ON THE METAVERSE, WEB3

AND NFTS

Brennan Plaetzer
PAGE56 CAPITAL, LLC [email protected]

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The metaverse files – a collection of several interesting opinions, views, sources, projections, and insights relating
to the metaverse.

The metaverse – an introduction

The term ‘metaverse’ comes from a novel called Snow Crash (first published in 1992) and described a computer
program that simulated a version of the real world. In Snow Crash, human beings used avatars to interact with
each other and computer-generated characters in a 3D virtual world called the metaverse. Using the Snow Crash
definition, almost any video game can be considered a sort of metaverse, however, in order to be a little
pickier, only games like Second Life, where you are portrayed as a person in a world that tries to be realistic, counts.
An academic version of this might point out that if some video game made a perfectly accurate layout based on a
real-world museum complete with the exhibits, that's a metaverse.
The metaverse can also be described as the convergence of physical and digital in a way that is persistent,
real-time and infinite in its ability to offer shared experiences allowing for a total sense of presence that
embodies a user. Consisting of a digitally mixed reality of reality and non-fungible and infinite items. A third view
of the metaverse is that it is an infinite space in which humans can do everything they normally do in the
physical space but in a multisensory stimulation. The metaverse has the potential to create the digital realm of
the future, as a quasi-successor of the internet/the metaverse as a successor to mobile internet.
At its core, the metaverse is a network of interconnected experiences and applications, devices, products, tools
and infrastructure. It will be a massively scaled and interoperable network of real-time rendered 3D virtual worlds
that can be experienced at the same time by a virtually unlimited number of users with an individual sense of
presence and with continuity of data (including identity, history, entitlements, objects, communications, and
payments).
In one sense, the metaverse is already here, every day that passes, people are spending an increasing
amount of time online and new forms of digital media, entertainment and immersive user experiences are
increasing the number and depth of digital experiences.

Saying that ‘Fortnite’ is ‘the

metaverse’ is similar to saying
that Google is ‘the internet’.
To say ‘VR’ is ‘the metaverse’ is
like saying ‘the mobile internet
is an app’. Sizing the metaverse economy in 2030 ($ in trillions).

As the internet becomes increasingly relevant to our lives and people spend more and more time online, the
metaverse will become more and more ‘real’. The current internet is mostly about transactions and access to
information, while the metaverse is mostly about activities and it will significantly expand the number of virtual
experiences used in everyday life and it is expected to transform the ways we socialize, work and play.
Based on history (one example: the transition from web1 to web2), we can guess that the metaverse will
revolutionize nearly every industry and function. Under this scenario, the future total addressable market of
the metaverse will be much larger than is currently being contemplated or projected.
An example of how quickly things are moving in the space: a metaverse-focused ETF launched in mid-2021
(just months after NFTs/the metaverse hit the mainstream press) called Roundhill Ball Metaverse ETF, and
its ticker is METV. It holds stocks (selected by a committee composed of ‘subject matter experts’) that fall under
the definition of the metaverse.

