HashKey: A Comprehensive Interpretation of the NFT Market Overview and Application Scenarios

Written by: HashKey Capital

NFT is an emerging niche in the cryptocurrency space that has gained increasing attention since 2020. More and more celebrities and high-net-worth collectors are entering the market to invest in NFT products, and well-known institutions are participating in the deployment of NFT projects. The rapid development of NFTs is attributed to the boom in DeFi, making it one of the future directions that the blockchain community has high hopes for, following DeFi.

Currently, the market capitalization of NFTs is relatively small, but the activity within the industry is rising. The main application scenarios are in areas such as gaming items, crypto art, and social tokens. The uniqueness and scarcity of NFTs make them very suitable for marking asset ownership on the blockchain, truly connecting digital assets in the virtual world with real-world assets.

In the future, the liquidity of NFTs will continue to increase, more physical assets will be tokenized, and the market will trend towards financialization. However, there are also issues with an incomplete ecosystem and security regulation. We believe that the main investment-worthy tracks for NFTs include: quality public chains, issuance and liquidity platforms, and the tokens themselves.

1. Market Overview

In the blockchain field, tokens can be categorized as fungible and non-fungible from an exchangeable perspective. Fungible tokens, or FT, based on the ERC20 standard, are tokens that can be substituted for one another and can be divided almost infinitely.

However, fungible tokens have limitations; in real life, truly valuable items are often irreplaceable and cannot be infinitely divided. Unique assets cannot be anchored by fungible tokens.

Non-fungible tokens, or NFT (Non-Fungible Token), are unique and indivisible tokens, such as tokenized gaming items, tickets, and artworks. NFTs are based on the ERC721 standard, and later the ERC1155 protocol emerged, where each ID represents not a single asset but a category of assets, allowing for the bulk creation of multiple tokens at once.

1.1 The activity level in the NFT industry is increasing: Since the launch of CryptoKitties in 2017, the NFT market has existed for over three years, with almost all NFT projects active on Ethereum and the WAX chain.

As shown in the figure below, the current top ten NFT tokens include Enjin, Flow, Decentraland, RedFOX Labs, Gala, SAND, Ultra, NFTX, WAX, and Bondly, among which Enjin's trading volume can reach around $100 million within 24 hours.

According to DappRadar's Q3 2020 NFT industry report, in terms of Ethereum, the number of daily active wallets for NFTs increased by 350% compared to the previous quarter, and NFT trading volume grew by 57%, with CryptoPunks having the highest number of daily active wallet addresses and trading volume. On the WAX blockchain, the number of daily active wallets for NFTs increased by 24,375%, and trading volume grew by 10,086% compared to the previous quarter.

Additionally, it is worth mentioning that Flow, a public chain focused on NFT crypto games and crypto art, was developed by Dapper Labs, the team behind CryptoKitties. Unlike most Layer 2 scaling solutions that shard the blockchain, Flow achieves scaling without reducing blockchain sharding: nodes no longer participate in the entire transaction verification process, and there is a division of labor among nodes.

They only participate in one of the steps: collecting, consensus, execution, or verification, which significantly increases speed and throughput. The card project NBA Top Shot was developed on Flow, and in February 2021, Flow announced the inclusion of the NFT trading platform OpenSea into its ecosystem.

1.2 Rapid growth in total market capitalization, but still small in scale: As of February 25, 2021, the NFT market capitalization reached around $3 billion, with Enjin's market cap accounting for 16.7% of the NFT market. The historical total transaction volume reached $3.23 billion, with a total of 5.31 million NFT items sold, averaging a transaction price of $60.

The growth in total transaction volume is based on the increase in the value of individual NFT assets, with the average price of NFTs peaking at $4,334.21 on February 22, 2021, up from about $100 six months prior, a forty-fold increase. On February 21, the historical transaction volume of NFT assets also reached a new peak of $20 million, approximately 45 times that of six months ago.

