NFTs attempt a comeback | Financial Post

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Non-fungible tokens — which went from being touted as the cutting edge of the digital frontier to the punchline for the most recent cryptocurrency bust — are suddenly staging an unlikely comeback.

No corner of the market experienced more pain than NFTs when the cryptocurrency bubble popped after a series of scandals in 2022. Global sales volume for NFTs plummeted 63 per cent to US$8.7 billion last year, with many assets becoming nearly worthless, according to data from CryptoSlam Inc.

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Those who spent fortunes on buying the hottest tokens were mocked as suckers and some investors even sued celebrity NFT promoters over claims that they’d been duped. Now, after bitcoin has staged a ferocious rebound amid the rollout of exchange-traded funds pegged to the digital currency, the NFT industry is searching for ways to turn the page and reignite excitement in its corner of the digital universe.

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Startups are resurrecting narratives about NFTs being used in gaming, finance and art, claiming they’ve learned hard lessons from the past that will make their latest attempt more endurable. They want the tokens to be seen as more than just expensive profile pictures limited to the rich and famous, but the digital assets aren’t on solid ground just yet.

NFT sales almost tripled to US$918 million in November from the month before and then surpassed US$1.7 billion in December, according to CryptoSlam. However, volumes dropped 33 per cent in January to US$1.2 billion, indicating that an NFT recovery could be complicated.

Skepticism about blockchain gaming, uncharted territory around financialized NFTs and questions about whether NFT art can recapture sky-high sales all pose challenges for the embattled market.

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“This yearn for exclusivity, I think, is just a giant mistake,” Luca Netz, chief executive of NFT startup Pudgy Penguins (LSLTTT Holdings Inc.), said. “What I think people really want is fandom. They want collectability.”

In gaming

Industry volatility is part of why Pudgy Penguins developed a toy line inspired by the chubby cartoon birds that make up its popular NFT collection, according to Netz. The Pudgy Toys line sold 750,000 units in seven months, garnering US$10 million in sales.

“We knew we needed to make a real revenue stream that was not predicated on variables we couldn’t control,” he said.

Each toy has a QR code that takes the owner to the Pudgy World online game, which is still being rolled out. Netz said he hopes to release a full version within the next 12 to 18 months. There are plans for the toys to include NFT traits, such as clothing items for a player’s penguin avatar, that can be sold within Pudgy World.

Like Pudgy Penguins, Yuga Labs Inc., creators of the Bored Ape Yacht Club, wants to parlay the success of its still-popular profile-picture (PFP) NFTs in gaming.

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During cryptocurrency’s bull run, Yuga raised funds at a US$4-billion valuation and embarked on a controversial token project, a collaboration with Adidas AG and a short film trilogy currently on pause. The company had too much on its plate, according to former chief executive Daniel Alegre, who spoke to Bloomberg prior to stepping down.

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Yuga is focused on building its BAYC-inspired Otherside game, which had a botched NFT sale tied to virtual land in its namesake digital metaverse and mixed reviews for its trailers. Alegre declined to provide an official launch date for Otherside, which was supposed to debut last year.

“We bit off a little bit more than we could chew in terms of timing,” Alegre said.

“Otherside is also a massive swing for the fences,” Yuga co-founder Greg Solano posted on X as he announced his return as chief executive. “We’ve got a lot of work to do.”

As Yuga and Pudgy Penguins push NFTs harder into gaming, they’re entering territory with mixed success. Axie Infinity, one of the best-known blockchain games, has been criticized for a US$600-million hack in 2022 and its poor gameplay.

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Focusing on making money rather than creating an enjoyable game is where many NFT projects go wrong, according to Zollpa LLC chief executive Aaron Jacobson.

“It’s not a sustainable model, where you do an initial coin offering or an NFT mint and require all the players to spend a lot of money up front before the game is even released,” he said.

Zollpa launched an open beta version of a shooter game called RoboSquad Revolution in November. The company has plans to eventually integrate NFTs that represent weapons or traits for players’ robot avatars.

Finance and art

Some startups are looking to use NFTs in finance. The popularity of collections such as BAYC and Pudgy Penguins has made them good candidates for loan collateral, according to Stephen Young, chief executive of peer-to-peer lending platform NFTfi Genesis Ltd.

“There’s quite a lot of volume still on the top blue-chip PFPs,” he said.

NFTfi has hosted more than 56,000 loans worth about US$500 million since launching in 2020. Young said lenders decide how much they want to loan and set the interest rate.

Michael Anderson, co-founder of Framework Ventures Management LLC, said he’s seen other financial uses for NFTs, noting that more companies are introducing tokens that represent “real-world assets,” or RWAs, such as a bond, commodity or real estate.

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“Even if we’re talking about something like a Treasury bond, it has different maturities, different yields, different prices and so that bespoke information needs to be stored on something that is non-fungible in nature,” he said.

But NFTs, including those that are finance-related, could draw regulatory scrutiny. The United States Securities and Exchange Commission reached a settlement with media company Impact Theory LLC in August after alleging that its NFT offering was an unregistered security.

Art NFTs, which had sales in 2021 such as a US$69-million purchase of a digital piece by the artist Beeple, are currently the best-performing category among a group of NFT indexes created by Nansen Pte. Ltd. The indexes track market performance for different types of NFTs, with the social category including PFP NFTs.

Sotheby’s Inc., which has sold NFTs since 2021, has continued to see interest in the tokens, according to Michael Bouhanna, head of digital art at the auction house.

“There are artists who have more of a coder background, and for them, using blockchain technology or some generative art programs in their creative process is very natural,” he said.

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Sotheby’s sold more than US$30-million worth of NFTs and digital art last year, a 50 per cent increase from 2022, but still less than half of the 2021 Beeple NFT sale. In January, Sotheby’s had US$1.6-million worth of sales for Ordinals, which are NFT-like objects based on the Bitcoin blockchain, as well as a more than US$1-million sale of digital art from the collection of bankrupt cryptocurrency hedge fund Three Arrows Capital Pte. Ltd.

Cutting through the budding optimism around NFTs is the concern that cryptocurrency’s association with scandal, crime and chaos could hamper new growth in the category.

“They hear the word web3 or NFT and they instantly shun the game and consider it a scam,” Zollpa’s Jacobson said.

Bloomberg.com

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