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The technological path and potential hurdles to wide scale, mass adoption of the metaverse
Near-term/long-term hurdles to the
metaverse: technology hardware is the
near-term hurdle, but long-term it’ll
likely be interoperability (the seamless
transfer of data between different
blockchains) as the reason there isn’t a
unified metaverse. Current attempts to
bring interoperability to the metaverse
include Decentraland and
SomniumSpace working to create a
‘portal’ between their respective
‘worlds’.
Some leading ‘experts’ in the space
are projecting that the metaverse’s
‘watershed moment’ will occur when
there’s an event that takes place
simultaneously across multiple
platforms, where players can walk
from one platform to the other as the
same avatar, wearing the same skin.
How the metaverse is/will be built:
Sectors that are leading metaverse adoption currently
chips, cloud, telecoms, hardware, 3D
engines, game developers, rendering and
spatial computing are all required to build the metaverse. The technology that makes up the metaverse is
characterized by persistent virtual worlds that continue to exist even when the user is not playing. An augmented
reality (‘AR’) that combines aspects of the digital and physical worlds.
Digging in a little deeper:
Hardware. Defined here as the sale and support of physical technologies and devices used to access, interact with,
or develop the metaverse. Consumer-facing hardware examples include VR headsets and mobile phones, and
enterprise-facing hardware examples include industrial
cameras, projection and tracking systems and scanning
sensors.
The chart to the right projects that only 10% of the US
population will experience VR at least once a month in 2023.
Additionally, it is being estimated that the current market
leading hardware headset resolution of ‘1800x1900’ is still two
times below (2x) where it needs to be in order to eliminate
pixelation so that VR can become mainstream. However, a
metaverse does not have to exist in AR/VR. All that’s necessary
for a metaverse to exist is social immersion in the broad sense.
Networking. Mass adoption of the metaverse will require
marked improvements in three core areas of networking
(bandwidth, latency and reliability). In a future where data
transmission is decentralized and where the demand for Sectors leading metaverse adoption today also plan to dedicate a
bandwidth has never been higher, networks and exchange significant share of their digital investment budgets to metaverse.
centers will be especially important. Bandwidth (how much
data can be transmitted over a unit of time) will have to see continued improvements. As will latency (time it takes
for data to travel from one point to another and back again). The current average round trip for data sent from
one city to another and back in the US is 35ms (still way too slow for a functioning metaverse), 5G should help
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improve the average time. Reliability (in terms of the reliability and quality of services) will also have to see
continued advancements. Local computing should become more important as its performance continues to
improve.
Compute. Defined here as the enablement and supply of computing power to support the metaverse. The
metaverse will require greater computing power that can support diverse and demanding functions.
The metaverse will have the greatest ongoing computational requirements in human history!
A decentralized compute network has three main parts: 1) applications- these are software that submits API
requests meant to be routed to any public or encrypted database nodes, 2) nodes- these are decentralized servers
that provide functions such as storing database indices, sending session info to an app, servicing API requests
submitted by application, servicing API requests, and 3) the network layer- the ecosystem that maintains the
operation of the decentralized protocol, including governance, protocol rules, the actors involved and the
economic games they participate in.
Virtual (+) platforms. Something is defined as ‘a platform’ when most of the content that people spend time with
is created by others. Virtual, defined here as the development and operation of immersive digital and often three-
dimensional simulations and environments. Virtual platforms are a subset of virtual worlds.
Current virtual platforms are much smaller than most would expect, for example Roblox ‘battle royales’
currently allow for a maximum of 200 participants (claim to be in beta with up to 700 participants- as of
Mar. 2022).
So, for the foreseeable future, most people will interface with the metaverse via consumer-facing, interactive and
immersive virtual platforms. The most successful platforms will benefit from strong feedback loops (network
effects- the continued, accelerating speeds of data movement are necessary to support the metaverse, but it is
really the network effects that take place when all the participants in the network are able to share real-time data
that offers some of the most interesting applications of the metaverse).
Interchange tools and standards. Defined here as the tools, protocols, formats, services and engines that serve
as actual or de facto standards for interoperability and enable the creation, operation and ongoing improvements
to the metaverse. The majority of web1 was built by ‘non-profit’ institutions including, government research labs,
public universities, and independent individual technologists. We are now in an area dominated by platforms that
are usually ‘rent-seeking’. More so, many publishers will continue to use their own ‘engines’/keep things internal
and will seek to keep content within their ‘systems’, which will slow the adoption of a unified metaverse.
Payments. Defined here as the support of digital payment processes, platforms and operations including fiat on-
ramps (another way of saying ‘converting cash/wire on a digital currency exchange’) to pure-play digital
currencies and financial services including cryptocurrencies and other blockchain technologies.
To be widely adopted, the metaverse will need to have a thriving economy. A thriving economy will allow for
multiple ‘winners’ with competition driving a
constant cycle of disruption and/or
displacement where many profitable
enterprises will be able to operate. In the end,
this will all help to drive strong continued
consumer spending within the metaverse.
Over $100 billion was spent on virtual good,
skins and lives in 2021 (the virtual goods
ecosystem is expected to reach $400 billion by
2025). Platform fees (rent-seeking) are a
major issue that must be addressed- an
example of this is that all the major virtual
platforms currently have their own
proprietary currencies (Fortnite uses V-Bucks, Roblox uses Robux, Call of Duty uses COD Points and Minecraft uses
Minecoin).