In terms of total transaction volume, the total for 2020 was 1.8 times that of 2019, and from 2020 until February 25, 2021, the total transaction volume reached $170 million, with the trading volume in the first two months of 2021 being 2.7 times that of the entire year of 2020. These data indicate that interest in the NFT market is continuously rising. Currently, NFTs only account for 0.2% of the total cryptocurrency market capitalization, indicating that the NFT market is still in its infancy and is a niche area.

Source: nonfungible.com

1.3 Well-known institutions participating in deployment, celebrities investing, and strong performance of popular projects: Some projects in the NFT space, such as MEME, NBA Top Shot, and Hashmask, have generated significant economic benefits and performed excellently, convincing many participants that NFTs will become a new explosive sector.

Additionally, some influential celebrities are also participating in NFTs, such as members of the band Linkin Park initiating a music NFT auction on Zora in February 2021. Several well-known institutions have also entered the space, including Marvel, the National Basketball Association (NBA), and luxury brand owner LVMH, which has participated in NFT deployment. The influence of these institutions will strongly promote further growth of NFTs.

2. Application Scenarios

2.1 Crypto Games ------ The earliest practical attempt and one of the main applications of NFTs

We believe that NFTs grant players true ownership of in-game assets, decentralizing the trading of game assets and allowing for seamless transfer and use across multiple games. Game data is securely stored on-chain, and game code is open-source, enabling players to unleash their creativity in creating game rules. In the future, the decentralization of crypto games will become even more thorough, and there will be more quality public chains dedicated to exclusive game development.

2.1.1 Development History

Since 2013, various online games incorporating Bitcoin have emerged, serving as inspiration for today's blockchain games. At the end of 2017, CryptoKitties burst onto the scene, widely regarded as the beginning of the blockchain gaming industry, creating a record of over 14,000 daily active addresses (on December 9, 2017) and causing Ethereum transactions to become congested.

As of April 30, the total transaction volume reached 43,067.04 ETH, approximately 200 million RMB. Ether Go, the first blockchain idle game launched in April 2018, had nearly 5,000 daily active users at one point, completing over 40,000 transactions in just over a day. In the following two years, the number of blockchain games saw tremendous growth, particularly on platforms like EOS and Ethereum, producing a batch of phenomenal games, though many only maintained temporary popularity.

2.1.2 Major Projects

The table below showcases some major projects in the blockchain gaming field:

2.1.3 Featured Project ------ NBA Top Shot

2.1.3.1 Market Overview

2.1.3.1a Total transaction volume ranks first. NBA Top Shot, a card-collecting game, skyrocketed in popularity less than six months after its public beta launch in 2021, with its total transaction volume now exceeding $200 million, ranking first among crypto collectibles.

This is about three times the transaction volume of the second-ranked CryptoPunks, with nearly 1.7 million wallet addresses participating in the collection, approximately 90,000 collectors. Among the platform's digital collectible cards, a classic dunk moment from Los Angeles Lakers star LeBron James sold for $71,400, becoming the highest-priced card to date.

Source: Cryptoslam

2.1.3.1b Developed on the Flow blockchain. Unlike most NFT projects based on Ethereum and WAX, NBA Top Shot is developed on the Flow blockchain, which was created by Dapper Labs, the team behind CryptoKitties. Flow employs cryptographic technology known as Secret Proof of Knowledge (SPoCK) and achieves decentralized high performance through Layer 2.

Flow protects developers' code upgrades through the PoSy consensus algorithm, is highly developer-friendly, secure, and has high throughput, better catering to the needs of decentralized games, with its ecosystem continuously improving. The well-known NFT exchange OpenSea joined the Flow ecosystem on February 24, 2021.

2.1.3.2 History of Traditional Sports Cards

2.1.3.2a Originating in the United States, primarily focused on baseball cards. The earliest baseball cards were issued in the 1880s, coinciding with the professionalization of baseball, featuring a player's photo on the card, known as a Trade Card. Early player cards were mainly given away as promotional items with cigarette purchases, and candy and toy manufacturers followed suit, gradually becoming a collectible in the U.S.

