Catalyst 1: The cambrian explosion and NFT finance

When an NFT is minted, it receives "superpowers" in the form of the ability to be purchased, traded, and transferred. It generates an economy. The economy, like a seedling in the soil, may thrive with the correct instruments. NFTs get a new degree of usefulness as financialization increases. It brings in new players (market markets, lenders, etc.) that are required for NFTs to become an established asset class genuinely.

We will remember 2022 as the year that laid the groundwork for NFT finance to take off. From January to November, the total number of loans made using NFTs as collateral increased more than tenfold, reaching more than $500 million. Even in the face of a bear market, the rising trend shows no indications of abating. Borrowing/lending is the essential financial utility that keeps an economy running, just as AAVE is a key component of DeFi.

90% of NFT loan volumes are handled by NFTfi and BendDAO. They represent today's two distinct lending models. The NFTfi concept is based on peer-to-peer lending with a single borrower and lender. The counterparties are known, and the terms are clear. BendDAO, on the other hand, is a peer-to-pool protocol in which the borrower obtains a loan from a liquidity pool rather than an individual lender. Peer-to-peer lending is a newer and unproven idea that presents new dangers. However, the potential efficiency advantages and rapid liquidity make it quite appealing.

2023 and Beyond Expectations

An NFT-Fi summer will occur at some time, comparable to the DeFi summer of 2020. Many innovative financial products built on NFTs will be released in the next weeks and months. Several will almost certainly employ their own native cryptocurrency to attract early adopters and incentivize liquidity providers. This might attract money flows from DeFi participants who have no direct interest in NFTs but are drawn in by possible gains and yields.

Source: NFT tech

It's also worth mentioning that NFTs got through the full cycle without using any leverage primitives, which is extremely impressive. Leverage is a "hell of a drug" that the NFT ecosystem has yet to fully appreciate. When users have easy access to leverage tools, we may see sparks flare.

NFT derivatives (options and perpetual) are introduced. Consider having direct exposure to the Bored Ape Yacht Club without spending 60 ETH on an NFT. Many more individuals will be able to engage in the economy as a result of this. The ability to hedge NFT exposure, on the other hand, will make it less dangerous for investors to acquire NFT assets, attracting big, sophisticated participants.

Derivatives increase system leverage and may significantly influence the pricing movement of NFT collections. There will be increased volatility, liquidity, and market efficiency. The major difficulty is determining the best protocol architecture to ensure that these derivatives have minimal spreads and are utilized. Examples:

NFTPerp is a decentralized exchange for NFT perpetual futures that include Azuki, Doodles, and Bored Ape Yacht Club. It is presently in closed beta.

Hook Protocol is an NFT-native options protocol that enables users to purchase and sell call options on NFT collections such as Otherdeeds and CryptoPunks.

NFT AMMs are gaining popularity. Sudoswap is the ERC-20 NFT analog of the Uniswap instant. Sudoswap is an NFT automated market maker (AMM) that provides rapid liquidity. Even when NFT transaction volumes declined, user retention remained high (recurring users as a percentage of daily users). AMMs are ideal for "fungible" NFTs like in-game goods or membership passes since the majority of the things are identical. As GameFi grows in popularity in the future years, we predict more traffic to pass via AMMs.

In an intriguing twist, Uniswap has created an NFT aggregator service that gathers marketplace listings from seven leading marketplaces, including OpenSea and LooksRare. This was anticipated after its purchase of Genie in June. It promises to be more gas-efficient than current marketplace aggregators and to allow complicated swaps in a single transaction by using its innovative Universal Router smart contract. Uniswap views NFTs as a separate value format from ERC-20s in the expanding digital economy.

Catalyst 2: The Great Unbundling of NFT Marketplaces.

NFT markets are the industry's crown jewels. They are cash-flow businesses that are extremely scalable and are not reliant on the success of any specific NFT project. Furthermore, they operate in a growing industry that has the potential to reach billions of dollars one day. Despite the bad market, OpenSea (OS) produced more than $500 million in income this year (and more than $1.8 billion in total fees), so it's no surprise that several contenders have emerged.

