Demand for NFTs in a Changing Marketplace

Executive Summary

The following article addresses the solutions offered by the blockchain technology in the form of non-fungible tokens through the lenses of buyers and sellers in a rapidly digitalizing marketplace.

Discussion

The vast adoption of the internet has created the necessary ecosystem for an unprecedent adoption of new technologies. It is reasonably safe to say that there is a widespread of mixed feeling towards blockchain technology via the creation of non-fungible tokens?(NFTs).

But even for the most skeptics, this is an interesting space to keep an eye on considering its prospective growth. According to SkyQuest Technology, the Global Non-Fungible Tokens (NFTs) Market was valued at USD 15.70 Billion in 2021, and it is expected to reach USD 122.43 Billion by 2028, with a CAGR of 34.10 % during the period of 2022 – 2028 (Skynet Technology Consulting, 2022).

Blockchain advocates envision a widespread adoption of the technology across multiple facets of people’s life. Leveraging on the superior benefits across multiple implementations such as enhanced transparency of political election, storing of medical records or tracking the source of foods for quality control.?

On this article, our focus will revolve around the practical implications that this technology in the consumer products industry. Starting with the ability to legitimize the transfer of ownership as the outcome of decentralized storage of information. Governed and accessible publicly through multiple independent entities as opposed to a singular governing body. Bringing to a direct resolution the ever-existing challenge of counterfeits.

Other revolutionary element is the ability to guarantee the ownership of a assets backed by tools such digital wallets and smart contracts. Cutting short any disputes on the rightful ownership of any product.

The marketplace is rapidly evolving with most of its components no longer responding to physical nature. Leading to an ecosystem where rarely the tradable asset is a tangible product, supported by a physical contract, traded for some tangible currency and stored in a non-digital space. What would happen if the components that make up this marketplace stretching from products, buyers, sellers are no longer driven by a physical enabler? In this case the infrastructure that enables the transaction gains relevance.

Buyer’s demographics are changing with a stronger presence of retail consumers. One of the biggest NFT service providers, Opensea has one third of its total NFTs priced at 100 USD and 53.6 percentage going under 200 USD per unit.?With edition sizes casually building up to 10,000 units per collection (Robin Barber, 2022).

Focusing on the digital product as one element of the marketplace. This technological advancement enables creators who do not express art in a physical form but through motion, music and digital visuals to suddenly monetizing their creation in a widely accessible manner. And what is even more disrupting, is the ability to generate revenue from the secondary market through the transfer of the product's ownership.

Platforms such as Opensea allows anyone with internet access to mint still, motion and music content into NFTs in a matter of minutes empowering intellectual property owners to define the secondary sales commission which average around 2.5% of the transacted value (Ozone Network Inc, 2022).

Presumably the majority of NFT minters are individuals due to the publicly accessible nature of the mainstream marketplaces. But there is a growing interest from brands eager to enter the space for a variety of reasons.

As part of a brand positioning strategy, Adidas has partnered with some of the most hyped collections in the NFT space such as Bored Apes Yacht Club by whitelisting their existing community known for their celebrity status (Adidas Singapore Pte Ltd, 2020) with names such as Steve Curry, Eminem or Jimmy Falcon among others (Daniel Van Boom, 2022).

Other companies such as Mighty Jaxx sees the potential of leveraging in this technology to directly communicate with their audience. Through customer profiling, companies are able to connect and better service their fandom cutting short on middlemen. A pilot project was conducted in 2020 when the phygital collectible company partnered with Sesame Workshop to generate an interactive video game named Nubbies only accessible to customers who had previously purchased a physical figure. After a successful verification, Mighty Jaxx conducted promotional campaigns directly to consumers despite that the majority of the physical distribution was executed through third party retailers and independent distributors (Licensing Global, 2021)

Entertainment brands are spearheading the NFT consumer products industry through licensing models by servicing in new ways their fanbase. Some of the biggest names in the industry such as NBA or UFC are leveraging on the enhanced functionality to gamify the consumer journey bringing an additional layer of excitement hardly achievable through traditional e-commerce.

Using soundtracks, visual effects and prizes. Redeeming an NFT resembles the thrilling experience of unveiling a blind pack of card as a kid. With the only difference that consumers are adults with disposable income willing to allocate 4.7% of their total earnings to entertainment (Lile Daly, 2022).