Goodwin & Co., maker of Old Judge and Gypsy Queen tobacco, was the first company to produce sports cards, while Topps was the first company to officially specialize in producing player cards, monopolizing the market for a time after 1951. Following the introduction of antitrust laws, Topps retained exclusive rights to issue NBA basketball star cards, leading to a fragmented market for player cards in the U.S.

2.1.3.2b Carrying cultural value. Traditional sports like baseball and basketball are significant parts of American culture, and player cards can sometimes represent a legendary era or a great team, possessing high collectible value. Beyond baseball, the influence of basketball culture represented by the NBA is undeniable worldwide, with superstars like LeBron and Kobe.

Today, sports cards are no longer just cards featuring one or two players' photos; new formats have emerged, such as limited edition cards, rookie cards, jersey cards, and autographed cards, which possess scarcity and increase in collectible value over time.

2.1.3.3 Advantages of NFT Sports Cards Over Traditional Sports Cards

2.1.3.3a More diverse presentation: In addition to the player images and basic information found on traditional sports cards, NFT sports cards can also include short videos or GIFs that capture "highlight moments" of NBA stars. The presentation of NFT sports cards is more diverse, attractive, and engaging, enhancing their investment and collectible value.

2.1.3.3b Lower storage difficulty: Traditional cards may suffer from oxidation, discoloration, or damage over time. The ink on autographed cards may also fade. Once NFT sports cards are tokenized, they do not face the storage or transportation issues of physical cards; NFT assets can be stored in wallets with almost zero storage costs, lowering the barriers to collecting sports cards and attracting more players. Additionally, the stronger liquidity of on-chain assets endows NFT sports cards with more desirable investment attributes.

2.1.3.3c Reduced risk of counterfeit cards: The traditional sports card trading market is unregulated, and after official card releases, secondary market transactions between individuals may lead to the sale of counterfeit cards, where players may mistakenly purchase low-cost fakes at high prices. With the help of smart contracts, the origin of NFT sports cards and every address that holds or transfers them can be tracked, making each card unique and non-reproducible, with information that cannot be tampered with, significantly reducing the likelihood of counterfeit cards.

2.1.4 Advantages of Crypto Games

Compared to traditional games, crypto games have the following advantages:

2.1.4.1 Players own game asset ownership: In traditional games, the ownership of game assets belongs to the developers, and players only have usage rights. Developers can freely transfer or alter users' game assets, while in crypto games, through smart contracts, users can truly own their game assets.

2.1.4.2 Game data is permanently and securely stored: In traditional games, there is a risk of game data being stolen by hackers, while crypto games, based on blockchain technology, cannot be hacked or attacked due to their distributed ledger, ensuring that game data is permanently preserved and cannot be tampered with.

2.1.4.3 Open-source game development: The code for traditional games is not open-source, meaning game manufacturers set the rules. Crypto games differ from traditional games' single-point trust, forming a peer-to-peer ecosystem where the code is open and transparent, allowing developers to unleash their creativity and innovate freely, enhancing the playability of games, reflecting the concept of Web 3.0.

2.1.5 Development Prospects

2.1.5.1 More thorough centralization, decentralized community governance (DAO) empowering NFT games: One of the issues with NFT games is the lack of underlying infrastructure and incomplete decentralization. Even if players nominally own game assets, the presentation of NFTs on the front end is determined by the centralized servers of game manufacturers.

DAO refers to a self-governing system that operates independently without centralized governance, based on a set of publicly recognized and transparent rules. In NFT game communities, any token rewards, voting, or transactions are recognized by the entire community. Data is public and transparent, allowing any member to query it without the possibility of tampering. Once deployed, it is unaffected by the creators or external forces. DAOs will play a crucial role in the "decentralization" struggle within NFT games.

