NFTs have been the breakout asset class of 2021. From digital art to a profile picture on social media, from a virtual sword in an online game to a plot of land in the metaverse, we look at the growing applications of NFTs to decide if they are just hype or could potentially grow to be as big as cryptocurrencies.

Were you at a Christmas or New Year’s party recently where your friends spent the entire night talking about their Non-fungible token (NFT) collection? It is hard to have a conversation these days without some mention about the record-smashing price paid for Beeple’s collage, how sought after the CryptoPunk and BoredApe NFTs are, or how another celebrity has bought a piece of digital real estate.

An NFT is a blockchain-based digital asset that is one-of-a-kind and verifiable. The NFT is underpinned by blockchain’s distributed ledger that validates the original digital asset, thereby giving it a value. This is critical in the digital world where assets could be endlessly replicated and distributed, unlike in the real-world where assets cannot be easily “copy-pasted”.

Sales volumes of NFTs surged to US$10.7 billion in 3Q 2021, over 7x higher than 2Q 2021, according to DappRadar data. It has been estimated that the total market capitalisation of NFTs currently stands at over US$14 billion. With the physical art market valued at ~US$1.7 trillion according to Deloitte estimates, this implies NFTs represent less than 1% of the physical art market. This presents significant opportunities for the nascent NFT market to grow further.

While the initial use case for NFTs was mainly in visual arts, its application has grown further since then to include music, writing, gaming and virtual real estate. These have all come together to provide the building blocks for the global, virtual, interconnected worlds or ‘metaverse’ we could be living in future.

1. NFTs as visual art and collectibles

One of the key milestones for NFTs as art was achieved in March this year when digital artist Beeple sold “Everydays: The First 5000 Days” at Christie’s for US$69 million. The sale of the collage of Beeple’s works from the beginning of the project in 2007 made him one of the most valuable living artists. This was further validated by the fact that the sale was made through an auction on Christie’s, which has sold some of the most famous paintings in history.

Ever heard of Crypto Punks, Bored Apes, and Pudgy Penguins? Beyond being just aesthetic pieces, NFTs have created a movement around community-owned collections of profile pictures. In a virtual world where people do not want to be looking the same, NFTs could play a major role in defining one’s digital identity in the future. Individuals could use NFTs in the same way that brands rely on slogans and other intangible assets to establish how they would like to be seen.

2. NFTs in entertainment

NFTs offer a chance for mass retail to own a piece of their favourite entertainers in music, film, sports, and fashion through fan tokens, which are essentially tokens with member rights. These rights can be financial in nature such as shared royalties, or they can be non-financial such as special access as a super fan, or a combination of the two.

In the realm of sports, NBA Top Shots collectors may get invited to an All-Star game, or could participate in a lottery to meet the players of their favourite team. Likewise in music, a collector of the NFT for a band’s new album could get a split of royalties from a documentary made on the band. This is exemplified by a NFT album released by the Kings of Leon, which offers different token types. While the album was released on major platforms such as Spotify and Apple, only the NFT version comes with special perks. One of the tokens provides the owner with front-row seats at live shows for life. The token owner also receives VIP treatment that includes a personal driver and concierge, as well as exclusive lounge access.

3. NFTs in content creation

“Web3” has been defined as a more democratised internet, supported by the growth of content creators and decentralised content platforms. In the area of writing, NFTs can be used for governance as well as writer compensation. This has found application on Mirror, a decentralised, user-owned, crypto-based publishing platform. Each essay on Mirror gets minted as a NFT tied to tradeable $ESSAY tokens. Readers can purchase these $ESSAY tokens and own a fractionalised part of the essay. Like a stock dividend, future revenue generated from the essay can be shared with holders of the $ESSAY token. In certain ways, the Mirror project appears to be a tokenised form of traditional content platforms, without any middleman who could take a slice of the royalties.

4. NFTs in gaming

According to DappRadar, in-game items generated US$2.3 billion in trading volume in 3Q21, representing 22% of total NFT trading volume. Axie Infinity provides an example of how NFTs are incorporated in gaming. An NFT called an axie can be created, bought and sold through the in-game marketplace. Through playing the game, players get to earn tokens which could then be used to breed other Axie NFTs. It has been reported that players of the game created by Vietnamese developers can earn several hundred dollars per month, potentially exceeding the wages of college graduates in developing countries.

5. NFTs in the Metaverse

The “metaverse” has been a buzz word recently, especially after Facebook renamed itself as Meta. In its simplest form, a metaverse is a digital universe created through a combination of various technology, including virtual reality and augmented reality. Users can “live” within this digital universe, driving the possibility of virtual real estate.

Meta is building out its metaverse that supports NFTs, including the ability to display and trade NFTs. Its CEO Mark Zuckerberg has commented that “you can think about the metaverse as an embodied internet, where instead of just viewing content — you are in it. And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage, like dancing, for example, or different types of fitness.”

Apart from Facebook’s metaverse, there are other metaverses being created as well. In June 2021, digital real estate investment firm Republic Realm paid almost US$1 million for a key plot in the Decentraland metaverse that was sold as an NFT. One of the key propositions is that the land can be subdivided, allowing each sub-plot to be sold or leased as its own NFT. This creates the opportunity to offer a digital real estate fund for investors just like a REIT in the physical world. For investors who are not able to purchase prime digital real estate, they would still be able to own a fractional piece of the asset.

Since the beginning of civilisation, human beings have collected objects like art that appeal to our feelings. The value of such items is in turn determined by market demand and supply, and prices go up and down depending on many factors including the scarcity and utility of the items.

While a lot of hype around NFTs have been driven by the jaw dropping transaction values for digital art, NFTs have found other uses in the form of supporting the content creator economy, decentralised platforms, as well as the metaverse. These uses can have a large total addressable market if investments are made to improve the existing infrastructure for NFTs, and allow NFTs to become the digital goods of the new economy.

We should also not neglect the idea that NFT’s broader value may lie in the cultural shift as we have increasingly shifted our lives online. Our workplaces and communication are now largely in the digital realm, and it is no surprise that the items that hold value to us are moving digital too. Like in the case of NFTs in content creation, there is a cultural value for artists who are now able to commercialise their art and connect directly with the buyer who has a true, provable certificate to demonstrate ownership. By changing the way we define ownership and how content is consumed, the interest in NFTs as an asset class may just be sustained for some time.

This research is commissioned by ADDX in collaboration with Canopy Research, a bespoke insights provider by Beansprout dedicated to guiding investors along their financial journey. Beansprout is a next-generation investment advisory platform licensed by the MAS.

This article is for general informational purposes only and has not been independently verified to ensure its accuracy and fairness. This article does not constitute any advice or recommendation from ADDX or ICHX Tech Pte. Ltd. (“ICHX”) or any of its affiliates. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. No representation, warranty or other assurances of any kind, expressed or implied, is made with respect to the accuracy, completeness, adequacy, reliability validity or availability of any information in this article. Under no circumstance shall ADDX or ICHX have any liability to the reader for any loss or damage of any kind incurred as a result of the use or reliance on any information provided in this article. This article may not be modified, reproduced, copied, distributed, in whole or in part and no commercial use or benefit may be derived from this article without the prior written permission of ADDX and ICHX. ADDX and ICHX reserve all rights to this article.