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Crypto venture capital focuses on trading platforms, games, and infrastructure in the NFT field.
Original title: “Talking about NFT Investment Logic and Ecological Layout”
Written by: NFT Labs
Nowadays, more and more NFT platforms and projects have sprung up, and they have also attracted the attention of investment institutions. For example, OpenSea, headquartered in New York, raised US$23 million in a round of financing led by Andreessen Horowitz (a16z) in March this year, and completed a US$100 million Series B round of financing led by a16z in July. After valuation of 1.5 billion US dollars. According to Crunchbase, the Rarible trading platform has raised $1.8 million in funding. This article will take an inventory of the NFT ecological sector, institutional investment portfolio and quadrant investment methodology in turn, and discuss some of the industry characteristics reflected in the NFT investment logic and market data.
NFT ecological layout of investment institutions
First of all, we start from the ecological layout of major investment institutions.
According to the investment portfolios of some institutions in the above figure, it can be seen that most institutions are mainly focused on three directions:
The first is the trading platform. The trading platform is an indispensable part of the NFT circulation link, and the profit model is clear, and it is also the Red Sea battlefield. OpenSea is in the leading position in the current NFT trading platform, providing common trading modes in the NFT secondary market, including issuance, trading, and auctions. However, there are still many possibilities in the trading platform track, such as NFT + DeFi, NFT lending, fragmentation, etc.
Trading platforms are usually subdivided into art trading, music trading platforms, fashion brands and luxury goods. At present, many centralized exchanges have launched NFT trading platforms, including Binance, Huobi, DoDo, Gate, etc. The centralized exchange itself is at the top of the ecological chain of the blockchain world, and is supplemented by huge traffic advantages. For them, entering the market with NFT can increase revenue, enrich the ecological layout, and provide users with a DeFi+NFT experience with a lower threshold.
The second direction is games. The first is the game studio, including Dapper Labs invested by a16z, which has developed the well-known CryptoKitties, NBA TOP Shot, Flow, etc. The Animoca Brands game studio, which Multicoin Capital participated in, is also a predator of the chain travel circle. Its products include the virtual world The Sandbox and the racing game F1 Delta time. These game companies have relatively mature game development and operation experience, and have multiple blockchain game projects under their umbrella. The projects can cooperate with each other and can convert original fans into users of new projects. In addition, the studio has rich experience in game operation and chain game marketing, and has a certain first-mover advantage.
In addition to game studios, there are also companies that integrate innovative gameplay methods such as Play to earn and GameFi that deserve attention. In traditional games, users spend hundreds or even thousands of dollars on skins. However, these skins do not change the gameplay itself, just to enhance the appearance of the characters. Play-to-Earn is a new business model of NFT games. Gamers become owners and investors of game assets. They tokenize the time they spend on the game by renting and selling in-game items, and obtain corresponding income. One of the representative projects is Axie Infinity. Players obtain an SLP token by winning battles with other players. SLP is needed in the game to breed new Axies, or they can sell and trade other digital assets on the open market.
The last is the infrastructure of NFT, which mainly refers to the public chain and side chain of NFT. Due to Ethereum’s low throughput, high gas fees, and network congestion, how to build a better infrastructure has been a long-discussed issue. The solution is nothing more than the following three, one is to migrate to other public chains (such as BSC, Near), and the other is to build a public chain focused on NFT (Flow developed by Dapper Labs, and Efinity on Polkadot developed by Enjin). ), the third is to choose the Layer 2 solution (Polygon, Roinin).
The methodology of NFT project investment can be divided into two dimensions to analyze project narrative and data. The narrative of the NFT project is mainly the vision and mechanism of the project. The data represents various data performance of the project. At the beginning of the project, the narrative value of the project is greater than the value of the data.
NFT narrative value
The project narrative value tends to be subjective. The first is the quality of the project and the reliability of the project party. Because the threshold of NFT issuance is extremely low, and it is easy to be imitated and plagiarized, the attention to the influence of the issuance team will further affect the judgment of the potential of subsequent transactions. The second is the vision and mechanism of the project.