OpenSea was one of the few NFT markets accessible in 2021, with extremely little competition. Other markets began to appear as NFTs gained popularity, but OpenSea had a significant head start in terms of supply (NFTs posted) and demand.

In January, OpenSea handled more than 90% of all NFT trading activity. Today, LooksRare, X2Y2, Magic Eden, and Blur have all emerged as important rivals, reducing the firm's dominance dramatically. Fee competition exists. OpenSea charges the most and pays the most royalties, while its rivals charge lesser (or no) marketplace fees and/or optional royalties. LooksRare and X2Y2 employ native tokens to incentivize listings and transactions, while Blur is about to debut its token. A sharp decline in NFT trading volumes has worsened the hypercompetitive dynamics as markets battle for a smaller slice of the pie in the near run.

Source: Coincu

Models of Marketplace Business

Marketplaces exist to link supply and demand for certain goods and services. Markets for buying and selling crypto assets are created by exchanges such as Coinbase and Kraken. Uber and Lyft established marketplaces to link drivers and passengers in need of transportation. Airbnb established a market in which tourists (demand) could connect with homeowners (suppliers) to rent out unused space in their homes. However, not all markets are created equal.

Non-fungible supply is an example of content. Because users on these platforms are not replaceable, each new user that joins Twitter or TikTok adds value to current users. They provide their own unique material (non-fungible supply) and sometimes stuff that is not available on other social networks. Non-fungible demand also benefits social media platforms; each Twitter user has distinct tastes and interests since not everyone enjoys the same stuff.

Another example is Airbnb. Phelps mentions this as an example of a market that benefits from non-fungibility. Each extra unit of supply (homes) boosts the value and "happiness" of its customers by providing them with more alternatives that cater to their individual preferences. When compared to Uber, the value of the 10,000th driver to a user is significantly less significant.

Because each incremental increase in supply is interchangeable with the previous, marketplaces that cater to fungible supply and demand ultimately experience declining rewards from each new user.

For example, exchanges compete in a market with fungible supply and demand dynamics. "It doesn't matter who you're dealing with; what matters is that someone is there to execute the transaction." Similarly, any new driver that joins Uber is replaceable with all of the existing drivers.

There's no arguing that these corporations have developed massive empires, but they aren't winner-take-all markets. They operate in marketplaces with little difference in the services they provide, as well as little variance in consumer preferences for those services.

Consumers are more encouraged to worry about pricing when the supply of the service offered is fungible, and user preferences are uniform (i.e., users desire transport from A to B). "The homogeneity of customer needs eliminates the possibility of a winner-take-all marketplace."

These ideas are applicable to any online marketplace, including those for NFTs. To begin with, NFT markets profit from the significant buyer and supplier dispersion.

Aggregating supply may help a new marketplace get started, but to develop a strong moat - and meaningful network effects - it must also aggregate demand, which is a more difficult job. Because it combined both supply and demand, OpenSea originally secured the majority of the market share.

OpenSea profited from the non-fungible supply as well. Many NFT collections exhibit a large range of differences between individual NFTs. While some have similar characteristics, there is typically a lot of variance within and across collections. Although the demand side is less diversified, it contains non-fungible purchasers, who are perhaps more distinct in their individual tastes than ordinary traders on fungible-token exchanges.

However, since non-fungible tokens may be listed on different exchanges, we've noticed a drop in switching costs across NFT markets. To return to the Airbnb example, although it is the dominant player in its vertical, it is not immune to competition since it competes in a market where switching costs are not prohibitively expensive (another measure of fungibility). VRBO may not have as many possibilities as Airbnb, but if it provides distinct options, consumers are more likely to investigate both markets before booking their ideal holiday.

