Messari Report: Why 2022 Will Be the Year of Sports NFTs?

Author: Tom Dunleavy, Messari

Compiled by: Captain Hiro, The Way of DeFi

Key Points:

• Sports NFTs are the intersection of sports cards and fantasy sports.
• There is a $30 billion market opportunity for existing fantasy/sports card players.
• Compared to traditional systems, sports NFTs offer exciting value propositions for fans and teams.
• Existing platforms provide users with easier onboarding opportunities compared to traditional cryptocurrencies, opening the door for hundreds of millions of users.
• Top Shot and Sorare are pioneers, but NFL All Day and FanCraze (cricket) are joining the race and will further accelerate industry growth.
• Deloitte estimates that $2 billion in revenue from sports NFTs will be generated this year alone.

Anyone entering the cryptocurrency space understands that operating in its current form is a somewhat chaotic experience, with users often having to jump through hours of hoops to actually complete a series of operations.

You have to buy your cryptocurrency on an exchange, download and set up a wallet, send the cryptocurrency to that wallet, find a market or exchange to trade, complete a transaction, and track it on a local block explorer. Oh, you want to join another currency's ecosystem? Great, you have to do it all over again.

Due to these complexities, only 300 million people (or < 4% of the world's population) are currently using cryptocurrency. If the industry wants more people to adopt it, it must: 1) provide a compelling value proposition; 2) make cryptocurrency easier to understand, or abstract the backend so users can operate simply and easily.

Sports NFTs do both of these things well.

Teams have a large base of passionate fans willing to spend time and money on their teams. Sports NFTs provide a profitable avenue for fans' interest in players or teams. Emerging sports NFT platforms focus on making the onboarding experience simple enough to just a few clicks. So, how big is this opportunity for the cryptocurrency space, and what kind of impact will it have?

Market Opportunity

For decades, fans have used trading cards to further engage with their favorite teams and invest in their on-field idols. When fans purchase rookie cards, it means they have a vested interest in that player's performance over the next decade. Trading cards have provided fans with some economic benefits in the game.

For most of the 20th century, sports card collecting was very popular, but as the supply of cards increased and card manufacturers became increasingly fragmented, interest shifted more online, and enthusiasm for sports cards stagnated. However, starting in the third quarter of 2020, sports cards staged a fierce comeback, highlighting fans' renewed interest.

Source: PWCC, Top 100 Card Index

Single cards of players like Tom Brady and Michael Jordan have sold for $2 million or more. Today, the sports card industry is approximately a $14 billion industry, with an annual growth rate exceeding 20%.

With the rise of the internet, fans found more ways to fuel their engagement. Some projects were designed to allow fans to draft players to form their own teams, which would compete against their friends based on their players' on-field performance, giving rise to fantasy sports.

Today, fantasy sports is a $22 billion market, growing at a rate of 9.5% annually. There are over 60 million players in the U.S. and Canada, primarily focused on baseball and football. Outside the U.S., over 100 million people play fantasy cricket, and 8 million play fantasy soccer.

The emergence of daily fantasy sports has further increased user adoption and intensity. DraftKings alone has 2 million monthly active users (up about 25% from a year ago), each spending nearly $100 per month, resulting in $2.4 billion in annual spending.

Sports NFTs are the intersection of trading cards and fantasy sports. This new traceable address market brings in hundreds of millions of engaged users, who spend billions of dollars annually.

How Blockchain and NFTs Combine

Sports NFTs are tradable collectibles on the blockchain. Because they exist on the blockchain, their scarcity is provable. The most popular model currently allows users to acquire player cards through markets or by purchasing "packs," with each pack randomly containing 3-5 cards.

These cards can then be held, staked for future appreciation, or used in games or challenges to win rewards. Cards have different rarity values based on their existing quantities. The rarer they are, the more valuable they become, or the greater their utility in games. NBA Top Shot (basketball) and Sorare (soccer) are the two most popular platforms to date.

These sports NFT platforms feel more like eBay than Uniswap. Yes, you operate these platforms on the blockchain, but they are incredibly smooth to use. The product lead for NBA Top Shot stated, "Over time, we can teach you, we can get you into cryptocurrency.