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The most disruptive aspect of digitally native programmable payment rails is that they enable greater
independent collaboration and funding, therefore, using a smart contract, you can currently launch a new,
multi-member entity within minutes. While cross platform and cross progression is good for individual/users,
it opens the opportunity for revenue leakage for all
participating platforms and leads to weaker network
effects for the same platforms.
Content, services and assets. The design/creation,
sale/resale, storage, secure protection and financial
management of digital assets. Content. IP will be
especially important in the metaverse and companies that
own beloved IP and popular brands will have a significant
role in the metaverse. The most popular companies in
Fortnite are Marvel, the NBA, Star Wars and the NFL. Services. Many personal services (including those in the
fitness/mental health segments) will be offered in the metaverse. Assets. Digitally native assets and assets are
going to follow users into the metaverse.
User behaviors. Observable changes in consumer behavior, including investment and spend, time and attention,
decision-making and capability will be major signs of metaverse adoption. Short-term behavioral changes: de-
stigmatization of time spent online and in virtual
worlds. Long-term behavioral changes: things
like generational change, Gen Z are engaging
with technology in a profoundly different way
than previous generations. Example- kids that
are now 10-12 years old have had iPad’s their
entire life (remember the ‘iPad baby’ that
couldn’t open an actual magazine? That video
was shot in 2011!).
The emergence of virtual experiences and
widespread gamer adoption highlights the
opportunity ahead. Roblox as an example:
Roblox has ~50 million daily average users (with
projections to grow to ~80 million by 2024)
consuming 2.5 hours per DAU of ‘experiences’.
Roblox monetizes its user base through the sale
of its virtual currency, Robux, which can be used
to enhance game experiences, customize a
player’s avatar, or acquire development
resources. Developers are compensated in
Robux, which can be exchanged for fiat currency
or spent back into the platform. Roblox’s
platform includes content developed by
individual creators and video game studios, as
well as non-endemic businesses such as film/TV
studios (including Warner Bros, Netflix) and
musical artists (including Lil Nas X)
Metaverse potential TAM, by subsector by 2030(I think)
demonstrating the use cases for non-gaming
general entertainment.
One of the common aspects is about how the metaverse will also be integral to digital economies. And if this is the
case, asserting ownership and proving digital scarcities will be vital attributes of the metaverse. Imagining a
metaverse without blockchains and NFTs is difficult as they already have the characteristics of the metaverse.

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Consumers view the ability to choose their avatar’s physical appearance as a key feature in terms of driving
overall enjoyment within the metaverse, followed by free content funded by advertisers and sponsors, and
ability to create content for other players.
AR/VR. Total AR/VR spending is estimated to reach $72.8 billion in 2024, up from $12 billion in 2020. Beyond
gaming, new uses for AR/VR technology will also be a major driver of growth. We still need much more
widespread adoption of VR headsets. Seamless virtual experiences currently require expensive hardware
(headsets, etc.). The pandemic accelerated gamer adoption four years ahead in terms of time spent playing and
in-game revenue growth. The current rate of penetration for AR is 28% and the VR market penetration is even
lower at 18%. To have an active and exceedingly popular metaverse in the future, things like AR/VR, GPUs, esports
will have to continue to grow and to continue to become more ‘mainstream’. By one estimate, the pandemic
helped accelerate the adoption and acceptance of ‘the virtual world’ by 4 years.
Virtual mainstreaming. People are increasingly viewing the ‘virtual world’ to be as ‘real’ as the ‘physical world’.
In the physical world, trust is how relationships and institutions function. Trust in the virtual world continues to
grow and is expected to help increase the scalability of the metaverse and the industries that support the
metaverse, as things like online friends, virtual items and crypto assets, smart contracts and live online experiences
become more and more mainstream.

The value chain of the metaverse/the seven layers of the metaverse:

Layer 1 – experiences – games, social, esports, theater and shopping.
Layer 2 – discovery – ad networks, social, curation, ratings, stores and agents are all parts of this layer. Discovery
is about ‘the push and pull’ that exposes people to new experiences in the metaverse. This will be one of
the most lucrative places in the metaverse for companies. Types of discovery systems focuses on what people
are actually doing, not on things like what people like, for example. This is a very important part of the metaverse
because a lot of the value of the metaverse is derived from interacting with friends through shared
experiences and community driven content, which is much more cost effective than most forms of marketing,
app stores, search engines and outbound display advertising (including ‘interstitial advertising’ which you are
forced to look at for a period of time at various points during the metaverse experience and ‘rewarded
advertising’ where you receive some form of digital benefit (typically currency, virtual items, or temporary access
to a feature or bonus) in exchange for watching an ad).
Layer 3 – creator economy – this layer contains all of the technology that creators use on a daily basis to craft the
experiences of the metaverse. The number of designers and creators will grow dramatically very soon. Examples-
design tools, asset markets, workflow and e-commerce.
Layer 4 – spatial computing – this type of computing proposes hybrid real/virtual computation that breaks down
the barriers between the physical and virtual worlds. Spatial computing enables a user to enter and manipulate
3D spaces and to augment the real world with more info and experiences (voice and gesture recognition, data
integration from devices and next generation user interfaces will support real-time info streams and analysis. 3D
engines, VR/AR/MR, multitasking, UI and geospatial mapping).
Layer 5 – decentralization – the ideal structure of the metaverse is a decentralized system that offers
interoperability. Distributed computing and microservices provide a scalable ecosystem for developers to tap into
online capabilities. DeFi., edge computing, AI agents, microservices and blockchain.
Layer 6 – human interface – examples include 3D-printed wearables integrated into fashion and clothing,
miniaturized biosensors and potentially consumer neural interfaces. Mobile, smart glasses, wearables, haptic,
gestures, voice and neural.
Layer 7 – infrastructure – this layer includes the technology that enables our devices, connects them to the
network and delivers content. 5G networks are expected to greatly improve bandwidth while also reducing
network contention and latency. 5G, Wi-Fi, GPUs and materials. ‘web3’ (a decentralized evolution of the
internet)- the (future) metaverse is not one specific metaverse, it is the next generation of the internet: a
multiverse (see below for more on web3).

