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Feature Report: Is There a Future for NFTs After Market Meltdown?

By Gary Symons

TLL Editor in Chief

If you want to know how investors feel about NFTs right now, just follow the sound of the screaming.

That should lead you to the hilariously apt Bear Market Screaming Therapy Group on Twitter and the communication app Telegram, where holders of Goblintown Ethereum NFTs (as= in the photo above) have gathered to post groans, howls, sobbing, and quite literally screams of investor regret.

Users describe the forums as a way to cope emotionally after being financially ‘rekt’, as the value of NFTs and cryptocurrencies plunged over the past three months.

Goblintown is just one example of how NFTs have dropped in value, but it’s far from the worst case. At its peak in June, the Goblintown NFTs had a floor price of $5,500, and less than a month later had sagged to $3,390.

But compared to some other NFT holders, the Goblintown buyers have gotten off pretty lightly.

As the world descends into a Crypto Winter, news outlets are posting stories about the “Bonfire of the NFTs.”

“The NFT market has collapsed along with cryptocurrencies, which are typically used to pay for the assets, at a time when central banks have jacked up rates to combat inflation and risk appetite has withered,” reported Canada’s The Globe and Mail. “Bitcoin lost around 57 per cent in the six months of the year, while ether has dropped 71 per cent.”

As the flames rose, NFT markets like Open Sea and crypto trading companies like Coinbase are feeling the heat. The latter, for example, announced it is laying off 18% of its staff—roughly 1,100 people—while its smaller competitor BlockFi is cutting 20% of its staff.

Those companies are blaming the economic downturn and higher interest rates, which have made investors much less inclined to place bets on riskier investments.

Companies that expanded with lightning speed are now desperately cutting costs, and hoping to ride out the so-called Crypto Winter, while investors pray that at some point the value of their NFTs somehow will bounce back. They may have a long wait, says Daily FX analyst Christopher Vecchio.

“The worst is not even behind us. It’s just getting started,” said Vecchio. “A lot of these companies tried to expand too quickly, and they had a fundamental misread on the macro environment.”

NFTs hit their peak around January this year, after a meteoric rise. In 2020, few people even knew what an NFT was, or how it worked, but by January 2022, trading on the largest NFT marketplace, Open Sea, soared to almost $5 billion a month.

Then the Russian Army invaded Ukraine, inflation suddenly rose, federal banks began hiking interest rates, and consumer confidence plunged to its lowest level since the Great Recession of 2008. By May trading of NFTs on Open Sea had dropped to $2.6 billion, and in June it dropped like a rock to just $700 million.

What goes up, must come down: a graph from NonFungible.com showing the dramatic fall in value of NFTs.

“NFTs are not inclusive of all our community and create a scenario of the haves and the have-nots. The speculative pricing and investment mentality around NFTs takes the focus away from playing the game and encourages profiteering, which we think is inconsistent with the long-term joy and success of our players.

“We are also concerned that some third-party NFTs may not be reliable and may end up costing players who buy them. Some third-party NFT implementations are also entirely dependent on blockchain technology and may require an asset manager who might disappear without notice. There have also been instances where NFTs were sold at artificially or fraudulently inflated prices.

As such, to ensure that Minecraft players have a safe and inclusive experience, blockchain technologies are not permitted to be integrated inside our Minecraft client and server applications nor may they be utilized to create NFTs associated with any in-game content, including worlds, skins, persona items, or other mods. We will also be paying close attention to how blockchain technology evolves over time to ensure that the above principles are withheld and determine whether it will allow for more secure experiences or other practical and inclusive applications in gaming. However, we have no plans of implementing blockchain technology into Minecraft right now.”

At the same time, the combination of cratering crypto prices and lack of investor interest in NFTs combined to drop the value of the NFTs themselves. According to figures from the tracking site NonFungible.com, the average value of NFTs fell from $1,754 at the end of April to $412 in late June.

The site’s co-founder, Gauthier Zuppinger, admits the bloom is off the rose for investors who were investing with the hope of getting rich quick. “The crypto bear market has definitely had an impact on the NFT space,” said Gauthier Zuppinger, co-founder of NonFungible.com.

