Are NFTs already in crisis?

Most people learned about NFTs after March 2021, when digital artist Mike Winkelmann — known as Beeple — sold his work at Christie’s auction for the equivalent of $69 million worth of Ether. , a cryptocurrency. Winning the work, entitled “Everydays: The First 5000 Days”, was the programmer and digital art collector Vignesh Sundaresan.

Since then, NFTs have gained increasing attention and have become one of the most important assets of the crypto sector, a term that denotes everything related to the blockchain and its applications. The acronym NFT stands for Non-Fungible Token (in Italian it can be translated as “non-reproducible token”) and indicates a digital certificate of authenticity: in short, they are labels that communicate via the blockchain the originality and uniqueness of a content . In the case of Beeple and most NFTs, a visual work of art.

After a year of strong growth, the sector peaked last September when some 225,000 sales were recorded in one day. Things have changed since then, such as an article in the Wall Street Journal much quoted and commented on in these days in the industry: in the last week of April, the number of daily transactions dropped to about 19 thousand, down 92%. The number of wallets – digital wallets for cryptocurrencies – active in the market also decreased by 88%, from 119,000 in November to 14,000 in early May.

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The drastic decline in activity seems to go hand in hand with a general decline in attention and enthusiasm for the sector. In March 2021, Sina Estavi, an entrepreneur active in the field, received the NFT linked to the first tweet in history (published May 21, 2006 by the social network co-founder Jack Dorsey) for $2.9 million. Last April, a little over a year after the purchase, Estavi relaunched it on OpenSea, the leading NFT trading platform, initially asking for $48 million. The highest bid he has received to date was $24,000.

Things don’t get any better with Coinbase, a cryptocurrency exchange service that launched Coinbase NFT this month, a section dedicated to these tokens. On its first day, the service had fewer than 150 registrations, data from analyst firm Dune shows. About a week after launch, only 1,236 have used it to buy an NFT.

There are many factors behind this crisis. This includes the exponential growth that the sector recorded in 2021 and early 2022, a trend that is difficult to sustain indefinitely. Also because, despite the increase, the sector has not been able to expand as much as was necessary in the number of users. According to Chainalysis, a cryptocurrency analytics firm, the 9.2 million NFTs sold as of last April have been bought by about 1.8 million people. About five NFTs for each buyer.

Monkeys and Metaverses
The distinctive centralization of this sector is also reflected in the excessive power built up by companies such as Yuga Labs, creator of the successful NFT Bored Ape Yacht Club line, which last March acquired two other wildly successful lines, CryptoPunks and Meebits. In the same days, the company announced that it had received $450 million in investment to build “a metaverse for NFT,” a video game that should be called Otherside. Also in March, the company unveiled ApeCoin, a cryptocurrency that can be used to buy goods and services in this digital world.

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At the time of ApeCoin’s presentation, journalist Casey Newton pointed out how the currency — and its associated DAO, a type of organization accessed by buying tokens — allows Yuga Labs to control the product and keep a cut of the profits. , without competing with other investors. According to Newton, the company can “talk about the benefits of decentralization” […] while enjoying the benefits of centralization”.

On April 30, Yuga Labs put the first assets for its Otherside metaverse on sale, generating very high demand despite the general downturn, which eventually exposed a structural flaw in the blockchain. Each transition that takes place on Ethereum, the blockchain used by Yuga Labs, actually triggers the payment of an additional expense, the “gas fee,” through which all users pay the miners, the ones whose computers work to validate transactions. This commission is not fixed, but increases in proportion to the registered traffic on the network: due to the great interest from Otherside, this additional cost has multiplied. For example, a user has come to pay $45,000 in gas fees to cover the purchase of an NFT that cost just over five thousand.

As for Ethereum, it couldn’t withstand the traffic generated by these 55,000 NFTs, causing it to overload and cause a lot of inconvenience. In those same hours, taking advantage of the chaos that accompanied the event, many users fell victim to theft and phishing attempts by bots draining their wallets. An increasingly common phenomenon in the world of cryptocurrencies: in 2021 alone, this form of scam has raised $14 billion.

A few days after the confusing launch of the metaverse series Otherside, the decline that hit NFTs has also overwhelmed Bitcoin, the world’s leading cryptocurrency, which has lost 54% of its value today compared to last November’s peak (falling below the psychological threshold of thirty thousand dollars). Ethereum also had similar losses.

However, the cryptocurrencies that have lost the most value and are undermining the entire crypto economy are the so-called stablecoins, translatable as “stable currency”, cryptocurrencies designed to maintain a fixed value – usually a dollar – to overcome the typical fluctuations. to avoid this speculative market. Some of these, such as USDC and Tether (not to be confused with Ether), maintain this stability by accumulating liquidity and assets to “hedge” the stablecoins in circulation.

There are also “algorithmic” stablecoins, such as Terra, which do not have these kinds of reserves “but maintain their value based on an algorithm that automatically creates a balance between the stablecoin and a partner currency”. This bond is called peg (hook) and is based on the constant creation and sale of tokens: in the case of Terra, the reference currency was the moon. These are systems whose stability, according to many critics, only exists in the name, and indeed encourages the continuous issuance of new cryptocurrency units, without any hedging.

Over the course of this week, Terra, USDC, and Tether all lost their peg to the reference currency, causing huge losses as well as Bitcoin – depreciated to $24,000 – in which Terra had invested a lot of resources, in a circle. mean that burned $800 million (estimation updated to May 11) and that Alex Hern del Guardian recalled the series of events that led to the collapse of the investment bank Lehman Brothers, a symbol of the 2008 financial crisis.

Until a few weeks ago, the NFT crisis was attributed by their supporters to inflation or other contingent factors. The facts of recent days instead point to structural causes of the entire cryptocurrency sector, with some analysts speculating that the collapse of the NFTs may only be the first sign.

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