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web3
web1, web2 & web3 intro + open vs. closed metaverse
web3 – we are now beginning the third era of the internet – what many call web3 – which combines the
decentralized, community governed ethos of web1 with the advanced, modern functionality of the second era.
This will unlock a new wave of creativity and entrepreneurship.
web3 gives people property rights via the ability to own a piece of the internet. While there is no single metric
to track web3’s development as a collective whole, we can look at several proxy measures that track different
aspects of web3 from defi to NFTs to adoption of web3 front-end applications like wallets.
web3 also aims to align network participants together toward a common goal- the growth of the network.
Ultimately, aiming to create a
portable and public database that
will give the user more control of
their data (including data residing
on-device), the rise of the
‘individual’ as creator and creators
will be able to monetize their
content more directly with ‘fans’. It
is being projected that the web3
community will emerge as major
political constituency in the next US Web2’s value share vs. Web3’s value share
midterm elections.
web3 has the potential to democratize access to opportunity and broaden access to the economic benefits
of the innovation economy. It will all come down to the database that sits behind an application. If that database
is controlled by a single entity (think web2 company), then enormous market power accrues to the
owner/administrator of that database. If, on the other hand, the database is an open public database (web3) that
is not controlled and administered by a single company, but instead is a truly open system available to all, then
that kind of market power cannot be built up around a data asset.

web1 - the first era of the modern internet – roughly 1990-2004 – was about open protocols that were decentralized
and community-governed. Most of the value accrued to the edges of the network: users and builders.
web1 protocols were stateless, meaning they didn’t capture state or user data (another way of saying that
the protocols of web1 did not generate any revenue because they had no idea who was accessing what data and
from where). Some of the largest Internet
companies that exist (e.g., Amazon, Netflix,
Google) were built on this ecosystem, or
benefitted from expanding into it (Microsoft,
Apple).
web2 - the second era of the internet – roughly
2005-2020 – was about siloed, centralized services
and players eventually become rent seeking. Most
of the value accrued to a handful of large tech
companies.

Web1, Web2 and Web3 details

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Play-to-earn is an emerging model of gaming in which players can make actual money based on how much time
and effort they put into a game. As the relationship between players and platforms continues to change and
evolve, new incentives for participants in blockchain-based networks will become more mainstream and web3
champions continue to signal that a new era of the internet is coming. Essentially web3 is expected to allow the
people that are creating the value to participate in the upside (vs. ‘web2’ that allowed the platform to
retain nearly all of the created
value/upside). For the time being, these
ecosystems are very dependent on capital
inflows from venture capital firms and
corporates, among others.
The currently envisioned metaverse will
also be increasingly decentralized (with
the possible breakdown of the mobile
operating system/app store distribution
model over the next 5-10 years) and offer
flexibility on payment mechanisms aimed
at a mix of themes, including decentralized
privacy and anti-establishment.
Traditional network effects vs. token network effects
Key challenges to web3: how to efficiently
bring data from a blockchain to an application, how to conveniently access data across multiple blockchains and
how to do both of those efficiently in a decentralized way.
web3 vs. web2 incentives: one of the hallmarks of the current shift between web2 to web3 is that the web3
communities are opt-in and they’re incentive-aligned via shared economic ownership (sometimes in the form of
tokenization benefits), by the kind of traits that lead people to share the same affiliation, the same tribe around
maybe certain assets or certain game universe.
S-curve transition: in the beginning, centralized platforms do almost anything that they legally can to attract
users, developers, and businesses in
order to build up multisided network
effects. Once they’ve built those
network effects and they know that
users, developers, and businesses are
‘locked-in’, they switch from ‘attract’ to
‘extract.’ The easiest way to grow
revenue is to start charging businesses
and developers to reach customers, and
to serve customers ads or products
based on the data they’ve accumulated.