Because non-fungible supply is becoming less of a barrier to entry, OpenSea has begun to compete on price because consumers are more likely to worry about transaction costs if they can buy/sell the same NFTs on other markets. The tendency toward optional royalties is one example of this, similar to the race to the lowest in pricing for competitive markets.

The increased competition among alternative markets also puts strain on OpenSea's capacity to be the ultimate aggregator of demand for NFT buyers and sellers, restricting its ability to run a truly winner-take-all marketplace.

The objective here is to figure out how to make buyers and sellers happy than any other alternative. That is why, as in other sectors, the race to the lowest in fees on NFT markets is expected to continue since it increases customer and seller contentment.

Leaving aside the dispute over whether this tendency is correct or incorrect - and, more especially, the negative effect it has on artists - the history of markets provides a lot of insight into the potential destiny of their crypto equivalents.

2023 and Beyond Expectations

When we look at the history of successful marketplaces (such as Craigslist, eBay, and Amazon), we see a similar pattern emerge: a huge incumbent with a packaged platform is challenged by startups with an unbundled offering that users prefer. They may sometimes grow to be bigger than the initial platform they disrupted (e.g., Zillow now generates 10x more revenue than Craigslist).

OpenSea and its primary rivals are big marketplace platforms that cover all NFTs. The environment for NFT markets will shift dramatically. A massive unbundling is poised to occur.

Vertical markets will grow in popularity. In practically every other field where online markets exist, we've witnessed the growth of specialist marketplaces. We know that the emergence of online marketplaces liberates economic value by connecting individuals who own or make things with vast groups of customers who are precisely interested in those items.

Vertical markets provide a superior user experience and revenue models that are specialized to their sectors. SuperRare, for example, recently sold out its first membership pass (RarePass), which provides members with a new 1/1 piece of artwork from its pool of prominent artists every month. This is challenging for platforms like OpenSea since they are tugged in several ways and cannot satisfy all of their clients.

Because the gross merchandise value (GMV) of these specialized markets is so little in comparison to OpenSea today, they are easily dismissed. However, we must keep in mind that they are still in the early phases of development, prioritizing consumer delight above GMV. At the right moment, they may reach an inflection point when their product is better enough to shift the market in their favor. Some potential tipping points include:

Inclusion of features not found on OpenSea, such as sector-specific analytics and insights.

Curation of strong vertical communities that keep together due to the social links developed.

More NFT teams will create project-owned, white-labeled marketplaces. The transaction fees earned by the Bored Ape environment collections (BAYC, MAYC, Otherdeeds) have exceeded $50 million for OpenSea. Consider if BAYC had its own marketplace and could keep all of those fees. Instead of being collected by a middleman, the fees would be reinvested in developing their vision and providing value to NFT holders. This is a significant breakthrough because NFT producers (artists, brands, talent, and so on) can capture a greater portion of the economic value they generate and share it with their network of supporters (NFT holders).

It was previously difficult for NFT teams to build their own markets. Rarible and Zora, for example, now enable others to build on their current infrastructure, making it much more manageable. Another element of NFT infrastructure that we feel will be quite significant in the future years is a reservoir. It collects liquidity across key markets and enables others to use their open and on-chain order books via APIs.

NFT teams have more control over their economics with a private marketplace. They may establish appropriate fees and royalties, allow trade in their local currency, and provide discounts or perks to members of the community. ApeCoin DAO, for example, has teamed with Snag Solutions to develop a marketplace that allows APE can be used for trade, has cheaper costs than OpenSea, and will promote the Bored Ape and Otherside economies.

Aggregators of thematic marketplaces will bring order to the chaos. Web3 aggregation is incredibly powerful and scalable. The blockchain's composability and on-chain provenance lessen the friction experienced by Web2 aggregators (legal licenses, authenticity checks). Gem and Genie have shown how rapidly aggregators may expand.

Thematic marketplace aggregators will arise to link buyers and sellers for certain kinds of NFTs, reducing the fragmentation caused by new vertical and private markets. For example, when gaming gets more popular, and trading, lending, and borrowing in-game assets become more widespread, a gaming marketplace aggregator that collects listings from all of the leading gaming markets becomes quite appealing.

