With the emergence of decentralized networks that can trustlessly secure and process peer-to-peer transactions, it doesn't only cover digital money.
Non fungible tokens (NFTs) are a new form of digital asset that are very similar to cryptocurrencies. Instead of having 1 of 21 million interchangeable bitcoins, each NFT is unique, stores metadata, and can be traced to it's source of origin.
These tokens can be openly sent and received by anyone that uses the same network. They can even be interfaced with smart contracts, further compounding the number of digital products that can be created.
Some examples of NFT products:
Digital collectables and art
In-game items and digital land
- AxieInfinity, Decentraland, EmberSword
- For more information on NFTs as in-game items, check out my article here.
NFTs with embedded services
Current market and impact:
$2 billion USD GMV for Q1 2021, an increase of 2,100% from Q4 2020. Please read the full report if you want to dive in further.
Note: This metric is only for NFTs on Ethereum, follows the ERC-721 standard and does not include fiat purchases like TopShot.
Yes, there is real demand for these products. Right now, at least.
The golden question is, will it last?
While the data looks promising, there has not been enough time to prove that a sustainable market exists, in my opinion. Let's see how NFTs perform in a bear market.
NFT marketplace can be classified into two main streams:
Primary Marketplaces (Platforms)
These marketplaces are where NFTs are initially released; either by the original creator, or a partner organization that helps a merchant create and distribute NFTs.
It is important to note, since NFTs are still very new – a lot of the merchants are developers themselves, and have the in house capabilities to create a marketplace storefront.
As the space starts to attract the mass market, less tech savvy individuals may look to get assistance with their own NFT related product idea. These platform-based services include companies like:
If I have time i'll do a review of this project.
These platforms provide a branded storefront, have native capabilities to mint NFTs, and require very little code to accept crypto payments. Functionality that makes it much easier for a layman merchant to participate.
When it comes to digital products, these types of marketplaces pose the most competition to existing eCommerce platforms, if this space gets established.
Secondary Marketplaces (Aggregators)
Once NFTs are distributed to buyers, peer-to-peer exchange is conducted on secondary marketplaces. Acting as aggregators, they help consumers list and sell their NFT assets. Given most buyers do not have marketing experience or the teams to create their own storefront, these services provide an easy way to re-sell individual NFTs.
The technology powering these new products is brand new. There are still many hurdles that block mainstream adoption, despite all of the interest and success.
Most of these NFTs are on Ethereum. Due to scaling challenges, Ethereum is experiencing very high transaction fees – making it difficult to transact lower value items, especially for secondary sales. Many NFT producers have opted to move to other chains in the mean time, which makes it even more difficult to track the total market for these products.
For example, Axie Infinity, a blockchain game moved to their own side chain with reduced transaction fees, as a core game mechanic that promoted sales - breeding - was previously too expensive.
More complex NFT sales like land, currently supported by a first come first serve basis, ends in frustration more often than not. Fortunately for NFT merchants, this is generally due to extremely high demand. A good problem to have.
1) GMV Increase
by product, type of merchant, and transaction volume
NFT products are a blue ocean. By supporting this channel, eCommerce leaders can further expand their TAM, and enable new entrepreneurs and ways to conduct digital commerce.
2) New revenue streams
NFT merchants, royalties on resale
NFTs allow for merchants to diversify their revenue streams. Physical goods can layer in with a digital representation, or promotional program. It also provides the ability for merchants selling highly liquid goods to earn royalty income on secondary re-sale.
3) NFT partner ecosystem
connect merchants with experienced NFT developers
eCommerce platforms can grow their networking effects by connecting interested merchants with blockchain development partners that can assist with the creation of NFT assets.
What could this look like? What's required to make this happen?
[ To be completed ] : user flow for a hybrid physical / NFT store, and what products could be listed
Allow merchants to list NFTs as sellable products on on their storefront.
Partner with or build out a simple NFT creation platform laymen can use to create assets for sale.
- Buyer and merchants wallets (onboarding req)
- Web3 plugin/transfer interface on checkout screen. transaction identification/integration for merchants.
- NFT generation. Either a platform for user driven creation or partner to create and send NFTs to merchant address
- Inventory listing on Shopify platform
- Crypto accounting. Depends on payment method, need to covert to local currency value at time of receipt, and what tax laws may be present.
Challenges & Risks
1) Rapid technology change
Even comparing the NFT space from now and last year, showcases a precambrian explosion of different product types, chains, and ways to interact with an NFT. If an existing provider were to enter this space, they would need a dedicated team that can stay on top of technology changes. Issues like rising gas fees on Ethereum would require pivots to keep demand high.
2) Blockchain expertise
Merchant trust is a scare resource. If an eCommerce provider were to offer support for NFT products, even if liability was waived or insured, it would require a good level of internal expertise to address any issues that create friction between merchant and service provider.
3) Market opportunity
So far, we have 3 months of data showing a 'worth mentioning' market size of $2 billion TAM last quarter. In comparison, a provider like Shopify's current GMV is $120 billion. We need to assume that incumbents would only be able to service a fraction of this, further reducing the amount of GMV contribution from this segment. The TAM is too small right now to warrant anything more than analysis or a few experiments, while more data can be collected.
4) International Regulations
Supporting NFT products also has the burden of following all international regulations, as it is a global platform. The compliance team would need to keep track of sudden changes for countries that crack down on NFT sales and taxation.
Blockchain transactions are immutable. This means that as soon as an NFT is sent to an address, that address has full ownership. Not to mention, if a sale is conducted in a cryptocurrency, the time difference can produce capital gains/loss for the merchant. This flow would need to have a clearly defined solution.
Nonetheless, an interesting vertical that is emerging in the cryptoverse.
What are your thoughts?