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The NFT Technology Stack: Maybe Only Imagination Can Constrain NFTs
This article explains the NFT technology stack and application cases in detail
In previous articles, we explained the concept and classification of NFTs. In this article, we’ll take a deeper dive into the NFT stack and some use cases that have been developing well over the past few months.
NFT technology stack
Layer 1: NFT infrastructure layer
The NFT blockchain layer has existed for a long time, and its success can be seen in some special applications (such as Flow and WAX). Ethereum is arguably still the largest NFT blockchain, and the ERC721 standard of NFT is also based on Ethereum.
Some NFT projects in the past have brought a lot of congestion to Ethereum (such as Crypto Kitties in 2017), so blockchain scaling solutions are particularly important. Among them, OpenSea, the largest NFT market, is built on Polygon, other projects are built on Rollups-based Ethereum Layer 2 scaling solutions such as Immutable X, or some projects have built their own side chains, such as Axie’s Ronin. Dapper Labs chose to build its own Ethereum Layer 1 blockchain Flow to meet these needs and achieve scalability.
Layer 2: Creator & Application Market Layer
We have seen a huge increase in the usage of both the second and third layers in the crypto bull market, and this is the direct benefit part of the NFT Development stack after the creator economy realizes the commodity marketization.
In February 2021, the sales of major NFT marketplace platforms reached $200 million. Among them, Beeple’s personal work “Everydays: The First 5000 Days” sold for $69.3 million, and Twitter founder and CEO Jack Dorsey’s first tweet also sold for $2.9 million.
At the second layer, the creator and app marketplace layer, we observe:
A liquid marketplace for creator content
Content priced by creator influence/past experience
Availability and Ownership of Artwork
commercialization of art
The second layer is mainly about the specific application of NFTs projects. In our previous article, we discussed the difference between “functional NFT” and “non-functional NFT”. This can also be further divided according to user profiles and NFT functions. Today, new concepts emerge, such as the emergence of creator development tools, the mainstreaming of generative art, and the rise of the metaverse.
Layer 3: Aggregator & Curated Product (Community) Layer
The third tier is the community, the DAO and CryptoVoxels, a platform that allows collectors to showcase their work. Virtual galleries and real estate are a case in point — Axie Infinity Universe recently sold eight parcels of land for $1.5 million.
The third and fifth layers can be called the “collector economy”, which is an extension of the creator economy. Collectors buy and display art, and DeFi provides collectors with a series of financial tools for NFTs, such as lending, leasing, staking, and trading their NFTs. This is actually the community, platform and financial products derived from art investment.
Tier 4: Valuation & NFT Fair Valuation
The fourth layer is about the pricing and evaluation system of NFTs. This is essential for the fair valuation of digital art and for collectors to track their portfolios. The fair valuation of new NFTs and other forms of art is very important to the sustainable operation of the “collector economy”. Without a fair valuation process, the financialization of NFTs will become difficult, or will eventually become a “bubble”.
We can see that different experiments are going on, such as Upshot using prediction markets or regulated opinions for valuation; while at showtime, the more “likes” an artwork gets on the platform, the higher its price. . The existing standard pricing mechanism takes the form of an auction. Some NFT platforms are adopting the bonding curve crypto-native mechanism to determine the price of the next NFT sold by that collector or artist based on supply and demand conditions (or other designs).
Layer 5: When DeFi meets NFT
The fifth layer is to financialize digital assets and use them for lending, leasing, etc.
Credit/Loan: Collectors will get the proceeds
Selling/renting reproductions: a copy fee
Collateral: Borrow assets based on your NFT (portfolio)
Index Funds: Bringing Liquidity to Your NFT Assets
NFT use cases
Popular NFT use cases at this stage are digital art, collectibles, and games. However, using NFT as a new distribution method and sales method of some commodities, tickets, real-life assets, game props, etc., this model is still being explored.
Collectibles with limited supply or distinctive branding can retain long-term value
The digital art and collectibles market is at the forefront of the NFT buying boom in 2021. Collectibles with generative art and unique IP retain their long-term value. The average price of each piece can be seen as a measure of the long-term value of an NFT.
According to the Credit Suisse Group 2020 report, 5% of the net worth of HNWIs (high-net-worth individuals) are collectibles and works of art. The “Everydays 5000” NFT is a digital version of his collectible.
Hashmask and CryptoPunk’s NFTs have a limited supply of 16,000 and 10,000, respectively. Their NFTs are strongly branded, which is also reflected in the price, with the average price of their pieces being $2,400 and $16,000 respectively.
Collectibles: Supply vs. Average Price (usd)
In the long run, we see the creator economy cementing its place in the media and entertainment industry with the rise of monetized user-generated content (UGC), creator toolkits, and NFTs. Similar to virtual real estate, virtual galleries, etc., the integration of AI into NFTs could be another interesting trend.
From a commercial point of view, NFTs can have a wide range of applications, such as commodity sales, ticketing systems (already used at the DevCon conference), and may also be used as a target to trade commodities (such as Centrifuge & Persistence). In fact, the Matthew effect will be very obvious in this field, and 1% of NFT collectibles will have 99% of the value in the market!