“We have seen so much speculation, so much hype around this kind of asset,” Zuppinger said. “Now we see some sort of decrease just because people realize they will not become a millionaire in two days.”

For licensing companies that have invested their money and in some cases their reputation on NFTs, that leads to a scary question:

IS THIS THE END FOR NFTs?

That really depends on who you ask.

Crypto and NFT enthusiasts say the downturn was an inevitable part of the development of Web3. Similar to the dot com crash in the 1990s, which trimmed out a lot of smaller companies with little value, they argue the Crypto Winter will kill off the non-viable companies, allowing the more serious players to rise when the inevitable spring thaw arrives.

Others, however, say the Crypto Winter may actually be a Crypto Apocalypse, and that the crash has a lot to do with the overly speculative value of NFTs and cryptocurrencies, which don’t appear to be linked to anything of intrinsic value.

Certainly, many investors will be left holding a largely empty bag, as once-hyped NFTs have in many cases become almost worthless. Take, for example, the case of a Malaysian businessman who paid $2.5 million last year for the NFT of Twitter founder Jack Dorsey’s first-ever tweet. In April, as the NFT bonfire began burning, he struggled to get bids of more than a few thousand dollars.

Even Bored Ape NFTs—arguably the hottest commodity on the market right now – have suffered serious setbacks, with prices tumbling from a peak of $238,000 in January, to $110,000 in June.

Despite those losses, there are many investors in the sector who say the crash was not only expected, but is an opportunity to pick up some blue-chip properties.

In late June, as the crypto market crashed, a crowd of 15,000 NFT enthusiasts crammed into New York’s Times Square for the NFT.NYC conference.

David Angelo, one of the founders of the NFT project Naughty Giraffes, argues NFTs are here for the long haul, even though some companies and investors may be crushed along the way.

For those who can weather the storm, Angelo says this period is an investment opportunity, even though many people who invested late will be left with potentially life-changing financial losses.

“Not everybody’s going to make it,” said Angelo, who wore a giraffe costume to the conference. “Not everybody’s going to be able to get to the promised land, which might be longer than we all hope and we all expect.”

In fact, there are signs that heavy losses are driving thousands of investors out of the market. The blockchain analytics company Chainalysis, for example, revealed that the number of accounts trading in NFTs has fallen by more than half since January 2022. At that time there were close to a million accounts actively trading in NFTs, but by early May that number fell to 491,000, and the number is still falling now.

But Angelo and the operators of NFT markets all insist that NFTs are here to stay, and that surviving the Crypto Winter is just part of the cycle for any new technology. They say non-fungible tokens are now finding their place within the broader economy, which includes licensing deals with major brands.

Last month, King Features told The Licensing Letter it was launching a line of unique NFTs for its venerable character Popeye The Sailor Man, and top licensing agency Brand Central had signed on the Bored of Directors, a group of people who own Bored Ape Yacht Club NFTs.

A tweet from Tiffany’s VP Alexander Arnault, promoting the company’s new NFTs featuring Crypto Punks.

On Sunday, the jewellery firm Tiffany & Co. announced its plan to sell NFTs, which give CryptoPunk holders the right to turn their NFT into a custom pendant, containing gemstones and diamonds.

The 250 tokens are part of a limited edition campaign, prompted by the company’s vice president Alexandre Arnault, who owns CryptoPunk #3167, turning his NFT into a pendant which he shared on social media in early April.

CryptoPunk holders will be able to purchase one of 250 NFTiff passes powered by blockchain solutions company Chain from Tiffany, with a maximum of three per person, which will enable them to mint a custom pendant based on their CryptoPunk.

So, NFTs are still being licensed, particularly in the worlds of art and fashion, but they are taking a beating in other arenas that may affect their long-term viability.

THE NFT BACKLASH IS LED BY GAMERS

The studio producing the game Worms was forced to backtrack in less than 24 hours after posting a release saying it was offering NFTs as a game perk. NFTs are now banned from the game.

Those who see the future as bright also argue that NFTs will be crucial to the development of the metaverse, as they will allow owners to bring their possessions from one metaverse world to the next. But, the forefront of the metaverse is currently in the video gaming sector, and recent data now indicates that gamers are actually so averse to NFTs that several gaming companies have been forced to walk back their NFT programs.