2.1.5.2 Building dedicated public chain ecosystems for games: Currently, most NFT games are developed on Ethereum, but Ethereum has drawbacks such as low TPS and high gas fees. High-quality public chain infrastructure dedicated to NFT game development is one of the future directions for NFT games.

Flow, developed by Dapper Labs, is a leading public chain specifically for games, having secured exclusive partnerships with organizations like the NBA. NBA Top Shot was developed on Flow. Flow offers advantages such as low costs, low latency, high throughput, and a developer-friendly environment and user experience.

2.2 Crypto Art ------ The most fitting application for NFTs

We believe that the market for crypto artworks can bring economic benefits that traditional systems cannot achieve. Through smart contracts, the historical transaction information of artworks, including issuers, exhibition records, and sales records, is completely public and transparent, significantly reducing the transaction costs of artworks.

Moreover, creators essentially retain ownership of their artworks, and artists can receive compensation for secondary sales through provable programming methods. Artworks anchored by NFTs possess scarcity and uniqueness, and it is this scarcity that drives demand for artworks.

2.2.1 Drawbacks of Traditional Digital Art Transactions

In addition to the requirement for artworks to meet on-chain conditions, the drawbacks of traditional art transactions are also significant factors driving the emergence of crypto art. The drawbacks of traditional artworks include:

2.2.1.1 Poor liquidity of works: In the traditional art market, trading venues are primarily galleries and auction houses, where creators exhibit their works through intermediaries. After buyers make payments, they can copy the artwork onto a USB drive. The drawbacks of this trading model are evident: low exposure for works, significant limitations due to time, geography, and audience, low monetization ability, and poor liquidity.

2.2.1.2 Creators cannot truly own copyrights: Once buyers obtain works from creators, they can replicate the same work and continue to trade it in the secondary market, diminishing the scarcity of the artwork as it spreads through copying, thus reducing the value of collectibles. The economic benefits of secondary sales and appreciation are objective compared to initial sales revenue.

Over the years, creators have continuously fought for royalties from secondary sales, known as "droit de suite." France first introduced the concept of "droit de suite" in 1920, with typically low rates; artists can receive 3% of the resale price in France. Countries adhering to the EU's 2001 Directive on the Protection of Authors' Rights in Artworks allow artists to receive 4% of the proceeds from resales.

In the U.S., California recognized droit de suite in 1976, and Congress sought public opinion on the droit de suite system in 1991 and 2011, but neither passed. In 2012, California's droit de suite bill was repealed. Besides inadequate legislation, enforcement is also challenging, often requiring legal involvement for creators to receive secondary sale proceeds, leading to high legal costs.

2.2.2 Major Projects

The table below outlines the main projects in the crypto art field and their characteristics:

2.2.3 Empowering the Art Field with NFTs ------ Taking SuperRare as an Example

2.2.3.1 SuperRare Market Overview

SuperRare, established in 2017, is one of the major crypto art markets, featuring functions such as galleries, auction houses, museums, social networking, and commerce. Currently, the platform has over 600 creators, with works typically priced in ETH, and a total transaction volume of around $20 million, with approximately 16,000 transactions. The most expensive work on the platform has reached 165 ETH, about $85,000, and all artists and their works sold on the platform undergo a review process.

Source: nonfungible.com

2.2.3.1a Significant increase in average transaction prices: The above figure shows the average transaction price of NFT goods in SuperRare, which has been fluctuating upwards. By the end of February 2021, the average transaction price peaked at $8,135, more than 47 times higher than at the beginning of 2020, and the increase has been even greater since entering 2021.

Source: Dune Analytics, queried by rchen8

2.2.3.1b Continuous rise in demand for collectibles: The above figure illustrates the growth of the number of artists and collectors in SuperRare in 2020, showing that the gap between collectors and artists is widening. By the end of 2020, the number of collectors was approximately twice that of artists, indicating a growing demand for collectibles.

