Will NFT, which works in tandem with DeFi, become the next hot topic in the market?

In September 2020, after the DeFi craze, the NFT concept took over liquidity mining and became popular. With the crazy surge in NFT concept tokens such as MEME, the NFT sector has become the focus of recent crypto asset investors, and is even expected to be "the next explosion point of the industry" and "extend the life of DeFi." So, what exactly is NFT? Can "DeFi+NFT" become the next new outlet?

1. The Origin and Concept of NFT

The concept of NFT began to develop in 2017. With a CryptoKitties game, a developer named Dieter, and a massive crypto bull market, NFT quickly entered the public eye.

At that time, Ethereum carried most of the token issuance and applications in the crypto field, and the concept of NFT originated from a popular application - CryptoKitties (hereinafter referred to as "CryptoKitties").

NFT is the abbreviation of Non-Fungible Token, which means non-fungible tokens, mainly issued by the ERC-721 standard. Dieter Shirley is the creator of this protocol and also the founder of CryptoKitties. After Dieter and his team defined and open-sourced the ERC-721 protocol, they launched the crypto game "CryptoKitties", which later became the most popular application of Ethereum at the time.

As we all know, the most popular token issuance standard on Ethereum is ERC-20. According to Dieter, in the summer of 2017, ERC20 and ICO were particularly popular, and many users asked how CryptoKitties and ERC20 interacted. In fact, CryptoKitties and ERC20 are not compatible because CryptoKitties are non-fungible tokens, while ERC20 is a homogeneous token. In order to find a fixed and simple answer to this complex question, Dieter proposed the concept of NFT, or non-fungible tokens.

Therefore, NFT is a concept that exists relative to homogeneous tokens. Tokens generated based on the ERC-20 standard are usually called Fungible Tokens, or NT for short, which are homogeneous tokens, also known as interchangeable tokens. Their main feature is that there is no difference between tokens, they can be exchanged at will, and they can be split and integrated. For example, cryptocurrencies such as BTC and ETH are homogeneous tokens (NT). There is no essential difference between each BTC and they can be exchanged and split.

Dieter's innovation is to introduce scarcity into the concept of cryptocurrency. The main features of NFT (non-fungible token) are uniqueness and indivisibility. Each non-fungible token is different. They are independent and unique tokens that cannot be replaced by each other. In addition, the minimum unit of NFT is 1, which is indivisible. This means that your NFT cannot be exchanged with someone else's NFT, nor can it be split into 0.1. Common BTC and ETH can also have 0.001 pieces, while the unit of non-fungible tokens can only be 1 and cannot be split into 0.01. Just like concert tickets, there is no concept of half a ticket.

Precisely because of their unique and exclusive characteristics, NFT tokens are usually linked to certain specific assets and used to prove ownership of digital items (such as game skins, digital collectibles) and tangible assets.

2. NFT’s Second Boom

The first and most typical application of NFT is the CryptoKitties game. In this game, each cat corresponds to an NFT on the chain, with a unique ID and genes, and more importantly, independent value. Since the proliferation of CryptoKitties, there are nearly 2 million cats of different styles, and nearly 90,000 addresses have at least one CryptoKitties. The most expensive cat was sold for 750,000 RMB.

As a phenomenal DApp in 2017, CryptoKitties once caused massive congestion on Ethereum, but it also made the concept of NFT popular.

After CryptoKitties became popular, many people began to issue their own ERC-721 tokens, and some games based on the concept of NFT also became popular, such as the crypto games "Age of Chains" and "Rare Pepes".

Since then, the main application scenarios of NFT have gradually expanded from crypto games to collectibles, artworks, domain names, identities and other fields, among which artworks and games have received the most attention. This was the first time NFT became popular.

Today, the NFT sector is active again and has become the focus of public attention because of its combination with DeFi’s liquidity mining. The most representative of these is the MEME project, whose token surge has caused a surge in market FOMO sentiment, and various imitations and tokens have also made NFT completely popular.

The MEME project is also called the "Pineapple" project by the domestic community (its UI design and logo are pineapples). It was originally a joke made by Jordan Lyall, the head of DeFi products at ConsenSys, to satirize DeFi. On August 15, Jordan Lyall sarcastically tweeted that a DeFi could be created by just using an Emoji as a logo and then changing the contract. "It may only take 5 minutes to launch a fake DeFi project." Later, based on this joke, the community really created the MEME coin and introduced a liquidity mining design: users who pledge MEME tokens can get pineapple points, which can be exchanged for NFT collection cards. This kind of collection card can be directly posted on OpenSea for sale.

After liquidity mining was launched, MEME coin soared 15 times in a week, and some similar projects and gameplay appeared, which attracted market attention and interest in the NFT sector.

3. Will NFT be the next trend?

NFT was originally a relatively niche field in the crypto world. Its combination with DeFi mining has made many market participants excited, believing that it is the next market trend after DeFi, or that it can help fuel the current liquidity mining fire.

So, is this true?

According to NonFungible statistics, the total transaction volume of the NFT market today has reached 113 million US dollars, with more than 4.85 million NFTs sold at an average price of 23.31 US dollars.

NFT Market Overview Source: nonfungible.com

Compared with the market size of DeFi, NFT is obviously still a niche and is still in the early stages of development. Since NFT is a non-homogeneous token, each asset is unique and has more personalized characteristics, which also makes it impossible for people to have a unified evaluation of this type of asset. Compared with the current mainstream crypto market tokens, NFT is more like a "privately customized" product, which cannot be traded in "bulk" on exchanges and can only be traded one-on-one over-the-counter, with poor liquidity.

Although the concept of NFT is very innovative, its characteristics determine that the threshold for large-scale participation by investors is relatively high. Therefore, this is why the most valuable applications of NFT are in the fields of collectibles and games. In addition to encrypted games and collectibles, its biggest market prospect lies in the NFTization of off-chain assets. As for whether NFT will be the next outlet, there is no need to assert it, but we may expect it to have a brilliant performance in the future.

Today, the combination of NFT and DeFi has brought new imagination to people. But under the hot appearance of DeFi+NFT, can it generate real value and lasting market effect?

At present, several major NFT concept projects on the market, such as WhaleShark, MEME, GRAP, etc., still focus on the gameplay of liquidity mining. In this process, people are not really concerned about DeFi or NFT itself, but the token speculation income brought by liquidity mining.

As Cao Yin, managing director of the Digital Renaissance Foundation, said in the interview themed “Will NFT be the next wave after DeFi?”, “For CryptoKitties NFT and the popular MEME NFT, we still remain on the sidelines, because market participants are not participating with a collection mentality, but a speculative mentality, which can easily lead to a collapse after the irrational prosperity of the market.”

The crazier the market is, the more we need to see both sides. At present, the most promising direction of NFT is still the application of crypto art and crypto collectibles, because NFT solves the scarcity of digital art and many practical problems of preservation and trading, and its biggest challenge is how to find NFT assets with valuable support.