Are NFTs already in crisis?
Most people became aware of NFTs after March 2021, when digital artist Mike Winkelmann – known as Beeple – sold one of his works at a Christie's auction for the equivalent of $ 69 million in Ether, a cryptocurrency. Winning the work, titled “Everydays: The First 5000 Days”, was the programmer and digital art collector Vignesh Sundaresan.
Since then, NFTs have attracted more and more attention, becoming one of the assets most important in the crypto sector, a term which indicates everything that has to do with the blockchain and its applications. The acronym NFT stands for Non-Fungible Token (in Italian it can be translated as “non-reproducible token”) and indicates a digital certificate of authenticity: in short, they are labels that, through the blockchain, certify the originality and uniqueness of a content. In the case of Beeple and most NFTs, a visual work of art.
After a year of strong growth, the sector had peaked last September, when it had registered about 225 thousand sales in a single day. Things have changed since then, as a much-cited article in the Wall Street Journal noted and commented on in the industry these days: in the last week of April the number of daily trades dropped to about 19,000, a drop of 92%. The number of wallets – digital wallets for cryptocurrencies – active in the market also dropped by 88%, from 119,000 in November to 14,000 in early May.
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The drastic decline in activity seems to go hand in hand with a general decline in attention and enthusiasm in comparisons of the sector. In March 2021 Sina Estavi, an entrepreneur active in the field, was awarded the NFT linked to the first tweet in history (published on May 21, 2006 by the co-founder of the social network, Jack Dorsey) for 2.9 million dollars. Last April, just over a year after the purchase, Estavi relisted it on OpenSea, the leading NFT trading platform, initially asking for $ 48 million. At the moment, the highest offer it has received was $ 24,000.
Things are no better on Coinbase, a cryptocurrency exchange service that launched Coinbase NFT this month. a section dedicated to these tokens. On its first day, the service had fewer than 150 registrations, according to data from analyst firm Dune. About a week after launch, only 1,236 have used it to buy an NFT.
There are many factors behind this crisis. Among all, the exponential growth recorded by the sector during 2021 and at the beginning of 2022, a trend that is difficult to sustain forever. Also because, despite the rise, the sector has not managed to expand as much as was necessary in the number of users. According to Chainalysis, a cryptocurrency analytics firm, the 9.2 million NFTs sold up to last April were bought by about 1.8 million people. About five NFTs for each buyer.
Monkeys and metaverses
The centralization characteristic of this sector is also reflected in the overwhelming power accumulated by companies such as Yuga Labs, creator of the successful NFT line Bored Ape Yacht Club, which last March had acquired two other hugely successful lines, CryptoPunks and Meebits. In the same days, the company announced that it had received $ 450 million in investments to build “a metaverse for NFT”, a video game that should be called Otherside. Also in March, the company presented ApeCoin, a cryptocurrency to be used to buy goods and services in this digital world.
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At the time of ApeCoin's presentation, reporter Casey Newton pointed out how the currency – and the corresponding DAO, a type of organization that is accessed by purchasing of tokens – allow Yuga Labs to control the product and keep part of the profits, without having to contend with other investors. According to Newton, the company “can talk about the virtues of decentralization while enjoying the benefits of centralization. “
On April 30, Yuga Labs put up for sale the first assets for its Otherside metaverse, generating a very high demand, despite the period of general decline, which ended up bringing to light a structural flaw in the blockchain. Each transition that takes place on Ethereum, the blockchain used by Yuga Labs, in fact provides for the payment of an additional expense, called the “gas fee”, with which all users pay the miners, those whose computers work to validate transactions. This commission is not fixed but increases in relation to the traffic recorded in the network: due to the great interest from Otherside, this additional expense has multiplied. A user, for example, has come to pay $ 45,000 in gas fees to cover the purchase of an NFT that cost just over five thousand.
As for Ethereum, it did not cope with the traffic caused by these 55 thousand NFT, going into overload and creating a lot of inconvenience. In those same hours, taking advantage of the chaos related to the event, many users were victims of theft and phishing attempts by bots that emptied their wallets. An increasingly common phenomenon in the world of cryptocurrencies: in 2021 alone this type of scam earned 14 billion dollars.
A few days after the confusing launch of the series linked to the metaverse Otherside, the decline it has interested in NFTs, it also overwhelmed Bitcoin, the main cryptocurrency in the world, which today has lost 54% of its value compared to the peak of last November (falling below the psychological threshold of thirty thousand dollars). Ethereum also had similar losses.
The cryptocurrencies that have lost the most value, undermining the entire crypto economy, are however the so-called stablecoins, translatable as “stable currency”, cryptocurrencies designed to maintain a fixed value – usually one dollar – to prevent the swings typical of this speculative market. Some of these, such as USDC and Tether (not to be confused with Ether), maintain this stability by accumulating liquidity and assets with which to “hedge” the stablecoins in circulation.
There are also “algorithmic” stablecoins, such as Terra, which does not have this type of reserves “but maintain their value based on an algorithm that automatically creates a balance between the stablecoin and a partner currency”. This link is called peg (hook) and is based on the constant creation and sale of tokens: in the case of Terra, the reference currency was the Moon. These are systems whose stability, according to many critics, exists only in name, and indeed encourages the continuous issuance of new cryptocurrency units, without any hedging.
Over the course of this week, Terra , USDC and Tether have all lost their peg to the reference currency, creating huge losses and also taking with them Bitcoin – which has dropped in value to 24 thousand dollars – on which Terra had invested a lot of resources, in a vicious circle that made it lose 800 million of dollars (estimate updated to 11 May) to the cryptocurrency market and that to Alex Hern of the Guardian reminded the chain of events that led to the fall of the investment bank Lehman Brothers, symbol of the financial crisis of 2008.
Until a few weeks ago, the NFT crisis was attributed by their supporters to inflation or other contingent factors. The facts of the last few days, on the other hand, indicate structural causes of the entire cryptocurrency sector, and some analysts speculate that the collapse of NFTs may be only a first sign.