2.2.3.2 SuperRare Empowering Art Transactions

2.2.3.2a Increased primary sales revenue for artists: Investors worldwide can appreciate artists' works through the platform, which offers higher exposure than traditional auction houses. In the decentralized peer-to-peer ecosystem of the crypto art market, artists are not affected by the high commissions of auction houses and dealers, retaining 85% of primary sales revenue (with the platform taking a 15% commission), thus increasing their primary sales revenue.

2.2.3.2b Binding artists to secondary sales rights: Ethereum smart contracts include provisions for secondary market sales royalties. In the SuperRare trading market, after artworks are traded in the secondary market, original creators can receive a 10% commission, generating passive income from resales. Because smart contracts have the power to manage assets, payments are automatically executed after secondary transactions without requiring third-party legal personnel, allowing artists to truly own their secondary sales rights.

2.2.4 Advantages of Crypto Art

Overall, the advantages of crypto art over traditional art can be summarized in three points:

2.2.4.1 Reduced costs: Crypto artworks reduce high transportation, storage, maintenance, and legal costs compared to traditional artworks.

2.2.4.2 Increased exposure and liquidity: Traditional art transactions are heavily limited by time, geography, and audience, with major art exhibitions primarily concentrated in large cities like New York, Berlin, Paris, and Hong Kong, targeting affluent social classes. In contrast, crypto art successfully connects the global market through blockchain and smart contracts, integrating global art resources and gathering artists, collectors, investors, and critics from around the world. Players can invest in fractional NFT assets, lowering the barriers to collecting and allowing them to browse artworks on comprehensive crypto art trading platforms at any time.

2.2.4.3 Clear ownership of works: The exhibition and circulation information of crypto artworks are all recorded on-chain, facilitating the auditing and tracking of specific artworks, significantly reducing the likelihood of counterfeits and fakes. The ERC721 protocol clarifies the origin of tokens, establishes ownership of works, and ensures that the residual value from secondary sales belongs to the creator.

2.2.5 Future Prospects for Crypto Art

The future development trends for crypto art mainly include four points:

2.2.5.1 Combining or bundling with more elements to form new asset classes: For example, finance, architecture, etc. These innovative combinations will unleash greater potential for crypto art.

2.2.5.2 Artworks will combine with more trendy products or toys: The cash flow income from the trendy toy market exceeds that of artworks, and personalized design and trend attributes have become the consumption logic for many young people today. The trendy toy market is booming and will continue to expand. This trend is already evident in the traditional art world, such as in the works of artist Takashi Murakami, whose paintings and sculptures have strong toy attributes.

2.2.5.3 Increased liquidity: In the future, more comprehensive trading platforms and second-hand trading platforms similar to OpenSea may emerge. Additionally, another source of liquidity is DeFi, where users can mortgage high-quality NFT assets in DeFi protocols to obtain loans for purchasing new assets, thereby increasing the liquidity of NFTs.

Moreover, in addition to single edition limited artworks, there will be more transactions and circulation of multiple edition limited artworks. Multiple edition artworks are a series of identical artworks commissioned or created by artists based on their ideas, which lower the barriers to collecting for players, enhance social attributes, and increase liquidity and appreciation potential.

2.2.5.4 Upgraded authentication and anti-counterfeiting technologies: With the advancement of authentication and traceability chip technologies, the likelihood of players encountering counterfeits will decrease.

2.3 Social Tokens ------ One of the most promising incremental markets for NFTs in the future

We believe that social tokens embody the essence of Web 3.0's peer-to-peer transmission, helping to reduce creators' reliance on centralized platforms, increasing the liquidity and monetization capabilities of creative works, and truly binding creators to their rights. Compared to physical assets on-chain, the value capture of native assets in internet communities will be higher. Currently, people have only scratched the surface of the potential of social tokens, which may become one of the most promising incremental markets for NFTs in the future.