Transitioning from web2 to web3: breaking down walled gardens

Breaking down walled gardens unlocks the digital transformation and monetization of long-tailed
engagement. The largest web2 companies were built on the same open and
standards-based environments that enabled web1 but created walled garden
ecosystems to enable social connection and content creation. The most prolific
examples are Facebook/Meta and YouTube (owned by Google) which created
walled gardens for social networking and user-generated content, respectively.
web2 marked the shift from desktop to mobile computing and from local to
cloud storage.
Looking back at the history of video games, traditional games were typically
purchased with an upfront fee of ~$60 with players only allowed to play with

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others based on the player’s platform (e.g., Xbox vs. Playstation). That changed in 2017 when Fortnite was released
as a free-to-play battle royale game, that was cross-platform (by Sep. 2018), which opened up the addressable
market and drove a myriad of competitive and social elements given the ability to play with other players
regardless of the platform, all of these elements allowed Epic Games (the creator of Fortnite) to create an
ecosystem in which they can promote live services (e.g., monetize skins that have no direct impact on game play)
and host virtual events for gamers to connect with each other as well as the artist. Since then, the business model
across video game companies has transformed from physical unit sales for premium games to in-game
content (events, competitions, skins, etc.) layered on top of premium games and monetized through
various forms (premium, in-game purchases, advertising and battle/season passes), which has led to the
rise of virtual currency.
Walled gardens are successful because they can make things easy to do and they also offer access to
exceptionally large audiences. But walled gardens are permissioned environments that regulate what you can
do and extract high rents in exchange. It’s very telling that, while many successful companies have been created
within the web2 ecosystems provided by companies like Twitter or Facebook - there isn’t really an example of a
true titan that has formed a durable, extremely-scalable business (greater than trillion-dollar market cap)
entirely inside any of these web2 walled gardens.
Live streaming platforms (an example is Twitch) and esports have also driven long-tail engagement around
key gaming franchises as an additional way to interact with other gamers, further strengthening the community
and expanding the economic opportunity (through tips, sponsorship, advertising, etc.). Publishers are increasingly
focusing on developing in-game content to drive engagement and ultimately, monetization. eSports tournaments
and streaming services such as Twitch are giving gamers a ‘slice’ of gaming industry revenues for the first time.
web3 has the potential to alter investors current perceptions of platform, moat/strength, industry input
costs and the potential shifting of media and commerce trends. As companies position themselves for
computing needs, hardware/software development and test/learn on use cases for consumers as well as for
enterprises.
The next generation of metaverse participants places importance on social elements and virtual worlds
within gaming. Looking at how the next generation of users spends their digital time in 2020 across the US, UK,
and Spain, online video and social media both represent ~26% of screen time at ~45 minutes, with gaming falling
closely behind at ~22% of screen time or ~38 minutes. However, when looking at the top apps by time spent,
Fortnite and Roblox rank first and second with more than an hour and a half spent in the games, both of which
are open environment multi-player games, signaling the value the younger generation places on social elements
and virtual worlds within gaming.

The NFT files - a compilation of a few interesting views, sources, projections, and insights relating to NFTs.

Introduction to non-fungible tokens (‘NFT’): in simple terms, an NFT is a unit of data stored on a blockchain
that certifies the uniqueness and ownership of a digital asset.
Each NFT comes with a unique identifier that gives the asset inherent
protection from duplication and division without a creator’s/owner’s
consent. Before NFTs were created, video game players did not have
a way to truly own their in-game items. The launch of NFTs allowed
players to claim full, undisputed ownership of in-game assets. NFTs
created a legal way for digital assets to retain value and be used
in multiple games.

Digital ownership is a relatively new concept that is becoming One of the earliest examples of NFTs came in the form of

increasingly popular and NFTs take digital ownership to the next level CryptoKitties, which gave users the chance to breed digital
cats. The team behind Cryptokitties played an instrumental
with the help of the blockchain. Prior to NFTs, digital ownership relied on role in the initial launch and roll-out of NFTs via ERC-721.
central servers of companies. The only way to truly own a digital item is
through ownership on a public blockchain. NFTs are also not controlled by a central entity, allowing for true

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ownership of the assets. A new class of digital collectibles enabled by NFT technology has created an exciting new
opportunity. You can think of NFTs as an authentication method for digital media and ownership.

An NFT can also be viewed as very similar to a deed to a house. A deed is a record of ownership of the house,
not the actual house itself (an NFT is essentially just an electronic record representing ownership of an asset, it does
not represent the actual digital asset itself). Each individual NFT is unique and has built-in provenance (meaning
known ‘origin’).