OpenSea - Fortune or Fate?

The rise of vertical markets does not spell the demise of OpenSea. Despite rising competition, an incumbent may still maintain a profitable business strategy. Craigslist is a major participant in the classified ad industry because of its massive supply, the size of which is impossible to imitate.

OpenSea seems to be doubling down on its own supply-side scale, which makes sense given its present competitive advantage of multi-chain support (similar to other centralized exchanges that offer cross-chain compatibility).

OpenSea is also one of the most widely searched sites in all of the cryptocurrency (according to SimilarWeb, it receives 30 million visits each month). Many smaller producers and project teams are still encouraged to list on OpenSea since that is where the majority of the demand (customers) resides. Creators or brands with extensive current distribution channels may opt to start on other vertical markets or develop their own marketplaces, while those with limited reach are more enticed to use OpenSea's distribution to increase exposure and discoverability.

Another benefit is brand familiarity; anybody involved in NFTs has used or at least heard of OpenSea. Leaning into this, if they can position themselves as the most reputable and safe platform for purchasing, trading, and minting NFTs, they may be able to stave off competitors with less experience. As more "non-crypto" consumers join this arena, providing a secure experience will become more vital. Many people will choose a well-known platform over a newer one, even if the latter provides a superior user experience.

Catalyst 3: NFTs Enter the Mainstream: Big Tech and Brands

In 2023, strong tailwinds will boost the widespread use and acceptance of NFTs.

Big tech is adopting NFTs

Instagram allows authors to mine, purchase, and trade NFTs on Polygon, in addition to Solana, Ethereum, and Flow. With over 3 million crypto wallets generated, Reddit introduced its collectible avatars. YouTube's new creation tools include NFTs. Apple supports in-app minting, purchasing, and selling of NFTs, while there is some debate about its intentions to bar Coinbase Wallet's NFT transfer capability until it receives 30% of gas costs.

Web2 corporations control the distribution channels that allow them to reach billions of people today. Monthly active users on the largest social media networks range from hundreds of millions to billions (MAUs). These platforms can abstract away a lot of the complexity in onboarding new consumers onto NFTs by utilizing their experience in designing outstanding UX products and connecting with familiar payment mechanisms like Apple Pay. Many companies are already working on their own NFT efforts, some of which are expected to start in 2023.

The mainstreaming of cryptocurrency is rapidly approaching. Never before in history has there been such a large number of potential users interacting with blockchains. Many users will get their first taste of crypto and NFTs via these Web2 sites, and others may not even be aware they possess NFTs.

NFTs are being adopted by major brands.

Nike, Adidas, Gucci, D&G, Tiffany & Co., and Time have all seen significant revenue growth from NFTs. In August, Tiffany & Co. sold $12 million in NFTs, entitling owners to custom-made CryptoPunk-inspired pendants. The Web3 audience is wealthy and eager to spend, and their success is attracting notice.

The majority of significant consumer corporations are already considering prospects in the metaverse. They are beginning to take Web3 seriously because it allows them to create more direct ties with loyal customers while also offering new methods for consumers to interact with and experience their brands.

Many firms' customer acquisition expenditures have also risen considerably in recent years. Increased regulatory scrutiny of targeted advertising methods, changes in privacy settings, and inherent constraints in data collecting for social commerce are driving more businesses to engage in DTC strategies. Although social media advertising is a large market for recruiting consumers, businesses are actively attempting to drive customer traffic to their own sites, allowing them to obtain first-party data and promote to these people.

Each company is unique, yet many have common aims that make Web3 appealing. Some perceive a chance to offer digital things to their consumers, while others are searching for methods to increase brand engagement (including building virtual spaces for their communities to gather). Brands will need to develop better strategies to gain and keep consumers as social media grow more crowded. Web3 might be the next battlefield since it is still a young area ripe for development.