2.3.1 Classification of Social Tokens

Social tokens are a type of token supported by individual reputation, brand, or community, representing a newer application in the NFT field. Social tokens are based on the premise that community value will continuously increase. They can be broadly divided into two categories: personal tokens and community tokens.

2.3.1.1 Personal tokens: Created by individuals, these tokens appreciate as the individual's value grows, but their value capture is limited and heavily influenced by personal branding. Creators can manage their communities by issuing tokens.

2.3.1.2 Community tokens: Typically used to access communities that require specific membership qualifications, such as needing to hold tokens issued by the community creator to enter specific Telegram discussion groups, receive information or services, etc. These communities also incentivize contributions through token distribution. Community tokens are mostly governance tokens for decentralized autonomous organizations (DAOs), which generally have broader achievements and greater growth potential than individual tokens.

Overall, early investors in personal tokens may reap substantial rewards, while community tokens may capture more incremental value. The following figure summarizes the main projects and token values of the two types of social tokens as categorized by Messari:

Source: Compiled by Messari

2.3.2 Value of Social Tokens

2.3.2.1 Increasing the monetization capability of creative works. The internet has provided creators with platforms to share their works, but the commercial viability, sharing, dissemination, and appreciation of creators' works are limited, meaning creators struggle to monetize their works effectively.

However, the emergence of Web 3.0 is expected to address this issue, allowing creators to issue social tokens within their communities, enabling supporters to share their favorite works, thereby enhancing liquidity and achieving appreciation of the works. Moreover, creators can categorize users based on their activity and contributions within the community and enjoy tokenized rights.

2.3.2.2 Binding creators to their rights. Creators can use social tokens to allow fans access to all works across the creator's social platforms, enabling fans to support creators and their favorite works without relying on platforms. This method unifies support for creators through tokenized tools. Creators can enjoy all profits from the appreciation of their works, achieving a binding of creators to their rights, reflecting the core essence of the peer-to-peer ecosystem of Web 3.0.

2.3.3 Featured Project ------ Whale

Currently, a notable project in the social token space is Whale, issued by WhaleShack. WhaleShark first issued it in May 2020, supported by a treasury of numerous NFT assets, including a large number of artworks, collectibles, and virtual item tokens. Creators can price their works in Whale on OpenSea.

The following figure estimates the value of WhaleShark's NFT asset treasury (audit results from Nonfungible.com in January 2021), showing that the value of the assets in the treasury has been on an upward trend for several months, valued at approximately $2.7 million on December 31, 2020, and nearly $6 million by the end of January 2021, a 120% increase in one month.

It is noteworthy that Nonfungible's valuation method relies heavily on historical data, with most NFT asset valuations based on the average transaction prices over the past few months, lacking predictions for future conditions. This valuation method is relatively conservative, and the treasury value assessed by Nonfungible can be seen as a minimum asking price.

Source: Nonfungible

Whale is not only supported by the NFT asset treasury but also encompasses various functions within the community, such as gaming and purchasing virtual assets. Whale has also created a DAO (Decentralized Autonomous Organization), meaning Whale is entirely governed by participants without a centralized organization.

2.3.4 Ecological Environment

Today, social tokens not only have increasing value but their ecosystems are also rapidly emerging. The following figure shows the main components of the social token ecosystem:

Token issuance platforms: Provide platforms for token issuers to mint and issue social tokens.

Token creation accelerators: Primarily incubate social tokens, helping creators design token models and create token standards.

Management tools: Mainly used for community governance, including group verification, identity verification, voting, proposals, initiating DAOs, airdrops, tipping, selling assets, yield farming, etc.

2.3.5 Value Considerations for Social Tokens

2.3.5.1 Compared to physical assets on-chain, social tokens have higher native asset value capture. Social tokens are supported by actual value in the context of the ongoing development of the fan economy. For example, the higher the personal influence of the token issuer, the higher the token price will be, with the issuance of tokens backed by the issuer's personal brand and reputation. Compared to assets on-chain, the value of native assets in internet communities will be higher, although this may not be obvious until the era of Web 3.0 officially arrives.