A blockchain is defined as a list of records (a ledger) that is linked using cryptography. Blockchains can both store
data and compute with blockchain software governing the hardware. In that regard, ‘creating an NFT’ can be
viewed as ‘uploading a file to the blockchain’. NFTs help remove rent-seeking entities/platforms from the
conversation and NFTs’ are serving as early building blocks for the metaverse.

Almost anything can be made into an NFT, and NFTs represent an extremely broad category. NFTs can be anything
from digital art to videos, music, gifs, games, texts, memes, code, podcasts, defi, punks, physical items, gift cards,
the metaverse, and websites. NFTs are simply a way to make digital files scarce.

The inherent uniqueness of each asset creates value & scarcity. Whatever the market thinks is valuable, makes
something valuable. The price of a non-fungible token reflects demand for what the token represents. Something
becomes more valuable more it is recreated/replicated online (example, very famous paintings) and you want to
own a piece of ‘internet history’, not just a copy of a .jpeg of it.

The opposite of non-fungible (the ‘NF’ in ‘NFT’) is fungible. Dollars are fungible. If someone gives you a five-
dollar bill and you give them back five one-dollar bills, the exchange value is equal. It doesn’t matter which dollar
bills you gave us. For example, if you had a stack of one-dollar bills, you could give someone any five of them, and
it wouldn’t matter. You could even Venmo them five dollars. Dollars are entirely interchangeable. That’s
fungibility.

Origin of NFTs
In 1993, Hal Finney (a Bitcoin pioneer and most likely Satoshi Nakamoto) had a vision of what NFTs would someday
become:

“Giving a little more thought to the idea of

buying and selling digital cash. We’re buying
and selling ‘cryptographic trading cards. Fans
of cryptocurrency will love these fascinating
example of the cryptographic arts. Notice the
fine way the bit patterns fit together- a mix of
one-way functions and digital signatures along
with random blinding. What a perfect
conversation piece to be treasured and shown
to your friends and family.
Plus your friends will undoubtedly love these
cryptographic trading cards just as much.
They’ll be eager to trade for them. Collect a
whole set! They come in all kinds of varieties,
from the common 1’s to the rarer 50’s, all the
way up to the seldom-seen 1000’s. Hours of fun
Hal Finney’s post from 1993
can be had for all.
Your friendly cryptographic trading card dealer
wants to join the fun, too. He’ll be as interested in buying your trading cards back as in selling them.
Try this fascinating and timely new hobby today!”

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That idea now brings us to 2017 and the launch of ERC-721. ERC-721 + the launch of NFTs. Fast-forward 25 years
later, to late-2017/early-2018 and with the official launch and acceptance of ERC-721 on the Ethereum network,
NFTs were officially created. ERC-721 is a token standard on Ethereum (aka ‘ETH’ and ETH is the second highest
marketcap cryptocurrency in the world, behind only Bitcoin) that allowed for the creation of NFTs on the ETH
network. It represents a standard for representing ownership of non-fungible tokens and ERC-721 serves as a
pillar of the ecosystem, supporting billions of dollars’ worth of NFT value.

NFT total addressable market (‘TAM’) and

growth projections. The CAGR of the global
NFT market is projected to be 35% between
2022 and 2026. Just eight years from today
(in 2030), the TAM of the NFT market is
projected to reach just under $150 billion in
value. However, mass adoption of NFTs will
most likely be driven by multi-chain scaling
solutions. One of the key drivers of the market
will be the increasing demand for digital
artworks.
Global NFT Market 2022-2026. CAGR of 35.3% (2021-2026).
How NFTs are created. Creating an NFT is a
surprisingly easy process. All you need to do is make an account with a marketplace like OpenSea that lets its users
create NFTs. You don’t need to know how to make an ERC-721 token or have any prior experience with blockchain.

NFT marketplace details. Total monthly NFT marketplace volume increased ~150x times from January 2021 ($20.0
million) to over $2 billion in December 2021. NFT trading volume in 2021 was 60% focused on the art and
collectibles category and the remaining 40% was focused on gaming NFTs.

NFTs as a novelty at first, however, over the next few years, people will build apps and platforms and those
apps/platforms will start giving NFTs more and more value (and utility). And then the two will enter a self-
reinforcing feedback loop. The
platforms will inform what
types of NFTs make sense and
will give them value. And now
that the NFTs have utility value
and have a form factor that
makes sense with the
platforms, more people will
build platforms for them.
Currently, NFT launches are
usually on a first come, first-
serve basis. The next step in
the evolution of NFT launches
will be to unlock fair launches.
The current infrastructure
might be able to support new
ways to launch NFTs but doing NFT ecosystem overview. Marketplaces, metaverse & games, collectibles, art marketplaces, crypto
so has the potential to further exchanges, crypto wallets, NFT finance and crypto domains.
complicate launches.

