Da Hongfei: Decoding NFT and entering the metaverse, how will blockchain and value entities be linked?

When commenting on the progress of this round of NFTs, if we regard the crypto market, popular culture, Generation Z consumerism, technology, cyberpunk thought and digital art as many unrelated independent activities that just happen to be carried out at the same time, we will fall into a sense of isolation in various fields, while turning a blind eye to the most important overall fact - digital value carriers have occupied an increasingly important position in the world we live in, and cultural values ​​are also moving towards digital form. The beginning of full digitalization means that the world we interact with will evolve into a more virtual era, in which "virtual" is the reality faced by everyone.

The Birth and Advancement of NFT

In the first quarter of 2021, "NFT" was undoubtedly a phenomenal buzzword. From the American digital artist Beeple's appearance in Christie's auction house, his NFT work "Everyday: The First 5000 Days" was sold for 69 million US dollars, to the soaring daily activity of NBA Topshot (Topshot's photos of NBA stars' wonderful moments), NFT has changed from an obscure professional term to a readily available mass entertainment commodity. In fact, NFT (Non-Fungible Token) is intended to describe a standard for encrypted tokens. In 2018, the ERC721 standard was officially launched, which improved the NFT technology we are currently familiar with. The market popularity and transaction volume of NFT did not grow linearly, but increased by several orders of magnitude in a short period of time after 2021.

Looking at the NFT direction, it can be divided into three stages of development:

• Embryonic stage (2012-2016): Non-homogeneous and unique digital asset standards began to emerge and were put into practice in bills, bonds, games, and collectibles.

• Development period (2017-2020): Starting with CryptoKittie, on-chain games and collectibles saw phenomenal applications for the first time, and the industry division of labor and upstream and downstream industries related to NFT began to take shape;

• Explosive period (2021-present): The infrastructure has begun to take shape, the crypto asset industry is in an upward cycle, consumer behavior has shifted, the digital art creation group has flourished, and classic IPs have entered the market.

Looking only at the NFT transaction volume in the past year (as shown in the figure below), the explosive growth this year can be summarized as follows: First, the increase in supply has stimulated the rise in demand. The entry of traditional IP (including sports, film and television, and music, etc.) and the accumulation of high-quality original works have provided NFT suppliers with a wealth of tradable assets. Secondly, the growth of on-chain assets and the entry of new users are reflected in the strong demand for NFT purchases and transactions. Finally, the supporting tools and infrastructure are relatively complete, providing a convenient place for transactions and reducing friction costs.

From the perspective of technological development and business model, NFT uses IP as a carrier to provide an unprecedented high-liquidity market for copyright-related transactions; using encrypted assets as a trading medium, it brings a new concept of assets and ownership. NFT has become a bridge connecting real-world assets and digital world assets. Although the transaction volume and popularity of NFT have declined recently, the number of daily active users has remained in the tens of thousands, the daily transaction volume has remained in the millions of US dollars, and the market value of NFT-related projects has reached billions of US dollars.

As of the end of March 2021, the total market value represented by NFTs has exceeded US$20 billion, accounting for 1% of the total market value of the crypto market during the same period. Regardless of the growth in market value, trading volume or market popularity, the NFT field has basically broken free from the growth ceiling of the crypto market itself.

Digitalization of cultural value and new business forms

If we understand NFT as a container of value, we must first clarify the adaptability of the container, and secondly, it cannot be separated from the value of the content it carries. In theory, NFT can be anything digital: sound, image, text, a prop in a game, or even a digital certificate of ownership of a physical object in reality, etc. Each NFT can be bought and sold like a physical asset, but blockchain technology allows people to track its ownership and validity. Gucci has collaborated with technology companies on an AR virtual shoe series. Louis Vuitton and Burberry have designed limited skins with brand characteristics for characters in League of Legends and Honor of Kings, respectively.

From the perspective of contemporary art, the great success of Beeple's works is a major leap forward in the form of digital art, and a successful integration of his creative concepts and experimental presentation methods. Long before NFT or digital assets, the exploration of digital art has begun since the birth of the information industry. Laposky, who used an oscilloscope to capture light wave images since the 1950s, was the first artist to create in digital form. He operated precision instruments for electronic photography and assembled them into a series of works. In the 1990s, Faure Walker, who integrated various creative tools such as painting, photography and PS, also insisted on creating a digital artwork every day for several years. Until today, Beeple has issued tokenized artworks natively on the chain. These creators are trying to expand the carrying limit of humanistic values ​​with the help of technological innovation. Previously, it was difficult for people to imagine how a JPEG file was priced and traded. Based on blockchain, creators have completed a complete set of work production, circulation, pricing, right confirmation and anti-counterfeiting traceability processes in their native digital environment and using their open network facilities, and avoided the gray areas of these complex links.

