baseline NFT Basket Index as a dependent variable, we conducted a Multivariate Generalised Least Square Regression on the NFT metrics. For each metric, we created a lagged time series as an independent variable. We ensured that all variables were stationary and visually checked one-to-one patterns with the graph of our dependent variable. After controlling for statistical biases, we found two variables with relatively high predictive power in-sample:

  • Trailing realised volatility of the Baseline NFT basket price: the coefficient is positive meaning that higher realised volatility predicts higher forward weekly returns
  • Volume of Blue Chip NFTs vs all NFTs sales: the coefficient is negative, meaning that the higher the relative volume of Blue Chip NFT sales, the lower the forward weekly returns. This makes intuitive sense as investors tend to “fly to safety”

To test the results of our regression out-of-sample (January 2022 to June 2022), we simulated a strategy that invests in the Baseline NFT basket price when our investment signal is positive and goes neutral (to cash) when it is negative. We chose a weekly review of the signal. We used the coefficients found in-sample, applied to the two time series of realised volatility and Blue Chip-to-all sale volumes to generate the investment signal.

The price action of NFTs as an asset class, and its market sentiment may differ from fungible crypto assets. We found relatively high predictive values of NFT prices for two on-chain metrics: the trailing realised volatility of the Baseline NFT basket price and the volume of Blue chip NFTs vs all NFTs. Traditionally, volatility has been a good measure of investor’s risk appetite, and the movement through and from Blue Chip NFTs to small capitalization NFTs could signal investors’ willingness to take on risk for more return (i.e., arguably an indicator for investor’s greed, and vice versa for fear). Based on these two metrics, and our regression’s coefficients, we created a ‘Fear & Greed’ sentiment indicator to track the NFT market. As we go through at least one complete NFT “cycle”, more live data points should help validate the robustness of this indicator.

3. What is the Correlation Between NFTs and ETH? The NFT market is facing its first-ever bear market after the crazy NFT summer run-up. The most valuable NFT projects exist on the Ethereum blockchain. Trades in the market are largely denominated in ETH. As the value of ETH dropped down to $1K from its all-time high above $4K, NFT valuations have suffered from this crash.

How are NFT and ETH Market Caps Calculated? If a cryptocurrency has a total of 1M shares and a share price of $20 per share, its Market Cap would be 1M $20 = $20M. In non-fungible tokens (NFTs), each NFT in a collection might have a different value because of rarity and other dynamics. The NFT market is also composed of ERC1155 (Semi-fungible) tokens. To account for both cases and provide an accurate representation of the total value of an NFT collection, NFTGo.io calculates the share price as the maximum value between the NFT collection’s floor price and its latest traded price. This mechanism gives us the ability to factor out the high-value NFTs from the collection and account for their greater value.

Although the average price of an NFT collection can be either overestimated or undervalued, market capitalization is a more accurate way of determining the total value of the NFT collections.

The Correlation Between ETH and NFTs. The chart below illustrates the rebased ETH and NFT market cap returns from the start of the period up until today. In a rebased chart, both values start as 100, and going above 100 accounts for increases, and going below 100 displays decreases from the initial value. The shared downtrend for both ETH and NFTs displays their strong correlation. Another interesting data point from the chart is the NFT market’s resilience compared to ETH in the current bear cycle. While ETH has gone down by more than 50% from its initial market cap, the NFT market has only decreased by 30%.

Why Did NFTs Crash Less Than ETH? It is worth considering that NFTs are a very small and niche subset of speculative markets. ETH is orders of magnitude more mainstream than NFTs. There are also huge funds with high leverage in the crypto markets that have been drastically liquidated over the past few weeks. All of these dynamics have been playing out together to cause a bigger decrease in ETH’s market cap.

One way of quantifying how mainstream NFTs are relative to crypto is by calculating the ratio of the NFT market cap with a mainstream crypto asset like ETH. The changes in the NFT/ETH ratio can show how close NFTs are getting to the size of the ETH market cap over time. In this case, the point of the analysis is not necessarily to forecast a time when NFTs could get to a 1 ratio value, but to analyze the growth rate of NFTs relative to a mainstream asset like ETH.

The chart below shows the NFT/ETH market cap ratio from late November 2021 to May 2022. We can observe an increase in the NFT/ETH ratio. The growth of the ratio indicates a growth in the size of the NFT market relative to ETH and ultimately quantifies how mainstream NFTs are getting to some degree.