Mainstream metaverse: NFTs and blockchain-enabled metaverses brought a new wave of mainstream adoption
and attention to the digital assets sector in 2021. Key highlights were auction houses selling NFTs and more broadly
engaging with crypto assets, along with large brands leveraging NFTs to appeal to new audiences. Lastly, large
corporations around the world have embraced NFTs via announcements and investments.
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In 2021, NFTs allowed digital assets to get seamlessly integrated into video games and allowed players to
officially ‘own’ their game assets. NFT/gaming investments also became one of the top 15 largest deal
categories for venture capital funding from a capital invested into the sector perspective for the first time ever in
2021. NFT and gaming funding experienced major growth and mainstream attention in 2021. Given the lag
between fundraises and product launches, all signs point to 2022 and 2023 being turning point years for
deployments of blockchain-based games and gaming NFTs.
Gaming market size. Projected to surpass three billion
global video game players in 2022.

Brands in the NFT space. NFTs became mainstream in 2022

and were increasingly used by marketers to create unique
brand experiences, increase brand awareness and to
encourage interaction. Some brands are even releasing NFT
collectables or limited editions as a way to open up new
revenue streams, build brand loyalty or raise money for a
good cause, while others are using them as a way to boost
their image, tell a story or reach new audiences, and still
others for live event ticketing (creates great use cases for an
NFT; use cases create utility).

NFTs also became a major player in the trillion-dollar advertising/marketing industry in 2022. As an example, it is
now common to see NFT projects launching from all sorts of brands and celebrities and NFTs are increasingly being
used by brands – both classic and cutting-edge – as part of their marketing mix, with food (Taco Bell, McDonald’s,
Campbell’s) and fashion brands (Louis Vuitton, Dolce & Gabbana, Nike and Gucci) leading the way.

A few well-known brands have recently introduced NFT series that serve to ‘identify, reinforce, and expand their
existing communities of brand enthusiasts’. If brands want to be taken seriously
in the NFT space, they will need to figure out how to make blockchain accessible
to everyone.

NFTs offer creators a whole new way to monetize directly with their fans:
NFTs generated $3.9 billion of proceeds for over 22 thousand creators in 2021, for
context, YouTube generated $15 billion in proceeds for its creators in 2021 and
Spotify generated $7 billion in proceeds for the artists on its platform in 2021.

What an NFT is and what it isn’t. File sharing was a boon to existing business models
in the entertainment industry. NFTs will also force people to rethink their ideas of
ownership in the digital realm. That said, NFTs at their core are ownable digital
objects. Any rights that ownership confers must be explicitly defined (and enforced)
by the minter. Securitizing NFTs with roadmaps or with the promise of future utility
(such as a VIP pass) can and should be viewed as simply one application of NFTs and
in no way a requirement or necessity.

Unique NFT features include:

Allows ownership registry without the need to ‘trust’ the other side of the transaction. Unlike a virtual asset
or currency that can be taken away from someone at the whim of a non-decentralized authority (such as the game’s
owner), NFTs are actual assets that are owned in a player’s wallet.

Ownership certificates. An NFT can be considered a form of ownership certification much like property titles for
real assets (for example, real estate or a vehicle). Ownership rights are a foundational aspect of investment and
the price of any good. NFTs give users the ability to own objects, which can be anything from digital art to

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videos, music, gifs, games, texts, memes, code, podcasts, defi, punks, physical items, gift cards, the
metaverse, and websites.

Permanence. Once an NFT is minted, it will exist on the blockchain forever.

Provable ‘scarcity’ (similar to a limited-edition print). Because all of the records are publicly accessible, software
can inspect the blockchain and confirm how many can exist. For example, if an item is one of a kind (often called a
“1 of 1” in the NFT space), you can confirm that. If it is from a limited edition of 1,000, you’d be able to confirm that
as well.

Provable ‘provenance’ (meaning ‘origin’). The history of an item’s ownership is recorded in the blockchain. Some
items may gain value simply because of who has held it in the past. With an NFT, you’ll know exactly who has held
it (all the way back to the creator). Verifiability is an effect of the public availability of blockchain data that has passed
a fault-tolerant group consensus mechanism.