2.3.5.2 Requires the ability to identify talent and predict brand value. Social tokens are primarily supported by individual reputation, brand, or community, appreciating as the value of the individual or community grows, which requires investors to have the ability to identify talent.

2.4 Other Applications

In addition to the applications of NFTs in crypto games, crypto art, and social tokens mentioned above, there are many exciting projects in other tracks as well. The table below outlines some representative projects of NFTs in comprehensive exchanges, databases, decentralized domains, finance, and their integration with DeFi:

3. Outlook and Bottlenecks

3.1 High-quality assets enhance market liquidity. First, more high-quality comprehensive trading platforms are expected to emerge in the NFT space, providing players worldwide with venues to mint or trade NFTs. Additionally, DeFi can provide liquidity for NFTs, allowing widely recognized high-quality NFT assets to be mortgaged for loans in DeFi protocols. Users can mortgage NFTs to purchase new assets, thereby increasing market liquidity.

3.2 More real-world assets on-chain. The true significance of NFTs is to provide a channel for real-world items to be tokenized, acting as a bridge between the physical world and the blockchain world. In addition to existing applications like gaming items and art collectibles, more real-world assets such as real estate and copyrights can be tokenized in the future. Furthermore, NFTs can also be seen as a process of tokenizing real-world interests, such as movies, music, theater, and fashion.

3.3 Increased financial attributes. Commercial papers, such as bonds and insurance policies, require carrying a lot of information and possess uniqueness in the process of circulation and trading in financial markets. NFTs, as non-fungible tokens, can correspond to different physical items, and the information of the papers can be tracked. NFTs can empower the financial sector, and their financial attributes will increase in the future.

3.4 Incomplete ecological environment. Compared to the previously popular DeFi ecosystem, the current NFT ecosystem is still not well-developed. Unlike the similar business and investment logic across various tracks in the DeFi space, the NFT track shows significant differentiation, with substantial project differences. Only a few tracks have developed maturely and possess investment value, leading to insufficient synergy among NFT projects and tracks, limiting their influence.

Additionally, concepts such as private keys, wallets, and mnemonic phrases involved in NFTs present high barriers for players, causing many to hesitate. Furthermore, the NFT market, being an emerging niche area, has lower liquidity compared to DeFi projects.

3.5 High security risks. First, global regulatory policies in the NFT space are still in a blank stage, and the development of NFTs is in a state of unregulated "wild growth." Given the characteristics of NFTs as non-fungible tokens corresponding to physical items, there may be criminal activities such as money laundering or trading prohibited items using NFTs. Moreover, as the value of NFT assets continues to rise and the ecosystem expands, they may become new targets for hackers following DeFi, with potential risks in cybersecurity vulnerabilities.

4. Investment and Track Assessment

4.1 Investment-worthy tracks include: quality public chains, issuance and liquidity platforms, and the tokens themselves

4.1.1 Quality Public Chains

High gas fees, slow speeds, and network congestion on Ethereum limit the development of many applications and result in poor user experiences. New types like Flow, which serves as a dedicated blockchain for games, or Layer 2 solutions like Matic and xDai Chain, have the potential to support the gaming or streaming industries.

Investing in high-throughput quality public chains or scaling solutions that support NFT project development on L1 or L2 is a promising direction for NFT investments. However, compared to more concentrated investments in the tokens themselves, broader investments in public chains may yield lower returns.

4.1.2 Issuance and Liquidity Platforms

NFTs are non-fungible tokens with uniqueness, and unlike fungible tokens, their commodity attributes outweigh their currency attributes. Since NFTs have greater commodity attributes, the issuance and liquidity platforms for these commodities are one of the main investment directions, such as trading platforms like OpenSea and SuperRare.

