How NFT Art Marketplaces are Merging with DeFi
This is part of a series of articles from ConsenSys Codefi’s Q4 2020 Ethereum DeFi Report. Download the full report to learn more about token standards for assets and payments, NFT marketplaces, social and community tokens, DAOs, flash loans, wrapped Bitcoin and Filecoin, lending projects and more.
Since non-fungible tokens (NFTs) represent the financialization of digital goods, NFT designs and marketplaces have become an undeniable growing sector of DeFi. Just as Ethereum has used ERC-20s to represent digital assets, NFTs can be understood as provable ownership rights for scare digital art. With art galleries around the globe closed due to COVID-19, and more cultural experiences occurring online, Ethereum found a growing niche for creators to share art and interact directly with an enthusiastic community of collectors.
By the end of 2020, the total market value for NFTs was $52,293,650 (42,720 ETH) with 53,663 unique works of art sold on the five largest platforms. Nonfungible.com, which tracks more types of marketplaces, counted 5 million unique NFTs sold for a total nearing $150 million. While this is still a fraction of the $63.7 billion yearly volume of the traditional art marketplaces, the number of unique artists, art, and buyers may be greater in the digital world. In traditional art markets, 1% of artists represent 64% of sales value.
Traditional art markets are notoriously illiquid with famous works of art changing hands only a few times over the course of a generation. With digital art on Ethereum, digital art trading is as simple as sending a transaction in MetaMask, and can happen 24/7. On September 1, 2020, the daily volume of NFT marketplaces was approximately $24,110 with 63 unique traders, and by November 13th, 2020, volume exceeded $618,500 with more than 1,800 unique traders.
With more trading activity and more artists understanding the unique advantages of selling digital art on Ethereum, more mainstream digital artists are also joining the fold. Mike Winklemann, a popular digital artist, who goes by Beeple, sold a collection of NFTs where the winning bid was $777,777.777. NFTs are starting to cross over to traditional art markets, too. In October 2020, the first ever NFT sold at a Christie’s art auction for $131,250, and the art is programmed to change its color depending where it is in the world and the time of day.
There are now at least 27 unique digital art marketplaces on Ethereum, with SuperRare, MakersPlace, Async Art, and Known Origin facilitating between $1-$8 million in sales since they launched.
Other categories of NFT marketplaces include collectibles, such as CryptoPunks (which has had $8.5 million in sales volume all time), CryptoKitties ($38 million in total sales volume) and MLB Champions ($1.5 million all time volume), where NFT figurines can earn rewards alongside live MLB baseball games depending on how well your team performs.
SuperRare, an exclusive NFT marketplace, has exploded in popularity recently. Total sales surpassed $2 million in the month of January, an all time high for the marketplace.
DeFi and NFTs
Design patterns in the DeFi space are blending into the NFT marketplaces as well. Much like DeFi projects before it, Rarible decided to introduce a governance token, RARI, and take steps toward the platform being governed by a Decentralized Autonomous Organization (DAO). RARI token holders (which includes creators and collectors) can vote for platform upgrades and participate in curation and moderation in the marketplace. They are also introducing an NFT index — a portfolio of NFTs for collectors who want to invest in the NFT market, but are unsure of what artwork to choose.
Even more experimental is Aavegotchi, created by Singapore’s Pixelcraft Studios, which received investment from Aave and The LAO among others. According to its whitepaper, Aavegotchi aims to “leverage the explosive potential of both [NFT markets and DeFi markets] combined.” Like CryptoKitties before it, Aavegotchi’s have traits that influence their rarity, such as “kinship” which starts at a fixed value and increases or decreases based on factors like how long the Aavegotchi has been with the same owner, and how often the owner interacts with it. Aavegotchi’s have DeFi attributes as well: The Aavegotchi’s earn value over time as it earns yield from Aave’s a tokens (such as aUSDC or aETH) and has DAO-governed game mechanics.
While the digital art and collectible market grows, what if NFTs could also represent revenue bearing assets, like a song that could be sold as a limited NFT and also allows a musician to profit off of secondary sales? The Grammy-winning artist RAC used the Zora platform to release a new album with this model. Zora is a marketplace to buy, sell and trade limited-edition goods, like shoes, records, art — really anything. All of these goods are launched with an associated token, which means the good can be dynamically priced based on supply and demand, or even launched before the item exists. Importantly, NFTs carry the rights to the real-world sales revenue as the item is resold. For example, if a pair of Yeezy sneakers were sold on Zora, both Kanye and Adidas would be able to capture resale value by a certain share of the tokens.
Most recently, the Hashmasks craze has overtaken the NFT space in crypto. Hashmasks are new NFT collectibles created by over 70 artists globally. Each Hashmask has unique features, and certain features are rarer than others.
16,384 Hashmasks were sold for a total of 10,243 ETH according to their sale schedule, or approximately $15.3 million, which can be tracked in the contract here. In the primary market, Hashmasks were sold out in less than one week. While the primary market for these Hashmasks ran incredibly hot, it will be interesting to see if these NFTs retain their value in the secondary market. Many owners have already put up their Hashmasks for sale on OpenSea.
Too Much Energy
As interest in NFT art on Ethereum has grown, so has a renewed focus on the enormous energy consumption required to confirm transactions and mint NFTs using the current Proof of Work consensus mechanism on Ethereum. Memo Atken estimates that the average NFT, when accounting for minting, bidding, and transfer of ownership has a footprint of around 211 KgCO2. Considering that watching an hour of Netflix is estimated to be 36 grams CO2, this is dissuading some artists who were considering releasing their art on NFT marketplaces.
It’s also one of the reasons why the Proof of Stake is so important to Ethereum’s growth: not only will it vastly improve the networks throughput, but it is estimated that it will reduce the carbon footprint of confirming transactions on the network by 99%. Thankfully, Proof of Stake on Ethereum 2.0’s Beacon Chain has already been humming along for two months, with 2,491,268 ETH already staked (about $3.8 billion). Turning off Proof of Work may come sooner than we think, some researchers estimating as early as this year with proposals to build the Ethereum directly on the beacon chain.