But if I put the cumbersome operations of cryptocurrency in front of you from the start, we would definitely lose you." Users don’t have to worry about wallets or seed phrases; they can forget about gas fees; the only thing they need to worry about is their credit card charges. Additionally, there are no hackers on these platforms. Sports NFTs greatly simplify the onboarding experience for users, who only need to focus on sports-related issues.

The most popular platform among users and sales is NBA Top Shot. NBA Top Shot was created by Dapper Labs, the creators of the famous NFT project CryptoKitties, and launched in the summer of 2020. Dapper built their own blockchain called Flow, which supports not only Top Shot but also an increasing number of other gaming networks, including NFL All Day, La Liga (Spanish League), UFC Strike, and FanCraze for cricket.

While Sorare typically offers one card per player, Dapper's product features "Moments" that are highlights from specific games of teams or players. These are short video highlights of players. For example, there can be multiple highlights of Tom Brady each season. This introduces an interesting supply and demand dynamic. Should a moment be created for every game? Once a week? Once a season? Dapper is still exploring the supply and demand dynamics and has even introduced a burn mechanism to help eliminate some supply.

Source: Top Shot, Sorare

The fantasy sports aspect of sports NFTs is still in its early stages. Sorare has weekly games where players can use their cards to form teams and earn points based on their players' performances on the field. Real prizes are awarded to the winners of these competitions. NBA Top Shot promises a similar fantasy gaming experience but has yet to deliver. Third-party websites, and even DAOs, have emerged to try to fill this gap.

So far, Top Shot Moments only have some utility during nightly "challenges." To complete these challenges, fantasy players must own certain moments, and the relevant players must achieve specific goals that night. As a result of completing these challenges, more "moments" are rewarded.

For example, if you own moments of the top five players with the most rebounds that night, you will be rewarded. Products for cricket, NFL, UFC, and La Liga have just launched, but there are signs that the fantasy sports aspect will be the most significant.

Value Proposition for Fans

More Engagement

Sports NFTs provide fans with a new way to experience games. They can actively participate in the success of the players they purchase. Traditionally, fans only cared about their hometown teams. Sports betting, sports cards, and fantasy sports shift the focus from hometown teams to any team or player of interest. Fans now have more reasons to actively support teams or players from across the country or the world.

Fans can also connect directly with their favorite players, as these players are also playing virtual games with them. Many players are avid collectors themselves. They even discuss this topic on the court. Rudy Gobert recently dunked on Josh Hart, and the microphone picked up Gobert saying, "This is going to be a great Top Shot moment." There’s no word on whether Hart (an avid Top Shot collector) agreed with this idea.

Profitable Opportunities

The entry price for cards starts at a few dollars and goes up to six figures. Players have the chance to obtain rare cards through the pack system, providing a fair competitive environment for everyone. Players can purchase rookie cards of unknown players they believe have potential. Or, if they think Cristiano Ronaldo will have a great game this week, they can go out and buy his card to add him to their Sorare team, hoping to win some cash. Sports NFTs are like a stock market for players. The value of different cards fluctuates daily based on players' performances and opportunities.

Real Utility

Sports NFTs can have significant crossover value in the real world. Own all the NFTs of the Toronto Raptors on Top Shot? Maybe you’ll get airdropped some tickets to an upcoming game. Watching a game at the Chiefs' stadium while you also have Patrick Mahomes' all-time moment? Perhaps you’ll receive a free meet-and-greet after the game. This is the next evolution of fan identity: provable fan identity.

Recently, eight fans who owned Top Shot moments of Suns players were invited to the NBA Finals, and another eight were invited to the 2021 NBA Draft. Thanks to their Top Shot collections, fans were able to interact directly with players. You likely didn’t bring your LeBron James rookie card to the game, but you can certainly show your phone to display that you own his moment.