We're beginning to see forward-thinking businesses join the game, bringing with them a new generation of Web3 participants. Not every business will do it perfectly, and many companies may not be able to develop a long-term Web3 strategy just now. However, organizations that understand the power of community and are ready to use the advantages Web3 has to offer have the best chance of creating strong moats and thriving in this new era.

2023 and Beyond Expectations

More brands and huge tech businesses will meaningfully incorporate NFTs into their business models, resulting in a flood of unique NFT use cases. Starbucks is one huge multinational that has incorporated NFTs into its loyalty program, enabling members to earn or buy limited-edition stamps that unlock extra advantages.

Source: Polygon

Dynamic NFTs, which vary in response to real-world events or user activities, have the potential to significantly increase brand engagement. Who will be the first to attain product-market fit is the key question. And who will create the blueprint for other brands and businesses to emulate?

As new users flood in, the Web3 maker playbook comes to life. So far, the majority of NFT miners have been Web3 natives and power users. This will alter when additional people join. Talented producers may profit via NFTs, building an initial fan base. This initiates a virtuous cycle of content development, audience expansion, and company expansion. The creator economy will prosper.

M&A activity will increase. Large firms who believe in the potential of the field will make strategic investments or acquisitions to obtain a competitive advantage. Nike's purchase of RTFKT in late 2020 is a great example – RTFKT has become its experimental Web3 playground, while Nike's main company continues to function as normal.

Consolidation will also occur inside Web3. Yuga Labs purchased 10KTF and WENEW this month, adding them to its ecosystem. Could Web3 startups with traction, such as VeeFriends, Azuki, Nouns, or Art Blocks, be acquired? It's not completely out of the question.

Catalyst 4: NFTs — The New Social Tokens

Social tokens are an intriguing notion. For the first time in history, we have verifiably scarce digital assets that can be linked to the reputation and success of a person (or group). Influencers and producers transmit value to their communities using social tokens, which symbolize and control how they do so. They have the ability to eliminate rent-seeking intermediaries from the value transfer process.

World Cup is an example that has attracted a lot of attention. Chiliz created more than 50 sports-related fan tokens (ERC-20s), collaborating with football titans like Inter, Rome (ltaly), and Manchester City (UK). Token holders get product discounts and may vote on team choices such as jersey design. However, there have been legitimate questions raised about their tokenomics. Only a tiny percentage of the fan tokens are accessible to the general public, with the vast bulk controlled by Chiliz and the teams.

Social tokens are increasingly being released as NFTs. This year's examples include: In February, Steve Aoki debuted his A0k1 credits. Passports to the A0k1verse may be upgraded using NFTs. Passports provide fans with free merchandise, special admission to Aoki events, and the chance to collaborate on a song with Steve Aoki.

Source: NFT evening

Cristiano Ronaldo collaborated with Binance to produce an NFT collection soon before the World Cup, letting him engage with his supporters more effectively. There are multiple rarity levels, with benefits ranging from signed Ronaldo goods to a personal greeting from the football legend himself.

VaynerSports is a talent and brand agency that represents professional athletes in football, baseball, combat, and gaming. AJ Vaynerchuk founded it and created the NFT membership pass, which enables holders to meet VaynerSports players and win tickets to professional sports events.

2023 and Beyond Expectations

For social and fan tokens, NFTs will be the primary medium. While early social tokens were fungible (e.g., Friends With Benefits, AC Milan, WHALE), we anticipate that future social tokens will be NFTs rather than ERC-20s. NFTs may be linked to rich material like movies, music, and photographs, giving them cultural and memetic value in addition to financial value. NFTs are ideal as main assets for social flexing and digital identification. They may also be used as a token-gated access membership pass. The design space and gamification possibilities of NFTs are enormous.

A massive wave of innovators, celebrities, and sports corporations will launch NFTs. This will be far greater than anything we've seen thus far. The underlying technological infrastructure is rapidly upgrading. No-code platforms, token-gating solutions, and tools for dynamic NFTs are just a few of the things that have piqued my interest.