To capture a drastic changes, we can use a log scale graph to accurately analyze the percentage ROI for changes of all sizes. The chart below shows the ROI of ETH and NFTs relative to their market cap at the start of the week. We can observe that both ETH and NFTs are moving in the same direction. However, the changes in the ETH market cap are more dramatic than NFTs.

The correlation coefficients of two data points give us insights into how dependent they are on one another. A correlation coefficient close to 1 means a one-to-one relationship between the two values. In our case, it means that the NFT market closely follows ETH’s market cap. Another case could be that the NFT and ETH market caps are subtly correlated. In this case, the correlation would be close to zero.

The strength of the correlations varies depending on the cycle of the market.

The chart below illustrates the correlation between the NFT and ETH market cap during the past year. The x-axis represents the NFT total market cap. The y-axis illustrates the Ethereum market cap. The correlations are not always negative or positive.NFTs have not been a straight follower of ETH trends. Bull markets specific to NFTs, huge sales, more Whales entering the NFT market, and the emergence of new Blue-Chips can all contribute to the NFT market becoming more independent from the ETH market.

The Pearson correlation is a formula used to analyze the strength of a linear association between two variables. This value (denoted by r) can be between -1 and 1. According to r’s value, we can analyze the linear correlation between two variables:

Using Bitcoin as a Reference. Bitcoin is broadly considered to be correlated with ETH. As both cryptocurrencies represent a large percentage of the total crypto market cap and are the two most popular cryptocurrencies, they typically rise and fall together during market pumps and dumps. We can use the strong positive correlation between BTC/ETH as a reference for analyzing the strength of the NFT/ETH correlation.

Correlation Is Volatile. In analyzing financial assets, it’s worth keeping in mind that correlation is a cycle and context-dependent factor. The strength of the correlation or even the positivity or negativity of the association between two assets can vary over time. The chart below illustrates the Pearson correlation between the two pairs in the past year. This chart illustrates how volatile the correlations between two speculative assets can be, even if the two are ETH and BTC, and they’re in the same cryptocurrency sector. The negative correlation between two assets is a signal of their unique value propositions in the market. We can observe that the ETH/BTC correlation has been close to 1 more often than the ETH/NFT correlation. Using BTC’s association with ETH as our reference, we can observe the independent movements of the NFT market relative to ETH.

Close to zero correlations show independence from the other asset while assets with negative correlations are used as a hedge against other assets. NFTs and digital collectibles at times have had the potential to be used as a hedge against possible declines in cryptocurrencies like ETH.

4. How NFT Culture Stifles Innovation (And The Boring Business Fundamental That Fixes It). You might ruin your reputation if you quit an NFT project that attracted the wrong people by setting the wrong expectations. And if you don’t quit? You’ll be stuck working on something that’s not working. The answer to that isn’t hoping people will get wise to how NFTs really work. They won’t. Instead, you need to carefully design your customer lifecycle. You can do this a few ways:

  • Impose limits: Limit access after a certain amount of time/uses.
  • Start with the product: Create utility that has clear exit/entry points and makes people sell organically.
  • Clarify when the project has officially failed and what you’ll do when it has done so.

Market Keys

Disclamer. To date, analytical tools are still evolving and provide only approximate data that do not cover all chains, DAG systems and other types of distributed ledgers, as well as NFTs of less common types, such as utility or financial.

Most collections continue to fall, NBA Top Shot maintains its position, and Sorare, Ethereum Name Service, Moonbirds Oddities, Meebits go against the market. goblintown looks like it won’t be able to gain a hold among the Bluechips.

The market reflects the situation on the chains, but Ronin is trying to find points of growth

Let’s take a look at the marketplaces. Opensea has regained its undisputed leadership. X2Y2 and Magic Eden are actively competing for second place

Among fractionalized NFTs, we still see the dominance of Fractional.art. The DOGE NFT is still the leader, and in the other positions we see significant ups and downs

The market capitalization of different categories. PFP NFTs are still the most expensive category. Note the growth in the volume of game NFTs and the significantly increased liquidity of utility NFTs.

Metaverse Analytic. Real time price, volume, and usage statistics for major Ethereum-based Metaverse economies.

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