According to survey data from market research firm YouGov and consultancy Globant, of 1,000 Americans aged 18 and up who played at least three hours of console, PC or mobile games (though not mobile-only players) 81% of them had never purchased an NFT, and only 40% of those surveyed said they were interested in both “playing” and “earning” aspects of the metaverse and blockchain gaming.

Worse, the people who hate NFTs, really hate NFTs.

According to tech writer Casey Newton of The Verge, “Outside those working on play-to-earn games like Axie Infinity, hostility toward crypto in the gaming community tends to be overwhelming.

“One of the most popular recurring stories over the past two months has been for a game developer to announce some sort of NFT integration in a forthcoming video game, inspiring a massive backlash, only to later disavow the project and apologize.”

One example is the game franchise Worms, which has sold an impressive 75 million copies to date. However, when studio Team17 announced the launch of an NFT project called MetaWorms, their fans went on the rampage.

In just 24 hours, the studio flipped and announced that not only would MetaWorm be cancelled, but the studio would never introduce NFTs again. “(Team17) is today announcing an end to the MetaWorms NFT project. We have listened to our Teamsters, development partners, and our games’ communities, and the concerns they’ve expressed, and have therefore taken the decision to step back from the NFT space.”

The backlash also extended to other companies that were working with Team17 on games. Playtonic Games issued its own statement during the controversy, saying, “We have no interest in utilizing NFTs in any aspect of our business now or in future. Nor do we endorse the use of NFT’s in the wider world.”

The gaming company AggroCrab Games was even more blunt, but then, they are AggroCrabs.

“We believe NFTs cannot be environmentally friendly, or useful, and really are just an overall (expletive deleted) grift,” the company said on Twitter, adding they wouldn’t work with Team17 again unless the decision was reversed.

Similarly, the game developer GSC Game World cancelled its NFT plans in a single day, after a backlash by players of its game Stalker 2. The idea was to essentially paste players heads on to the game characters, and the art would include an NFT, but players reacted with such hostility that the developers immediately issued a mea culpa.

“Dear Stalkers, We hear you. Based on the feedback we received, we’ve made a decision to cancel anything NFT-related in S.T.A.L.K.E.R. 2. The interest of our fans and players are the top priority for the team. We’re making this game for you to enjoy—whatever the cost is. If you care, we care too.”

UBISOFT FORCED TO STEP AWAY FROM NFT PROGRAM

Ubisoft watched its plans for NFTs sail off into the sunset, after a hostile reaction by gamers on its Ghost Recon: Siege video game.

Team17 and GSC Game World are hardly the only companies to feel the wrath of its player base over NFTs.

The much larger and extremely successful game developer Ubisoft stepped into a wet NFT cow pie when it announced Quartz, an NFT platform for buying and selling NFTs of in-game items.

Players saw it as environmentally unsound, and potentially exploitive as it might lead to a play-to-earn strategy, in which players grind for hours to earn a collectible they could then resell.

The backlash took Ubisoft by surprise, as they first defended the Quartz platform.

“I think gamers don’t get what a digital secondary market can bring to them,” Nicolas Pouard, VP at Ubisoft’s Strategic Innovations Lab said. “For now, because of the current situation and context of NFTs, gamers really believe it’s first destroying the planet, and second just a tool for speculation. But what we [at Ubisoft] are seeing first is the end game. The end game is about giving players the opportunity to resell their items once they’re finished with them or they’re finished playing the game itself.

“So, it’s really, for them. It’s really beneficial. But they don’t get it for now.”

Unfortunately, reception was made worse when Ubisoft announced the first game offering Quartz NFTs, Ghost Recon Breakpoint, would get no new content—essentially an end-of-life announcement that some players took as stranding their NFTs in a dead game. The entire project was shut down months later.

AXIE INFINITY: AN NFT DISASTER STORY

Some of the hostility around gaming NFTs may be linked to Axie Infinity, touted as the world’s first major blockchain video game.

Developed by Sky Mavis, the idea was to create a game in which players could not only have fun, but also earn money by grinding through levels to win in-game items backed by NFTs.

The game Axie Infinity initially exploded in popularity as the “world’s first blockchain game,” until the value of NFTs plunged, followed by a devastating, half-billion dollar hack.