In the field of commercial artworks and their derived art consumer goods and cultural peripheral products, the younger generation of consumers have increased their acceptance of new things and their consumption power of cultural products, which has gradually revealed the potential of the popular collectibles market. Generation Z is an audience experience established in digital narratives and is the native inhabitant of the contemporary digital world. Unlike the millennials who grew up in the transition period between fine art and digital art narratives, they naturally identify with the value of electronic forms. For millennial consumers, NFTs are naturally highly integrated with various online memes, and their high recognition of fun has naturally greatly increased the appeal of NFTs.

The high liquidity, open prices, and transparent transaction process achieved by blockchain are unattainable by offline transactions. NFT has overturned the power structure of the creative and content industries, returning more control to creators. I believe that more and more creators and IPs will join the NFT ranks. Taking the current on-chain data as an example, the average single transaction amount of NFT is around 10,000 yuan, and the chain may generate a new market of hundreds of billions of yuan, such as Pop Mart.

As cultural identity is increasingly concentrated on digital carriers, the digital world's ability to meet various human needs is also improving. When people can carry out sufficiently rich economic and cultural activities in virtual space, a new way of interacting with the world has also emerged, namely the metaverse.

Metaverse: Reality built on virtuality

Blockchain has built an open and stable value carrier and provided ample possibilities for the flow of digital value and collaboration between individuals, but building a complete worldview experience still requires huge infrastructure support. 5G, VR equipment, IoT facilities, AI technology and clean computing power are all indispensable key industry pillars. In the direction of blockchain, digital identity systems, decentralized storage and fog computing still need to be developed. According to the consensus formed so far,

The five elements of the Metaverse include a reliable economic system, virtual identity and assets, strong sociality, immersive experience, and open content creation. If the Metaverse is to eventually create an independent immersive virtual digital world with an open, self-consistent economic system, low entry restrictions, smooth real-world interaction, and sustainability, then we are still in the embryonic stage of the Metaverse.

The metaverse process can be divided into the following stages according to the development level of the pillar industries:

• Phase One - Social + Gaming: The immersive experience takes shape, basic entertainment and social functions can be realized in the virtual world, and a small number of players form a sense of belonging to the metaverse.

• The second stage - the concepts of virtual/reality gradually blur: elements of the real world such as consumption, finance, and life services are connected to the virtual network, the user base and usage time are further improved, and the metaverse becomes an important part of social life.

• The third stage - the real Internet: a digital universe at the "Oasis" level in "Ready Player One", where the virtual and real worlds are inseparable, the user base and usage time reach a huge level, and a new civilization is formed in the virtual world.

Looking at the current status of the development of various pillar industries, the blockchain direction is the most complete and most likely to be implemented. NFT has become a new value carrier, making virtual items assetized, thereby realizing the value transfer of data content. By mapping digital assets, online equipment, decorations, and land property rights have become tradable entities.

DeFi's efficient and reliable financial system can accelerate the construction of the metaverse. Users' financial operations are not restricted by geography, economic level, or trust. Through smart contracts, they can be executed automatically and autonomously to avoid black box operations. The combination of DeFi and NFT can expand to the content, intellectual property, records and identity proof, financial documents, etc. of the metaverse, creating a transparent and autonomous financial system that can accommodate more diverse assets and more complex transactions, and support the construction of metaverse civilization.

Blockchain sectors focusing on the metaverse are also beginning to take shape. The old virtual reality project decentraland has entered a stable development stage, and the recent rapid growth of the digital image field driven by cultural and creative industries has increased the richness of the ecosystem. In addition, game development companies led by Flow have already gained strength, and we can expect more interesting game products to appear.

What is worth looking forward to is that we have seen the early residents of the future world pouring in. According to Roblox's annual data last year, there are an average of more than 30 million users active in Roblox's elemental world every day, with a year-on-year growth rate of nearly 80%. Of course, this is just the beginning, and we look forward to the arrival of a broader and richer digital world.