Non-fungible Tokens (NFTs) have been one of the most applied parts of Web 3.0 Technology over the past two years. Although NFTs use cases have been sparingly explored when compared to its potential, collectible NFTs and Gaming NFTs have made the space active since 2020.
Indeed, NFTs should play a major role in blockchain tokenization, making it possible for physical and indivisible items to have a tokenized version of the blockchain, but the quick profits obtainable from flipping collectible NFTs have seen many new projects jump into the technology, which has had a polarizing effect; on one end, it has rapidly popularized the technology, and on the other, it has attracted a FOMO effect, where project owners only care about developing projects with bland use cases, as long as it is popular enough to make money. This wave was high in 2021 and even in the earlier days of 2022 but has indeed crashed rapidly since then, making many people ask questions about the long-term viability of the technology or if, in fact, it was all a scam.
The Situation of NFTs in 2022
NFTs carried over the hype and popularity gained in 2021 as the year started on a high, as OpenSea recorded an all-time monthly-high record in January, completing as much as $5 billion in trades between Ethereum and Polygon networks, usurping the previous record set in August 2021; generally, NFT trading volume in January hit $17 billion across major NFT trading platforms. Q1 2022 remained healthy, as several billions were recorded in transaction volume. However, due to the steady decline of crypto prices in Q2 (that saw Bitcoin crash below $20k from $47k), interest in NFTs waned, as the trading volume dropped by 41% in Q2 and a further 60% drop in Q3 from Q2 volume. Worse still, September recorded a 97% drop from January's $17 billion record, with a measly $466 million in trading volume.
The crashing of crypto prices was only the trigger for a domino effect on NFTs' decline; due to increased external hype, NFTs became overvalued and only needed the slightest push to come crashing down. Although NFTs were indeed overvalued, the level of price crashes is unexpected; the following factors contributed to the free fall of NFTs in 2022.
1. Bear Market: Beyond Bitcoin, the entire market has lost significantly, especially those focusing on dApps and DeFi, such as Ethereum, Solana, Avalanche, Cosmos, etc. For example, a person with an NFT worth 0.05 ETH as of April would be willing to sell off their asset for 0.03 ETH as of May than hold it amid a price crash, where Ethereum lost over 80% of its value. Hence, the bear market reduced NFT transactions, as people mainly sold off their assets to lock in profits and stopped trading.
2. Fear of Missing Out (FOMO): Many NFT investors are just passers-by; they have no real reason for supporting a project, but because they don't want to miss out on the NFT wave, they invest heavily into NFT projects without understanding the purpose, roadmap, or other important details, with the sole purpose of making money, and not necessarily for adoption; hence, the crash in prices defeats the purpose, and people are forced to sell the NFTs to avoid further losses.
3. Many Projects Have No Use Cases: As much as investors can be faulted for jumping into projects without due diligence; it is important to note that several projects are without utility; they are mainly treated as collectibles to be resold, which eventually fizzles out because the allure of profits is the only thing that makes people purchase them.
NFTs play a huge role in achieving all these, so if indeed we anticipate a virtual world, we'll see the uses of NFTs in full flight. Even in the gaming industry (currently the most utilized sector for NFTs), NFT technology will experience a spike, as NFTs' global market share is predicted to reach $122 billion by 2028, from $15.78 billion in 2021.
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