For example, the recently popular Bored Ape Yacht Club, each ape with an issue price of 0.08 ETH, has sold to six figures. The project attracted celebrities, KOLs and famous athletes, such as NBA Rookie of the Year Ramello Ball.
Why these monkeys’ recent transactions will exceed Larva Labs’ Cryptopunk and Meetbits, which have huge traffic. First of all, the founding idea of Bored Ape Yacht Club expresses the voice of many NFT collectors: every ape who devotes himself to the blockchain field has realized the freedom of wealth. Secondly, in Bored Ape Yacht Club, the person who owns the ape holds the copyright of the ape, which means that the owner can sell products with the image of the ape and create the surroundings of the ape image he holds, including books, comics, Even coffee and beer brands. This is extremely rare in NFT collections.
NFT data evaluation
One is the activity level of the community and the number of followers on social media. NFT is more dependent on market activity than DeFi. When buying collectibles, the fans behind its creators are particularly important. The more popular the creator, the higher the NFT value of their creation. The number of followers on social networks such as Twitter is one of the most important data for evaluating projects. When participating in NFT projects, you can go to official media channels such as Medium and Twitter to learn about the latest project developments, or join official chat channels such as Discord and Telegram to learn about project activities and community activity.
The second is the transaction record in the market. These historical transaction data can be found on NFTGO, as well as other data dimensions. It is worth noting that the evaluation of NFT projects is not based on the assets for sale on the platform, because the scarcity and uniqueness of NFTs determines that the market’s evaluation criteria for each asset are constantly changing.
The third is the data evaluation of infrastructure. Need to refer to technical advantages (such as safety performance, throughput), ecological construction level (quality and quantity of projects in the ecology), IP resources, and so on.
NFT project judgment
- What stage the project is in (is it mature or early to mid-development).
- Whether the project has a stable competitive advantage.
- Is the project’s mid- and long-term investment logic clear? Is it in line with the industry’s general trend?
For example, let’s briefly analyze the project The Sandbox.
First of all, the track. The meta-universe track where The Sandbox is located is in a stage of rapid development and is a high-quality track with huge upside space. At present, Meta Universe has moved from inside the circle to outside the circle. In the future, it may attract more abundant capital and financial demand.
Second, the community. You can compare The Sandbox with other meta-universe concept projects at the same stage, compare their creators, artists, the number of LAND (land) owners and contributor communities, existing registered accounts, and the speed of LAND sales, etc.
Third, social media. The number of followers of The Sandbox on Twitter, as well as the number and activity of the Telegram and Discord communities. Participation in community activities such as VoxEdit creation and Game Maker game production contest.
Fourth, partners. You can pay attention to whether the project’s partners include well-known IPs and institutions, etc., and whether they have KOL endorsements, etc.
Risks of investing in NFT
Finally, talk about the common risks of investing in NFTs. NFT itself is a high-risk market. Since most users follow the trend and hype IP, NFT has the risk of price fluctuations of tokens and collectibles, especially the value of collectibles is often difficult to measure. To judge the fair value of a certain NFT, everyone has their own measurement system in their minds. Regarding the valuation of investing in NFTs, please refer to our previous article How to Valuate NFTs?
Precautions for investing in NFT
Secondly, if you really want to participate in a project, you must learn about the project through multiple channels, such as the project’s official website, official media channels telegram, Twitter, Discord, Medium, etc., project progress, financing situation, domestic and foreign media reports Circumstances, whether there is negative information, etc., so as to determine whether the background of the project is regular. If the information is obtained from a third party, do not listen to it, and carefully confirm whether the source of the information is reliable.
In addition, it is worth noting that there are endless levels of information counterfeiting. For example, some projects will use the same organization name to attract users. For example, the following picture shows the announcement of SoftBank. Kishu Inu’s consultant Softbank is a copycat company, not SoftBank Singapore literally.
