Industry Insights | Shanghai has introduced relevant policies to encourage the development of NFTs, bringing new opportunities to the NFT industry?

NFT is the abbreviation for Non-Fungible Tokens, which literally means non-fungible tokens. It can be understood colloquially as a digital asset on the blockchain that serves as a proof of ownership for digital artworks, event tickets, and other digital goods, and is the unique cryptocurrency token used to represent digital assets.

Each NFT is mapped with a unique serial number and stored in a decentralized, tamper-proof, traceable, and collectively maintained shared database known as blockchain. Unlike homogeneous tokens that use blockchain technology such as Bitcoin and Ethereum, which are also divisible and non-substitutable, NFTs are unique assets in the digital world and can be bought and sold freely like other assets.

Behind NFTs is always an asset, which can be images, collectibles, music, etc. NFTs are stored on the blockchain, but due to costs, the assets they accompany are not necessarily stored on the blockchain and may be stored elsewhere on the network, such as IPFS (Inter-Planetary File System).

Source: Compiled by Frost & Sullivan

The main characteristics of NFTs include uniqueness, indivisibility, immutability, transparent execution, tradability, and continuous revenue generation.

NFT'suniquenessIt refers to the distinction from traditional artworks, which can be copied at will through methods such as tracing. Each NFT is mapped to a unique serial number and stored and traced through blockchain-based rights confirmation. Therefore, each NFT is unique;IndivisibleIt means that each NFT is the smallest trading unit, and it cannot be infinitely divided like Bitcoin or Ethereum;UnalterableIt means that NFT metadata and their transaction records are stored continuously, and once a transaction is confirmed, it cannot be manipulated or tampered with;Transparent executionIt refers to a series of NFT-related activities, such as on-chain transfers, sales, and purchases, which are public, transparent, and traceable;Tradable and continuously yieldingIt means that each NFT and its corresponding product can be traded and exchanged. The continuation of earnings refers to a certain proportion of the previous 'copyright owner' being distributed after each transaction with an NFT.

The period from 1993 to 2017 was the 'seed phase' of the development of the NFT industry.As early as 1993, before the birth of NFT products, the concept of NFT had already taken initial form. At that time, Hal Finney proposed the concept of 'cryptocurrency trading cards,' but due to technical limitations, NFTs only existed in theory. The 'colored coin' that emerged in 2012 is another proto-form of a token similar to NFTs. Colored coins consist of small denominations of Bitcoin and can represent various asset types such as coupons and shares.

In June 2017, the world's first NFT project - CryptoPunks - was released on Ethereum, marking the official birth of the NFT industry.In October of the same year, the Dapper Labs team launched a game called CryptoKitties. The emergence of NFT games further propelled the development of the NFT industry, and the concept of NFT was first proposed by Dieter Shirley, CTO of Dapper Labs, in the same year.

The period from 2018 to 2020 was a construction phase for the development of the NFT industry.Between 2018 and 2019 alone, over 100 new projects emerged in the NFT ecosystem. Led by NFT trading platforms OpenSea and SuperRare, transactions on NFTs gradually became more convenient and complete. At the same time, the application areas of NFTs have gradually expanded from gaming and art to music and other fields. The combination of NFTs and decentralized finance (Defi) led to the creation of Gamefi, further expanding the NFT industry.

Since 2021, the NFT industry has entered a period of rapid expansion.The digital artwork 'Everydays: The First 5000 Days' by artist Beeple was sold at a price of $69.34 million at Christie's, marking the successful “internet memeification” of the NFT concept through this landmark event. The sales of the blockchain game Axie Infinity have also risen rapidly, driving the overall NFT market into a period of rapid expansion.

Currently, the core value of NFTs is mainly reflected in three aspects: the assetization of digital content, cost reduction and efficiency improvement for digital asset transactions, and enhancing the commercial status of content creators.

Firstly, NFTs can tokenize digital content.Under the current internet system, users only have the right to use digital content and cannot truly make digital content a personal asset. The emergence of NFTs has expanded the boundaries of digital assets, which are no longer limited to digital currency. Any unique asset can be minted into an NFT, whether it is physical assets or various digital contents such as images, audio and video, game items, etc. This has increased the tradability of digital content (for example, a virtual land in the game Axie Infinity was sold for 888 ETH).