NFT projects will benefit from accessible “on-ramps” for new users. Making the ease of on-boarding easier and
easier will help to build the mass adoption of NFTs.

Programmability. Using ‘smart contracts,’ NFTs can take on special behaviors or be traded between players - or
even other games and worlds.

Decentralization. There’s no central authority that controls the NFT economy and enforces smart contracts. The
NFT economy maintains its integrity in a completely trustless way, and now the community has the ability to add
enormous value to the ecosystem.

Potential NFT value drivers include:

1) Built-in rarity/provable ‘scarcity’. Because all of the records are publicly accessible, software can inspect the
blockchain and confirm how many can exist.

2) Creator economy/tokens/tokenization/web3 opportunity: web3 introduces a powerful new tool for

bootstrapping networks: token incentives.
Tokens align network participants to work
together toward a common goal – the growth
of the network and the appreciation of the
token. Tokens give users property rights: the
ability to own a piece of the internet.

3) Popularity/ecosystem establishment.
Demand/exposure of an individual NFT
project depends a lot on the initial success of
the project’s advertising/notoriety. Some
NFTs function like membership tickets or
digital keys to online spaces of engagement. An NFT series with a published future roadmap and planned projects
under which holders of the NFT gain access to an expanding array of products, activities, and experiences.
Popularity and demand are also major current drivers of value. Offers access to unprecedented liquidity: NFT
owners can exchange NFTs in a peer-to-peer and 24/7 global liquid market.

4) Validity of digital ownership of the NFT is derived from specific IP and no market can operate without clear
property rights. NFTs help solve this problem by giving transacting parties something that they can agree
represents ‘ownership’.

5) Metaverse implications and utility of the NFT (examples: in-game/universe utility, redemption for real-world
assets). Most NFT projects today lack true utility, meaning that buyers cannot further leverage their NFTs after
their purchase.

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6) Potential financial outcome or yield (viewing the NFT purely from an investment perspective).

7) Future features. An NFT can be programmed to, for example, expand its purpose in the future, or even to
provide direct utility to its holders. NFTs can allow the individual artist/creator the opportunity to benefit from the
future appreciation of their NFTs (usually in the form of a small percentage profit share every time their respective
NFT is sold in the open market). Unclear how creators get paid in the space if, for example, two people simply
‘swap’ NFTs and there are no ‘transactions’. NFTs allow NFT creators to benefit from their creations in the future
by getting a percentage of the sale price every time the NFT sells.

8) Commercial rights/some degree of governance. This allows the community to build ‘properties’ on top of
their NFTs that grow the value of the overall brand (network effects in action).

Examples of challenges to mass adoption of NFTs:

User experience/UX. Simply getting started on a site to buy an NFT or a blockchain-based game can be a
cumbersome experience. The steps: 1) set up an Ethereum wallet and backup the seed phrase safely, 2) purchase
ETH with fiat currency and send the ETH (have to pay a fee here) to your ETH wallet (meta mask is an example of
a wallet), 3) create a wallet in the game’s ecosystem, 4) link an email ID to the game account, 5) send ETH to game
wallet from ETH wallet (have to pay a fee here again) and 6) other things like download the game and purchase
in-game items……

Utility/use cases need to continue to grow in both their offerings and experiences. As more uses cases and
more general utility come to NFTs, the more users will join.

Scalability. Will need to increase the current max of 100 users per zone in the metaverse, to something way higher,
potentially infinitely higher. It is currently estimated that only 25% of the global population will have access to 5G
by 2025, so network bandwidth needs to increase greatly, and the current state of the infrastructure is unsuitable
for building any of the envisioned metaverses. NFTs will play a large and vital part of the future metaverse and a
smaller than anticipated metaverse TAM will also likely greatly reduce both the use cases and growth of NFTs.

Developed economies. Trading across different games, more depth, and an increasing user base.

Gas fees need to go way lower or an alternative blockchain must be adopted to support NFTs if ETH cannot.
Gas is defined as the computational effort of conducting transactions or smart contracts on Ethereum blockchain.

Interoperability. Value in one game can compound in other games.

On-chain storage. One big misconception of NFTs is that the media is stored on-chain. Except for certain on-chain
NFTs (representing only approx. 10% of all NFTs), the metadata associated with an NFT generally points to a
centralized server (40% of NFTs) or IPFS (50% of NFTs) and therefore the media associated with these NFTs are
subject to risk of loss. Unfortunately,
storing large files like images and
videos on-chain is very expensive and
almost nobody does it. To put it into
perspective, one megabyte of data on
Ethereum can cost thousands of
dollars at recent market rates.

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