When participating in NFT transactions, verifying smart contracts is also one of the authentication methods. Before and after the issuance of the project’s NFT, scammers may use fake addresses to defraud money. By verifying the official information of the project, when necessary, it can be directly verified by the project team to reduce the risk of fraud.
Finally, the security of the NFT project. The project party goes bankrupt or runs midway, the third-party server is hacked, and the creator of the fragmented NFT withdraws the liquidity, then the person who buys this uToken will suffer liquidity risks. Also, when purchasing an NFT, it is necessary to carefully confirm whether the NFT was cast by the original author, which is very important. Because everyone can take pictures of other people’s Cryptopunks to cast new NFTs, which are fakes.
NFT ecological layout
People usually divide NFT projects into trading platforms, games, art, collectibles, virtual worlds, etc. These are actually NFT applications seen by top users or Dapps built on top of the protocol layer. If we analyze from a more holistic perspective, in addition to Dapp, there are also the underlying infrastructure and intermediate network protocols that serve the NFT. For example, the NFT trading platform is an application based on NFT standards such as ERC721 or ERC1155 built on the underlying foundation (Ethereum, WAX, Polygon). The underlying infrastructure provides performance and interoperability for the trading platform, and the ERC standard limits the usage scenarios of top-level applications.
In terms of functional attributes, the NFT industry chain can be divided into three layers from top to bottom:
One is: the application layer, what users see and use daily,
The second is: the protocol layer, the technology stack between the NFT application layer and the computing layer.
The third is: the settlement layer, responsible for the storage and recording of the value of NFT.
From the long picture at the beginning of the article, it can be seen that in the field of NFT, investment institutions are also involved in the settlement layer, protocol layer, and application layer.
NFT ecological classification
The application layer can be divided into cards, collectibles, NFT+DeFi, games, collectibles, trading platforms, music, etc.
NFT lending platform and liquidity mining are a combination of DeFi and NFT. For example, Unicly, NFT fragmentation trading platform. Deposit your own NFT such as Cryptopunks or Hashmasks, and put it in the vault to mint uToken. This gameplay provides NFT holders with great liquidity. It is also a good opportunity for other players who are not able to choose NFT, because there is no need to hold any NFT during the whole process, by holding uToken issued by others, waiting for appreciation, and then selling it on AMM.
NFT’s earliest landing attempt was games. The NFT game project that integrates DeFi is also called GameFi, which refers to the presentation of financial products in the form of games to gamify the rules of DeFi, such as the use of NFT equipment to increase revenue and the introduction of a battle mode. Compared with traditional liquid mining , GameFi projects are more interactive with users and are more interesting.
A very wide range of tokens issued by individuals or communities. For example, Grammy Award-winning recording artist RAC issues personal social tokens, and its token holders can access private Discord groups, which is a way for early supporters to interact and reward.
There are many hot items in the collection, such as Meebits, a 20,000 unique 3D characters designed by Larva Labs. Existing CryptoPunks and Autoglyphs owners can also get free Meebit. There is also Bored Ape Yacht Club-a collection of 10,000 unique Bored Ape NFTs that can access the “Swap Club”, only for Bored Ape members. In addition, each BAYC provides a free dog for “adoption.”
The protocol layer is a key module between the settlement layer and the application layer. A unified chain protocol standard can effectively reduce the threshold and difficulty of NFT asset issuance, and solve the problem of asset security, authenticity, liquidity and decentralization in the NFT market. At present, the most widely used protocol is ERC721 and ERC1155.
NFT standard protocol
- ERC721-The metadata structure of NFT tokens on Ethereum. The first standard representing NFT assets was created by Dapper labs Dieter Shirley and brought to the market by CryptoKitties.