A growing number of individuals, particularly decision-makers, are becoming aware of the potential for NFTs to expand their brands and generate new income streams.

Asia might be the first region where social and fan tokens take off. Asia has a fervent fan culture, and followers are eager to financially support their favorite performers by buying vast quantities of items. One prominent example is K-pop. K-pop talent firms rely heavily on merchandise and record sales for income. Because property rights are not always as strong in Asia as they are in the United States, there is a stronger cultural acceptance of NFTs.

So yet, only a small percentage of sports and entertainment producers and influencers have established their own social tokens. This is likely to alter in the future years.

NFT initiatives will issue their own fungible coins. When it comes to creating an economy based on people and brands, fungible tokens and NFTs complement one another. They allow the community to grow beyond the small number of NFT owners. The most obvious example is ApeCoin, which was created to support and supplement the Bored Ape economy. It has grown from an initial community of 20,000+ APE holders to 100,000+ distinct wallets now. In the future, keep an eye out for Azuki, Moonbirds, and Clone X tokens.

Native fungible tokens are the currency that keeps the ecosystem running – they serve as a medium of exchange for value transfers. Members of the community who make major contributions in terms of time and effort may be rewarded with tokens. Fungible tokens may also be used to buy goods, mint future NFT drops, or as a gamification mechanism (stake your NFTs for tokens, earn tokens for completing tasks).

Importantly, more focus should be put on deliberate approaches to tokenomics. Simple stake-and-earn procedures are ineffective. Tokens should be directed toward individuals who create value, with productive contributions rewarded with increasing ownership.

Catalyst 5: "Phygital": Combining the physical and digital

The boundaries between our digital and real worlds are becoming more blurred. Objects may now exist in both the metaverse and the actual world due to advances in technology. NFTs serve as an unchanging representation of authenticity and ownership in both worlds, acting as a bridge. They provide tangible goods with additional capabilities, such as accessing token-gated advantages and providing novel AR experiences.

RTFKT produced a Nike AR sweatshirt this year that can be worn on Clone X avatars and entitles owners to the identical actual hoodie. 9dcc, a premium fashion business owned by gmoney, has released a line of t-shirts with integrated NFC chips that allow the NFT to travel along with the actual object. Azuki introduced its physical-based token (PBT), which is based on an open standard that connects tangible goods to an NFT.

Source: Hypebeast

These early phygital commodities have already earned millions in sales, demonstrating that such things have latent demand.

2023 and Beyond Expectations

More actual products will be offered with NFTs. The technology that allows NFTs to be linked to actual goods is not complicated, and it will become less expensive and more intuitive in the future. This will be used by brands to provide wonderful consumer experiences to complement their physical goods.

Giving out free NFTs with actual item sales also lets marketers begin creating their own on-chain social graphs, which they can then query, segment, and reward depending on who is connecting with their brand and goods the most. This is the first step toward putting more real-world goods on the blockchain.

Digital artists and designers are in high demand. Phygital brings up a new realm of tactile storytelling and experiences. The employment of AR filters in fashion is a developing trend among today's social media addicts. Talented digital artists and designers are critical to producing high-quality material.

Bottom lines

NFTs, like other crypto markets, have taken a tumble this year. A Bored Ape used to cost well over $400,000. Today, you can get one for less than a quarter of that price. However, focusing on prices often causes us to overlook the forest for the trees. The amount of innovation and creative energy in the NFT field is astounding, and it shows no signs of abating. Every day, more individuals are learning about the potential of Web3 and the advantages that NFTs may give. Some of the world's most powerful corporations and brands are getting engaged in significant ways. The genie has escaped, and there is no turning back.

NFTs are cryptocurrency's first significant mainstream opportunity. The small market valuation of NFTs in comparison to the total crypto market demonstrates how early we are. NFTs have the potential to evolve into a multi-trillion-dollar business, and that future may be nearer than many people imagine.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

The NFT outlook for 2023