Source: NBA Top Shot Twitter

Today is NBADraft Day, and our collectors are starting to shoot hoops with @obitoppin1 and @Eisenberg43

Source: Top Shot, Sorare

No Offseason

Star quarterback Russell Wilson was recently traded to the Denver Broncos. Speculators loved this landing spot and immediately began buying his NFL All Day moments, causing prices to surge by 25%. The prices of player cards from his new team also doubled. There is no offseason, even when players are not on the field.

Safer than Physical Cards

We’ve all heard stories of someone owning a Mickey Mantle rookie card or a rare Pokémon card, only for their parents to throw it away with other "toys." Sports NFTs avoid similar mishaps. All major sports NFT platforms require a phone number and email address to ensure you are never locked out of your account. While this sacrifices decentralization, most users are currently more interested in the sports aspect of NFTs than the economic principles of cryptocurrency.

Supply is Observable

A huge problem with printed sports cards is oversupply. In the 1990s, multiple suppliers had the rights to print cards for each league, saturating the market. Suppliers printed as many cards as possible to grab cash. On the other hand, sports NFTs are scarce because they are licensed to official suppliers for each league. Dapper controls these licenses for the NBA, NFL, UFC, La Liga, and other leagues.

Even single-supplier models have faced supply issues; NBA Top Shot faced strong backlash in 2021 when the minting quantity for new moments increased from 1,000 per highlight moment to 60,000. Because they fully control this variable, Dapper was able to quickly adjust and implement "burn" and trading mechanisms to reduce supply.

Market Inflection Point

Sorare and Top Shot have only existed for a few years. Their promotion has been measured, and so far, they have invested limited marketing. To date, the adoption of Sorare and Top Shot has been organic, resulting in relatively slow and steady growth. The initial popularity of Top Shot was largely due to speculation, but overall, these two oldest platforms have appreciated at a gradual pace. Top Shot is still officially in a testing phase.

So what gives us confidence to see users accelerating adoption? In short: NFL All Day and FanCraze.

NFL All Day

In North America, the demand for football is limitless. Among the 60 million North American fantasy players mentioned earlier, 40 million play fantasy football. The popularity of fantasy football is four times that of fantasy basketball. Therefore, if Top Shot has over a million users, based on these trends, NFL All Day should have over 4 million users.

Most of these fans have incomes far above the average wage in the U.S. This group spends more than the average consumer across various categories, from dining to apparel. This group is willing to spend disposable income on their passions. It turns out that NFL All Day has been no different in its brief history.

The NFL All Day marketplace launched in late February this year. Despite being in a restrictive closed testing phase, its sales volume within a month reached the levels that Sorare achieved in its 22nd month and Top Shot in its 7th month. Currently, about half of the registered NFL All Day users have made purchases in the market in the past month.

This is five times the user activity of NBA Top Shot. The number of unique buyers per month is approaching the best month in the three-year history of SoRare. For those unfamiliar with the NFL, it is currently the offseason for football, making these numbers even more impressive.

Given the engagement in the closed testing phase and the overall popularity of fantasy football, as we approach the 2022 season, NFL All Day seems like a good bet to attract thousands of new users to the platform.

FanCraze

With the fervor of football fans, the story of NFL All Day is nearly complete, while the story of FanCraze is still developing; however, its user base remains very solid.

FanCraze is the world's largest cricket management organization—it's also the official NFT partner of the International Cricket Council. The FanCraze marketplace launched in January this year and currently shows some seemingly strong trading volumes. While there is currently no public aggregation of statistics, blockchain data shows that approximately one transaction occurs every minute: this is the current maximum for the network. Multiple NFT moments have sold for five-figure prices.

FanCraze recently raised $100 million in their Series A funding, which should drive further investment. This Series A funding follows a $17.4 million seed round led by Tiger Global Management in 2021. The opportunity for existing fantasy platforms to expand into NFTs is also attracting capital. The popular platform Dream 11 is investing in the cricket NFT platform Rario. FTX is negotiating with the Mobile Premier League (MPL) to launch a platform.

If only a small fraction of the 100 million fantasy cricket players decide to explore FanCraze and these other platforms, we could see a significant influx of new users into the cryptocurrency space.