The concept actually took off, with hundreds of millions of dollars pouring into the company, and some players reporting they made as much as $2,000 a month.

Particularly for players in low-income countries, that’s serious money.

Sky Mavis achieved a valuation of around $3 billion by October 2021 based on a $150 million investment by big venture cap firms, but by March, just six months later, cracks in the foundation began to appear.

The number of daily active users shrank from 2.7 million to 1.5 million, but more importantly, the value of the in-game currency plummeted from 40 cents to 2 cents as the wider cryptocurrency market began to crash.

And then, catastrophe struck. Even as Sky Mavis labored to reassure investors and players, hackers managed to hack Ronin, an Ethereum-based blockchain that underpins the game Axie Infinity. The thieves made off with a shocking $540 million, and while Sky Mavis has vowed to repay the money, they say it will be repaid in Ethereum, which is now worth a fraction of what gamers lost in dollar terms.

POTENTIAL SLOWDOWN FOR NFTs IN LICENSING

Mojang says its game Minecraft is banning NFTs from the platform due to concerns of potential fraud, inequity among players, and damage to the environment.

Clearly, the bloom is off the NFT rose for now. As cryptocurrency markets have crashed, NFTs have dropped in value, leaving many investors with thousands or even millions of dollars in losses. Others have lost money in various hacks like the one at Sky Mavis, with the total of DeFi hacks now topping $2 billion for this year to date.

Larger gaming companies like EA Games, once a proponent of the technology, now say they have no plans to implement an NFT strategy, shutting off one of the most potentially lucrative revenue flows for NFT licensing.

Much worse, the hugely popular Minecraft just issued a stunning takedown of NFTs, saying it has banned the technology from its platform. In three devastating paragraphs, Minecraft said NFTs have the potential for fraud, create inequity in the game, and are damaging the global environment.

“NFTs are not inclusive of all our community and create a scenario of the haves and the have-nots. The speculative pricing and investment mentality around NFTs takes the focus away from playing the game and encourages profiteering, which we think is inconsistent with the long-term joy and success of our players.

“We are also concerned that some third-party NFTs may not be reliable and may end up costing players who buy them. Some third-party NFT implementations are also entirely dependent on blockchain technology and may require an asset manager who might disappear without notice. There have also been instances where NFTs were sold at artificially or fraudulently inflated prices.

As such, to ensure that Minecraft players have a safe and inclusive experience, blockchain technologies are not permitted to be integrated inside our Minecraft client and server applications nor may they be utilized to create NFTs associated with any in-game content, including worlds, skins, persona items, or other mods. We will also be paying close attention to how blockchain technology evolves over time to ensure that the above principles are withheld and determine whether it will allow for more secure experiences or other practical and inclusive applications in gaming. However, we have no plans of implementing blockchain technology into Minecraft right now.”

That does not necessarily mean the NFT concept is gone for good, as many metaverse developers see it as one of the primary tools by which commerce and ownership will work in a decentralized, Web3 world.

What it does mean, however, is a marked slowdown in the use of NFTs in gaming, and likely in many other areas of licensing as well. While that may change as crypto companies develop more environmentally friendly ways to mint new coins, and crypto wallets improve their security, TLL has been told a number of licensors have put NFT programs on an indefinite back burner.

For example, Sony’s Playstation division recently announced a new digital collectibles feature for a revamped loyalty program, but the company made sure everyone knew it did not involve NFTs.

“It’s definitely not NFTs; definitely not!” said Grace Chen, the company’s VP of network advertising, loyalty and licensed merchandise. “You can’t trade them or sell them. It is not leveraging any blockchain technologies and definitely not NFTs.”

During the Licensing Expo in May, TLL approached several companies and asked them on the basis of anonymity whether they planned to implement an NFT licensing program. Many said yes, but notably, many others said any plans for NFTs were off the table for the foreseeable future.

“It’s just not on our radar right now,” said one prominent licensor. “There’s the environmental issues around NFTs and cryptocurrencies, and there have been several fraud cases, and it makes us concerned about the risk of reputational damage. I mean, I’m honestly not even quite sure what the point of them is, but more importantly, if things go badly with NFTs, we don’t want our brand to be harmed. That’s too big a price to pay for what may be some short-term gain.”

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