1.2 NFT MARKET

The Non-Fungible Tokens Market size is expected to grow from USD 3.0 billion in 2022 to USD 13.6 billion by 2027, at a Compound Annual Growth Rate (CAGR) of 35.0% from 2022 to 2027.

The major factors fueling the NFT market include the increasing influence of celebrities to fuel the momentum of NFT adoption, revolutionizing the gaming industry, and the slow but continuing rise in demand for digital artworks. Moreover, increasing use cases of NFT in real estate, crowdfunding, supply chain management, retail, and fashion, efforts of industry giants toward making Metaverse a reality, and personalization of NFT would provide lucrative opportunities for NFT vendors.

COVID-19 Impacts on Convergence of Art and Technology

NFT is a niche topic with many speculations still going around the same, and COVID-19 fast-forwarded the adoption of NFT technology in addition to many other traditional markets, especially NFT related to art. At the beginning of the pandemic, since art galleries and other NFT-related assets were closed due to lockdown, art sellers and collectors were pushed to adopt the digital space. According to FuelArts, art fairs went online, galleries mastered VR, and auction houses offered mixed bids combining art and luxury goods. Due to this, the demand for innovation in the art market increased and attracted various startups and venture capital. This further resulted in a boom in new payment methods and instruments to help create, manage, and sell NFTs, creating opportunities for users to take advantage of the Art+Tech fueled NFT technology.

Compentry tickets the last 20 years before the pandemic, art-fueled tech companies have made USD 640 million. According to industry experts, the exponential rise in digital marketplaces posts the outbreak of the COVID-19 pandemic contributed the most to the adoption and growth of NFT. These platforms attracted online shoppers with many enticing offers and a new, informative way to represent art. Art collectors also preferred marketplaces for static online auctions of NFT offered by most galleries. Marketplaces have benefited most from the NFT hype as sales of digital collectibles surged to USD 10.7 billion in Q3 of 2020, up from USD 1.3 billion in Q2 of 2020.

NFT Revolutionizes the Game Industry

One of the crucial factors behind the exponential increase in demand for NFTs is that NFTs have extended their horizon from music, videos, and sports to other streams, such as Metaverse and gaming.

In 2017, Enjin was one of the first mainstream gaming companies to merge blockchain technology with its infrastructure and issued a gaming cryptocurrency, ENJ, officially whitelisted for use in Japan. Also, with the advent of Play-to-Earn (P2E), players can buy, sell, and trade earned in-game items. For example, games such as Axie Infinity and Splinterlands enable users to mint rare in-game assets into NFTs and buying or selling these gaming-related asset transactions pile up. Data on DappRadar shows that Splinterlands generated more than 4 million daily transactions on Aug. 7, 8, and 9, 2021, while the entire Ethereum network generated an average of 1.2 million daily transactions.

NFTs enable gamers to generate revenue through their in-game assets by converting them into NFTs. Also, according to Forbes, Axie Infinity witnessed a surge in user growth in the Philippines when it offered players an alternative source of income during the pandemic. Hence, the gaming industry, especially the play-to-earn blockchain gaming model, has established itself as an immense growth opportunity for NFT.

Copyright Protection Issues Still Remaining

Current NFT marketplaces do not have a dedicated legal framework and regulations to validate the ownership of an NFT and the associated copyright evidence. Duplication of genuine works is a threat. Without the creator's consent, such duplicated assets can be spread online. This is restraining the baseline of the NFT market.

NFTs are beneficial for digital artists as it allows complete ownership to the original creators and earns from their work.

Efforts of Industry Giants towards Making Metaverse a Reality

The Metaverse is a vision of an internet-enabled virtual world where people have avatars and interact with digital assets with Augmented Reality (AR), Virtual Reality (VR), and Extended Reality (XR). This is developing rapidly as blockchain technology evolves. Industry experts believe that NFT will be the revenue model for the Metaverse. Currently, virtual items are the revenue model in video gaming viz USD 175 billion business annually. Since the Metaverse will have digital avatars, NFTs will enable direct access to real-life identities and digital avatars in the Metaverse. NFTs are expected to be used in various places in the metaverse, such as user interaction, socialization, and transactions. For example, in 2019, an NFT-based token was used as an entry ticket for NFT.NYC event. After the success of this event, many other events started using NFTs as entry tickets, fueling the further adoption of NFTs in the Metaverse. With significant players like Meta, Microsoft, etc., investing in the Metaverse projects focuses on introducing massive transformations for online interaction. For example, Decentraland enables the virtual purchase of the real estate in Metaverse and shows the places where users own Metaverse real estate using land tokens.

