Collectors of non-fungible tokens (NFTs) sent more than $37 billion worth of the digital assets to NFT marketplaces so far this year, nearing the $40bn recorded for the entirety of 2021, according to a new report from Chainalysis.
However, activity in the market has been mostly uneven since NFTs — unique digital properties in the form of art or media purchased using blockchain technology — rose to prominence last year, the New York-based software company said in its State of Web3 Report.
The market has fluctuated since last summer, with activity largely remaining flat save for two big spikes in late August. This was likely driven by the release of the Mutant Ape Yacht Club collection, while another spike stretched from late January to early February, likely due to the launch of the LooksRare NFT marketplace, the report said.
"It’ll be interesting to observe whether NFTs can recapture the broad public interest they achieved in late 2021, and whether this leads to increased transaction activity or rising prices for popular NFT collections," Ethan McMahon, an economist at Chainalysis, wrote in the report.
Interest in NFTs surged last year amid an uptick in overall acceptance of digital assets. NFTs are part of the virtual asset class — which includes cryptocurrencies and tokens — and fall under the umbrella of Web3, the emerging new concept of the World Wide Web, with blockchain, decentralisation, openness and greater user utility among its core components.
Discussions are currently under way around the world to create a "best-in-class approach" to boost the virtual asset industry, Chainalysis co-founder Jonathan Levin told The National during March's World Government Summit in Dubai.
A unique and lucrative market
Major companies are also racing to integrate NFTs into their services to drive up alternate revenue streams. Meta Platforms, the owner of the world's biggest social media network, Facebook, has plans to introduce NFTs on the platform and on Instagram soon.
The first NFT, Quantum, an octagon-shaped animation minted by New York-based artist Kevin McCoy in 2014, sold for $1.4 million at a Sotheby's auction in 2021. The most expensive NFT by far is digital artist Pak's The Merge, an artwork generated by purchasing portions to create a bigger NFT, which sold for $91.8m in December.
The number of active NFT buyers and sellers remained largely in the tens of thousands from the first quarter of 2020 through the second quarter of 2021, with a first significant spike recorded in the next three-month period, nearing half a million, the Chainalysis report showed.
The growth continued, with numbers rising to about 627,000 in the fourth quarter of 2021 and further to around 950,000 in the first three months of 2022.
However, the number of unique addresses dropped almost by half as of May 1 to about 491,000, the report said.
Geographically, Central and South Asia are the most active regions in the NFT market, followed by North America and Western Europe.
This distribution of activity shows the growing interest in the asset class, Mr McMahon said. Other regions are expected to catch up and level the playing field as the market grows further.
"While some regions certainly lag behind, the fact that no region has made up more than 40 per cent of all web traffic since the beginning of 2021 suggests that, like cryptocurrency as a whole, NFTs have captured a global audience," Mr McMahon said.
"Analysis of NFT transaction sizes can also tell us a great deal about who’s investing and collecting."
The vast majority of NFT transactions are at the retail size, meaning below $10,000 worth of cryptocurrency, the report said. NFT collector-sized transactions — those between $10,000 and $100,000 — grew significantly as a share of all transfers between January and September of 2021, but since then have stayed flat.
"This suggests that, for the time being, the addition of new retail NFT investors is keeping pace with the addition of bigger NFT investors," Mr McMahon said.
In terms of transaction value, the study showed that NFT collectors account for the majority of activity. Institutional investors are gradually closing in, especially in weeks when extremely large purchases have been made.
During the week of October 31, 2021, institutional transfers made up 73 per cent of all activity. More institutional-sized transfers followed in subsequent weeks; since then, these made up 33 per cent of all activity.