The second core value of NFTs is their reliance on blockchain technology to ensure the uniqueness, authenticity, and permanence of assets, as well as to effectively solve the problem of rights confirmation.Decentralized storage ensures the permanent existence of assets, preventing them from disappearing due to the cessation of operations by centralized platforms. This is conducive to increasing asset transaction rates and reducing transaction costs (such as the cost of authenticating collectibles), enhancing asset liquidity, and attracting more buyers of digital assets to engage in trading activities.

The third core value is the decentralized trading model of NFTs, which has, to a certain extent, enhanced the commercial status of content creators.Making the results of content creators more monetizable and tradable, reducing the commission split on centralized platforms. Through smart contracts embedded within NFTs, creators can obtain continuous royalties from subsequent transfers. Take OpenSea as an example; NFT creators can set a royalty rate of up to 10%.

Currently, the Chinese NFT market is still in its infancy, with mainstream domestic NFT sales or trading platforms mainly including Alibaba Auction, Ant Group's Fan Token, Huanke, and NFT China.

The digital auction channel of Alibaba Auction can be divided into two categories: digital copyright transactions and digital collectibles. The digital copyright transaction channel went live on August 15, 2021. Its auction items are authenticated and listed on the blockchain “New Version Chain” by the copyright alliance. Buyers can obtain the copyright of works other than personal rights such as the right of signature, and the copyright can be transferred again 90 days after the transfer. Digital collectibles are built on Ant Chain and TreeMap Chain, covering multiple fields such as art, sports, and esports. The copyright of digital collectibles belongs to the copyright holders of the works, and buyers can only use them for non-commercial purposes.

Ant Chain Fans' Token is a mini-program launched by Alipay. Its NFT collectibles are authenticated and traded based on Alibaba's Ant Chain. The copyright of digital collectibles belongs to the issuer or creator, and buyers only obtain non-commercial usage rights. Buyers can transfer them for free after 180 days, but trading is not supported. Currently, more than ten NFTs have been listed on Ant Chain Fans' Token.

Comparison of Mainstream NFT Trading Platforms in China

Source: Compiled by Frost & Sullivan

Firstly, the downstream application areas of the NFT industry are expected to continue expanding and maturing.NFTs are currently developing rapidly in the fields of collectibles, art, and gaming, but their development in other areas is still in its infancy. However, with the growth of NFTs, their application scenarios will continue to expand, becoming more integrated with various fields, such as GameFi (like Land of Strife), DeFi (like Meme), insurance (like iearnfinance), community tokens (like Whale), virtual worlds (like The Sandbox), etc., all of which are expected to see better integration.

Secondly, NFT works will form independent IPs, enhancing their own value.With the development of NFTs, there may emerge IPs related to NFT works. These IPs can be supported by games or collectibles, combined with fields such as trendy products and toys, and may form their own fan base in the future, fostering a fan economy.

In addition, more traditional consumer enterprises are expected to participate in the NFT market.More and more traditional consumer brands are embracing the NFT market, using it for marketing. Brands such as Audi, Louis Vuitton, Adidas, Anta, and Procter & Gamble have successively 'tested the waters' with NFTs, selling NFT products or using them for brand promotion. In the future, more consumer brands are expected to become participants in the NFT industry to achieve goals such as brand value dissemination and profit through virtual product sales.

Finally, IPs in the NFT space are expected to be re-exported into traditional entertainment industries.The continued popularity of the NFT industry is expected to lead to some popular NFT projects developing unique digital content IPs that are beloved by the public. In the future, it is hoped that these will extend to the traditional entertainment industry, combining with traditional fields such as film and television, and trendy culture, including but not limited to creating related animations and distributing blind boxes.

In summary, although the NFT industry still faces issues such as speculation and the confirmation of native assets at this stage, in the long run, NFTs are expected to fully leverage their excellent characteristics such as immutability, transparent execution, tradability, and continuous returns. With the continuous maturation of technology and certain support from national policies, NFTs are poised to play a central role in digital content assetization, reducing costs and increasing efficiency in digital asset transactions, enhancing the commercial status and creative enthusiasm of content creators, and promoting progress in multiple fields such as decentralized gaming, finance, and online community building.