Industry experts also believe that in Metaverse, NFTs can be used in the form of currency, which can be adopted for transactions and purchase and trading of virtual digital assets, such as virtual property. Hence, the Metaverse is expected to be the most significant opportunity for NFTs.

High and Hidden Fee Constraints Need to be Broken

NFT transactions are associated with high and hidden gas fees, which most first-time users are unaware of or ignorant of. Many NFTs are based on the Ethereum blockchain, and ERC-20, ERC-721, ERC-1155, and some other token standards are used for issuing smart contracts. The Ethereum blockchain, in particular, uses the proof of work mechanism to determine its value, which causes high gas fees, and this is one of the challenges faced by the NFT marketplace these days.

As discussed above, Ethereum is working on reducing this limitation by moving from a proof-of-work model to a proof-of-stake model through which the energy per transaction could be reduced to as low as 35Wh, which would also result in reduced gas fees.

Media and Entertainment are Expected to Have the Largest Market Share

In the media & entertainment industry, NFTs have the potential to transform the way films are completely made, produced, and distributed, democratizing this unilateral industry in the process. To demonstrate the future of NFTs in the world, the NFT community Arabian Camels is making a USD 50 million Hollywood film called Antara. NFT is especially useful for budding filmmakers and artists hardly visible in the industry. For big production and elite film franchises with millions of followers, NFTs provide a unique opportunity to solidify their fandom in the Metaverse. Multiple production houses, such as Disney and Lionsgate, are already working on developing their own NFT marketplace. Integrating NFTs into the entertainment industry can enable users to participate in every step of film production and distribution actively. NFTs will allow viewers and creators to connect beyond the screen and thus take the industry to unimaginable dimensions.

“On the other hand, the NFT derivatives financial market is one of Blue Ocean. As an early market for market entry, there is only a small, immature market with limited business models such as loan/borrowing, fragment investment, and fundraising based on NFT assets. As many industrial fields are introducing NFT, the growth of the NFT-Fi market is obvious in the future.”

New Attempts have been Detected within the Value Chain of the NFT Industry.

It is true that NFTs, like the virtual asset market, face liquidity problems and skepticism about their growth potential. However, as discussed above, in the industry, it is inappropriate to doubt the growth potential of NFTs. Although the growth potential of the NFT marketplaces is expected to slow down, the market size of $77.6 billion in the global NFT market by 2025 is expected due to the diversification and strengthening of NFT projects. Meanwhile, the NFT marketplace, leading the quantitative growth of NFTs, has an oligopolistic monopoly market with two players, OpenSea and LooksRare, occupying about 91% of the market share. Indeed, the term Winner-takes-all can be seen as applicable here. And the loan/borrowing market with NFTs as an underlying asset is gradually growing. Focusing on music, art, and real estate, NFT fragment investment or fundraising biz models for users are also appearing. However, the characteristics of this business model are that it has direct competition with the existing financial market. It is challenging to lead the market on the NFT-Fi side, which has relatively poor scale and capabilities.

The value chain of the NFT market is primarily divided into creation, publishing, distribution, and NFT derivative finance (NFT-Fi). For products, NFT vendors such as BAYC or CryptoPunks are expected to become more diverse and strengthened. Of course, in short to medium term, the market will have an oligopoly structure, and latecomers will not be able to guarantee success as they are exposed to uncertainty in NFT earnings. Opportunities based on differentiation exist in this market. For publishing, there are not many players with a straightforward protocol yet, but it is expected that the number of players in the form of an NFT agency will gradually increase. For distribution, despite the oligopolistic structure of the market, the challenges targeting specialized markets continue to grow. Even though having a similar business model is considered a Red Ocean, NFT derivatives financial market is recognized as a Blue Ocean. As an early market entry market, there is only a small, immature market with limited business models such as loan/borrowing, fragment investment, and fundraising based on NFT assets. As many industrial fields are introducing NFT, the growth of the NFT-Fi market will be evident in the future.

The NFT fragment market is emerging as a hot potato. The NFT fundraising market is attracting attention through security fragments of investment. This is different from the existing concept of NFT joint purchase. Both positive and negative views exist in this market regarding competing with the current financial market.