Investment Opportunities

Token Investment

Sorare operates on Ethereum. Therefore, unless you are a venture capitalist, you have no direct channel to access the platform. Dapper's products operate on the Flow blockchain, which gives users the opportunity to access all products within its ecosystem. As Top Shot gained traction, the Flow token saw an impressive rise in 2021, but as the ecosystem stabilized, its token price sharply declined.

Source: Messari.io

The supply schedule for Flow certainly hasn’t helped the price, as approximately 300 million tokens (about 30% of the fully diluted supply) will be unlocked in the second half of this year. With another 250 million tokens unlocking, 2022 looks like another tough year.

Source: Messari.io

However, the activity on Flow remains impressive. At certain times, the number of users on the platform even exceeded that of the Ethereum network.

Source: Cryptoslam.io, trading volume on March 22, 2022

Moment/Card Investment

The single largest way to profit from traditional sports cards, fantasy sports, or sports NFTs is simply to find and own the best players before others catch on. A straightforward investment strategy for sports NFTs is to purchase rookie cards/moments of high-potential players each year (similar to "rookie" cards in sports cards) and hold them.

If the market follows the trend of Top Shot, we could also see opportunities for individual moments to appreciate. Top Shot has released moments in different "series." For example, the first moments are Series 1, followed by Series 2, Series 3, and so on. The cheapest Series 1 Top Shot common (least rare) moment is currently $22, while the cheapest Series 1 NFL All Day moment is priced at $4.

Compared to Top Shot, moments in the first series of NFL All Day are about twice as much. If the supply variable is controlled well, All Day moments seem to be a pretty good cheap option. On FanCraze, the cheapest moments are around $6, indicating that supply will be similar to Series 1 of NBA Top Shot. A simple buy-and-hold strategy for these early moments could yield some straightforward dividends.

More advanced strategies include buying and selling around significant performances, trades, or other milestones in a player's career. If collectors want to delve deeper into more speculative sports careers, they can now even invest in college players through NFTU.

Player-Sponsored NFTs

Players are excited about the new attention and revenue opportunities they gain through sports NFTs, but they are not just passively letting these actions go through the league. Stars are launching their own dedicated NFTs. NBA legends like LeBron James and Zion Williamson have sold NFTs for six-figure sums each. NFL stars Patrick Mahomes and Rob Gronkowski have sold sets totaling millions. Tiger Woods is also getting in on the action. Tom Brady has established a company called Autograph that allows players to easily launch their own NFTs. Autograph raised $170 million in Series B funding.

Source: Front Office Sports

Alabama QB Bryce Young is running its first "rookie" NFT
With artwork by Arturo Torres, 3626 versions will go live on August 31
NFTs will also be issued alongside the token, with the following use potential:
Video chat with Young
Early airdrops
Autobiography, apparel

Website Support

A large team of websites analyzing each ecosystem has emerged. They also provide players with insights on undervalued or overvalued cards and strategies around fantasy aspects. OwnTheMoment, MomentRanks, and TheFirstMint cover Top Shot and All Day, while SorareHub and SorareScout are popular spots for Sorare fans. By investing in one of these websites or even building your own, there may be opportunities to generate income. Users with less capital can write articles or conduct analyses for these websites for smaller compensation.

Conclusion

Sports NFTs will become a massive gateway for onlookers to enter the cryptocurrency ecosystem. Just the beta version of Top Shot attracted millions of users and generated nearly $1 billion in sales. As marketing increases, these products will become more mature, and more users will come in from the sidelines. NBA Top Shot is where Dapper initially tested multiple innovations in newer products, and many of the early issues in the system seem to have been resolved.

Soccer and cricket have larger and more passionate fan bases, which should fuel further adoption of Top Shot and Sorare. Major sports leagues like the UFC, MLB, La Liga, and others entering the ecosystem should drive more marginal growth. Deloitte estimates that we will see $2 billion in revenue from sports NFTs this year alone.

Trading cards make sense to the average person, and fantasy sports make sense to the average person. Sports NFTs are the logical next extension.

There were ICOs in 2017, DeFi in 2020, but 2022 will be the year of sports NFTs.