- ERC1155-Manage multiple types of NFTs in a single smart contract
- ERC998 —— Nestable NFT, that is, the binding relationship of multiple NFTs
- EIP2981-NFT royalty
- ERC1523-NFT as an insurance policy
- EIP1948-NFT with changeable information
- ERC875 —— Batch Transfer NFT
In addition to the mainstream ERC-721 and ERC-1155, some NFT underlying public chains have begun to develop NFT chain protocols. For example, DNFT, a decentralized NFT protocol that supports cross-chain. Support the development of various products related to the creation, trading, analysis, derivatives, and data of NFT assets. Or Vera, Polkadot’s NFT lending and liquidity agreement. These belong to the NFT general protocol layer, which can empower NFT application scenarios, such as finance, data, cross-chain, and privacy. It is mainly divided into liquidity agreements and cross-chain agreements.
Release the application scenario of NFT providing liquidity in finance. By collateralizing the NFT to generate easy-to-circulate ERC20 tokens to enhance the liquidity of the NFT. For example, in Unicly, NFT holders create their own uToken on the Unicly protocol. The protocol generally involves mortgage fragmentation of a set of NFTs, minting a corresponding number of ERC20 tokens, and then participating in liquidity mining, transactions, etc.
Most of the current NFTs are based on the ERC721 standard, and the scenario is limited to Ethereum. Other public chains in the settlement layer also have NFT transactions, such as WAX, Conflux, and so on. The NFT cross-chain protocol can provide interoperability between the main chain and other main chains. For example, DNFT, DNFT is a cross-chain decentralized NFT protocol based on Polkadot Substrate, which provides the underlying cross-chain infrastructure services for various current NFTs.
The settlement layer can include all major underlying public chains and side chains of the data settlement layer, such as Ethereum expansion plans, storage, domain names, etc.
Ethereum brings problems such as low throughput, high gas fees, and network congestion. Solving the scalability problem has become particularly important. There are no more than three solutions: migrate to other public chains (such as BSC, Near), build a public chain that focuses on NFT (Flow developed by Dapper Labs, Efinity developed by Enjin), and choose Layer 2 solutions (Polygon, Roinin, Immutable) ). For a detailed interpretation of the above public chains and side chains, please refer to our previous article “Where is the next breaking point?” In-depth inventory of NFT infrastructure: public chain and side chain “ .
Evaluation criteria for investment infrastructure: technical advantages of infrastructure (throughput, security performance), degree of ecological construction (quality and number of Dapps in the ecology, number of wallets), developer experience, asset liquidity, and IP resources on the chain .
Chart source: DELPHI DIGTAL
Since the NFT cannot be easily changed after it is created, the data storage, storage of NFT assets, metadata, and code, and how to maintain persistence over time is a key link. The data storage solution needs to be based on the needs of creators, consumers, and developers for NFT data storage. And to ensure the durability and reliability of the data. Representative projects include Arweave, Filecoin, NFT.Storage, etc.
NFT investment cycle
Chart source: NFTGO
At present, NFT has experienced three rounds of bull market. NFT first broke out in 2012, thanks to the first NFT-like token to be built on the Bitcoin network-Coloured Coins, also known as Bitcoin 2.x. Since then, NFT has continued to develop, which can be traced back to the Rare Pepe Directory project launched by Counterparty.io in 2016 and the CryptoPunks project launched by John Watkinson and Matt Hall in 2017. The real prosperity in the NFT field began at the end of 2017. The CryptoKitties launched in the Ethereum boom in early 2018 caused a surge in attention to NFT activities.
Chart source: NFTGO
Starting in 2020, the third outbreak of NFT has brought about a surge in sales in the NFT market. Since the beginning of the year, in less than three months, the combined market value of major NFT projects has increased by 1785%. There is also the explosion of blockchain games in the Play-to-earn model. For example, the daily active users (DAU) of the dark horse Axie Infinity in July soared from 38,000 at the end of April to 252,000. This month, Axie Infinity’s agreement revenue exceeded the sum of many DeFi projects. The data performance of the NFT market and more and more investment institutions appear in the NFT market. When do you think the next wave of NFT will break out?