But customers are aware of the intrinsic value of the digital assets positioning the purchase not only as a source of entertainment but an investment. The average American saves 18% of their income (Lile Daly, 2022), a significantly more appealing figure for brands. Which combined with the average American entertainment spend. The budget reaches a staggering figure of 22.7% of their total income.

Collections usually disclose the success stories of obtaining that extremely desired NFTs whose price feels like a winning lottery ticket. Ruled by the laws of supply and demand, the UFC Strike collection have reached a staggering figure of 300K USD in the secondary market from an initial listing price of 9 USD. Other NFTs of this same brand have reached asking prices of 1 million dollars in the secondary market. Propelled by a promise of future gains, customer tends to overestimate their return on investment driven with a sense of optimism. But while there is a major focus on the success stories. These are to some extent outliers with a lot of glitter. The raw data tells us that one third of NFTs experiment have little to no trading activity. And another third trade below its original listing price (The Business Times, 2022).

Through this critical view of NFTs as an investment tool. We have seen the rise and fall of some the biggest play to earn blockchain supported games in the likes of Axie Infinity (Joshua Brustein, 2022) or Cryptokitties (Xin-Jian Jian and Xiao Fan Liu, 2021). Both sharing common features of failing to retain value over time due to a rapid growing demand driven by hype. Followed by an oversupply of digital assets reducing profitability and overall demand for the assets leading to a reduction in the marketplace and therefore failure of the assets to preserve value.

Assuming that NFTs have a questionable intrinsic value, this multi-billion dollar economy is questionably entirely driven by high risk investment seekers willing to diversify their portfolio. But a movement seduced by the privileges that come along with owning a digital assets. Also defined as utilities.

NFT are usually described as passes. Gateways that extend access to benefits with a common objective, to build a sense of community and belonging. Some of this utilities transverse into the physical word such as invitations to events. For example food experience by Coffee Bros (Dan Hunnewell) or yacht parties by Yacht bored Ape Club (Daniel Van Boom, 2022)

But the growing interest to connect lays within the digital realm. The videogame Fornite redefined the scope of digital gathering through a Marshmello concert attracting 10 million people for the virtual performance (Andrew Webster, 2019). Followed one year later by a Travis Scott’s concert that attracted 12 million viewers in 2020 (Samson Amore, 2020).

NFT providers are promoting the usage of platforms such as Discord. A social chat where asset holders get exclusive access to certain forums. To exemplify this, only NFT holders of the AFINITY collection have access to the “AFINITY Owners Club” with benefits such as early access to new drops, opportunity connect with other holders, exclusive content among others (AFINITY, 2021)

To even creating a metaverses, 3D digital ecosystems that create a platform to user to connect and express themselves such as Sandbox and Descentraland. Governed by the rules of supply and demand. A native currency is used to create and trade assets such as objects and games.

Digital identity gains new weightage, with avatar becoming vehicles that represents user’s personalities. Playing by the same rules as the physical World. Creation of identity is defined through the association to various elements. This is where the luxury brands are pioneering the space offering assets to their users that generate a sense of status. Examples extend from Louis Vuitton creating jewellery in the form of NFTs (Tiffany Lung, 2022) or Gucci releasing fashion accessories perceived as status symbols (Magham Mcdowell, 2022).

With all these benefits coming together under the support of various platform committed to legitimize virtual identity. Such as Twitter who started advocating for users to have the option to verify the authenticity of the profile pictures involving NFTs in early January 2022 (Benedict Jorge, 2022)

Conclusion

This technological breakthrough brought a land of possibilities to both sides of the marketplace spectrum. Sellers are now able to create new revenue streams, directly communicate with audiences through a legitimate and transparent infrastructure. On the flip side we have customers able to enjoy a new portfolio of benefits with the possibility of flipping over their assets in a more liquid marketplace.

But like any new technology, there are flops throughout its adoptions bringing concerns on security, scalability and compatibility. Together with a current lack of utilities appeal for non-digitally driven buyers.

Author's Vision

The NFT collections that fail to fulfil a promise of deliveries will lose relevance while those ones that fulfil the needs of their audiences through their utilities will thrive. During this journey, there will be a migration of brands from a widespread usage of licensing models to self-run platforms which would allow brands owners to fully leverage from the technology.