Currently, OpenSea and SuperRare have not issued tokens, while the trading platform Rarible has a governance token, RARI, that allows players to buy and sell NFT goods and engage in liquidity mining to earn token rewards. Investors can consider positioning in such tokens. However, it is not advisable to invest in overly niche trading platforms with small market capitalizations due to insufficient depth, high price volatility, and the risk of short-term losses for users, as well as a lack of regulatory assurance for platform compliance.

4.1.3 The Tokens Themselves

The previously mentioned art collectibles, gaming items, social tokens, NFT financial products, and platform governance tokens all have investment value. Collectibles and artworks often become valuable for various reasons or backgrounds, which are usually non-reproducible and possess scarcity. Investors need to leverage their knowledge of artworks to assess their collectible value, while the value of gaming items varies based on the popularity and fun of the game itself.

Given the scarcity and uniqueness of NFTs, their application in the financial sector is an important direction for future development, with insurance, derivatives, and indices being major investment opportunities for NFTs in finance. The value of platform governance tokens depends on the quality of the assets they govern and the overall ecosystem, representing an index of the value of NFTs on that platform. With the rise of the "fan economy" and "ownership economy," social tokens representing individual and community values also present potential investment directions.

4.2 Important indicators for assessing NFTs include the quality of the NFT works themselves, the artists, the trading platforms, and external evaluations

Investing in NFTs in the cryptocurrency space is akin to alternative investments in traditional investment institutions. Compared to traditional investments, alternative investments have lower liquidity and weaker information effectiveness, potentially yielding excess returns while also helping to reduce overall portfolio volatility and increase investment diversity. Similar to traditional art valuation methods, players investing in NFTs need to consider the following four key factors:

4.2.1 The NFT works themselves: The NFT works themselves are the most important indicators for assessing NFTs. The intrinsic value of collectibles and artworks is difficult to estimate and requires a certain level of artistic appreciation from players. The preservation or appreciation of gaming items depends on the game's continued appeal to users, allowing players to assess the investment value of NFT works based on their personal interests, artistic sentiments, and appreciation perspectives.

4.2.2 The artist: If an artist has high recognition, buyers are more inclined to purchase their works. Artists with high market demand can sell their works at high prices, while the likelihood of emerging artists selling their works at high prices is low. Active artists in the NFT space include: Matt Kane, Pak, Josie, Pascal Boyart, Hackatao, Coldie, Trevor Jones, JOY, etc. Players can prioritize selecting works from these artists.

4.2.3 The quality of the trading platform: Auction houses play a significant role in the traditional art market. If an artist's work is purchased by a well-known auction house, the artist's status in the art world is somewhat recognized, further enhancing the value of their works.

With the increasing number of NFT trading platforms, players need to evaluate their quality and choose reputable platforms with high recognition to ensure the quality of NFT works. For instance, users can opt to purchase NFT assets from platforms like SuperRare, where artists and their works undergo strict review.

4.2.4 External evaluations: In traditional art investments, collectors can assess the value of artworks by gathering external evaluation materials such as artist profiles, exhibition news, and auction results. In the NFT space, users can similarly refer to news, market trading data (such as transaction prices and volumes), or third-party audit reports to evaluate the value of crypto artworks.

4.3 Focus on asset protection and secure NFT collection

4.3.1 Users are advised to choose hardware wallets for storing NFTs: The private keys of hardware wallets are stored separately in chips, making them less susceptible to malicious attacks, providing a secure way to store NFT assets, unlike software wallets that face more attack vectors.

4.3.2 Users should consider the security of how platforms handle metadata: If an NFT project stores its metadata on a third-party centralized server, users may suffer losses if the project ultimately fails or if the third-party server is hacked. For collectors, the degree of on-chain integration of NFT projects is crucial, and they should choose projects with high on-chain integration and metadata stored on-chain. For such projects, users can also trace the source of information and track the status of NFT assets using Ethereum explorers or other query tools.