Appendix

Adidas Singapore Pte Ltd (n.d). Into the Metaverse. Retrieved on July 2022, from https://www.adidas.com.sg/metaverse

Van Boom. D. (n.d). Bored Ape Yacht Club NFTs Explained. Retrieved 2022, from https://www.cnet.com/culture/internet/how-bored-ape-yacht-club-nfts-became-400k-status-symbols/

AFINITY. (n.d). The Private Discord channel for AFINITY Collection NFT holder. Retrieved 2021, from https://anifty-jp.medium.com/the-way-to-enter-the-private-discord-channel-for-anifty-collection-nft-holders-723366d9ea4d

Amore. S. (n.d). Travis Scott’s ‘Fortnite’ Concert Attracts Record 12 Million Viewers. Retrieved 2020, from https://www.thewrap.com/travis-scotts-fortnite-concert-attracts-record-12-million-viewers/

Barber, R. (n.d). NFT Statistics, Facts & Trends in 2022: All You Need to Know About Non-Fungible Tokens. Retrieved?2022, from https://www.cloudwards.net/nft-statistics/

Brustein. J. (n.d). A Billion-Dollar Crypto Gaming Startup Promised Riches and Delivers Disaster. Retrieved 2022 from https://www.bloomberg.com/news/features/2022-06-10/axie-infinity-axs-crypto-game-promised-nft-riches-gave-ruin

Hunnewell. Dan. (n.d). This NYC Coffee Company Looks to Open a Café with NFTs. Retrieved 2022, from https://www.prnewswire.com/news-releases/this-nyc-coffee-company-looks-to-open-a-cafe-with-nfts-301416367.html

Jorge.B (n.d). What are PFP NFTs. Retrieved 2022 from https://www.coindesk.com/learn/what-are-pfp-nfts/

Licensing Global. (n.d). Mighty Jaxx Unveils' Sesame Street' Nubbies. Retrieved on 2021, from https://www.licenseglobal.com/toys-games/mighty-jaxx-unveils-sesame-street-nubbies

Lile Daly (n.d). American Households' Average Monthly Expenses: $5,111. Retrieved 2022, from https://www.fool.com/the-ascent/research/average-monthly-expenses/#:~:text=Average%20monthly%20spending%20on%20entertainment,and%20wasn't%20considered%20entertainment

Lung. T. (n.d). How Brands Are Revolutionizing Consumer Engagement With NFTs. Retrieved 2022, from https://www.forbes.com/sites/tiffanylung/2022/03/30/how-brands-are-revolutionizing-consumer-engagement-with-nfts/?sh=4fb112693a10

Mcdowell. M. (n.d). Gucci goes deeper into the metaverse for next NFT project. Retrieved 2022, from https://www.voguebusiness.com/technology/gucci-goes-deeper-into-the-metaverse-for-next-nft-project

Ozone Network Inc. (n.d). Opensea: Complete Beginner’s Guide! Finding GEM NFTs!!. Retrieved 2022. From https://www.youtube.com/watch?v=1LnN5rfiVYU

Skynet Technology Consulting. (n.d). The Global Non-Fungible Tokens (NFTs) Market is expected to reach a value of USD 122.43 Billion by 2028, at a CAGR of 34.10% over the forecast period (2022 - 2028) - SkyQuest Technology. Retrieved 2022, from https://www.globenewswire.com/en/news-release/2022/05/26/2451426/0/en/The-Global-Non-Fungible-Tokens-NFTs-Market-is-expected-to-reach-a-value-of-USD-122-43-Billion-by-2028-at-a-CAGR-of-34-10-over-the-forecast-period-2022-2028-SkyQuest-Technology.html#:~:text=According%20to%20SkyQuest%20Technology%2C%20the,forecast%20period%20of%202022%20%2D%202028

The Business Times. (n.d). NFT collection failures begin to mount in flashback to ICO bust. Retrieved 2022 from https://www.businesstimes.com.sg/wealth-investing/nft-collection-failures-begin-to-mount-in-flashback-to-ico-bust

Webster. A. (n.d). Fortnite’s Marshmello concert was the game’s biggest event ever. Retrieved 2019, from https://www.theverge.com/2019/2/21/18234980/fortnite-marshmello-concert-viewer-numbers

Xin-Jian Jian and Xiao Fan Liu. (n.d). CryptoKitties Transaction Network Analysis: The Rise and Fall of the First Blockchain Game Mania. Retrieved on 202, from https://www.frontiersin.org/articles/10.3389/fphy.2021.631665/full